Investment Highlights

• We maintain HOLD call on Bank Islam (BI) with unchanged forecasts and fair value (FV) of RM2.20/share. Our FV is based on a P/BV of 0.7x supported by FY24F ROE of 7.9%. No change to our neutral 3-star ESG rating.

• An investor day was organised by the group to provide updates on its strategic focus, progress on digitalisation, financial performance and commitments on sustainability.

• For retail banking, the housing and personal segments will continue to drive the group’s financing. Management is still targeting an overall financing growth of 7%-8% in FY23F. Besides, the group will also be growing its financing to SMEs in the halal industry through innovation solutions.

• BI plans to leverage its fully cloud-native digital banking app, Be U launched last year to capture new markets and grow the business. The group has recently introduced Be U Debit Card-i which allows cardholders to track their finances via a built-in expense tracker.

• On existing digital channels, the transaction volume and number of active users for Go Mobile have risen significantly in 1H23 compared to 1H22. Meanwhile, for Internet Banking, the number of active users rose but transaction volume slid slightly due to the shift in some transactions to Go Mobile.

• Thus far, financing of more than RM38mil has been disbursed to borrowers for the purchase of 285 EV vehicles. The group aims to finance EV infrastructures and any renewable energy funding requirements of borrowers.

• Meanwhile, on institutional banking, BI plans to grow its Syariah-ESG assets, improve customer experience and increase cross selling to boost revenue. We gather that the group plans to roll out new investment account (IA) products. New restricted IA products are aimed mainly at institutional investors and high net worth individuals to provide additional non-fund based income. It will not be constrained by the requirements of additional capital on the group.

• The group intends to scale up the participation and contribution for Sadaga House, a charitable crowd funding platform. BI through Sadaqa House collects, manages and distributes donations from the public by channeling to identified charity projects to achieve positive outcomes for underserved communities.

• Funding for Sadaga House is from charitable sources, zakat and wakaf and does not depend on shareholders’ funds or customer deposits. This alleviates concerns about asset quality risk.

• As of July 2023, BI through Sadaqa House has collected more than RM10.8mil. We understand RM2.8mil has been released for blended finance (iTEKAD & iTEKAD BangKIT). In addition, the group has disbursed RM496k under the Funding Escalator (BangKIT Business Grant) programme.

• No changes to FY23F guidance (financing growth: 7%-8%, GIL ratio: <1.5%, credit cost: 30bps-40bps, NIM: >2%, operating expenses (OPEX) growth: 9%-10% and ROE based on profit before tax and zakat of 7%-8%).

• Recall the group recorded a CASATIA ratio of 39.1% in 2Q23, which was above the industry’s 30.7% while NIM improved to 2.11% in 2Q23 from 2.06% in 1Q23. We gather that in July and Aug 2023, NIM was higher than 2.11%. Nevertheless, in 4Q23, pressure on COF is anticipated to be higher due to the likelihood of intensified deposit competition towards the end of the year.

• With deposit competition still persisting, we remain concerned about elevated funding cost for smaller-sized banks. There is limited potential for credit cost to trend lower in the near term for BI in view of the need to keep provision buffers to weather through global economic uncertainties.

• The stock is fairly valued trading at 0.7x FY24F P/BV and we see limited upside potential for now.

Source: AmInvest Research - 12 Oct 2023