Investment Highlights

• We maintain HOLD on Bank Islam (BI) with a higher fair value (FV) of RM2.50/share from RM2.20/share previously. Our revised FV is based on higher FY24F ROE of 8.3% (previously: 7.6%), leading to a P/BV of 0.8x. No change to our neutral 3-star ESG rating.

• FY24F/25F/26F earnings have been tweaked higher by 9.8%/4.2%/4.6% to reflect higher assumptions for loan growth while our CI ratio estimates have been adjusted lower.

• BI, predominantly a consumer Islamic bank has retail/non- retail financing making up 76%/24% of its total gross financing as at end Dec 2023. SME remains relatively a small segment of the entire financing book. The group’s financing growth is expected to pick up pace in FY24 after slow growth of 3% YoY in 4Q23 due to a deliberate strategy to manage funding cost.

• The group is targeting a higher financing growth of 7%-8% in FY24. Growth in retail financing will still be largely driven by house financing, where mortgage rates continued to be intensely competed by banks and personal financing. We anticipate growth in personal financing to be more challenging going forward due to the recent stricter guidelines issued by regulatory authority on 15 Dec 2023, which includes the consideration of all commitments under Buy Now Pay Later (BNPL) schemes in assessing the repayment ability of borrowers. On non-retail financing, BI will be focusing on funding working capital requirements of supply chain companies.

• On interest margin, we project a subdued NIM of 2.15% in F24F vs. 2.16% in FY23 based on our expectation that domestic cost of funds will remain high in the near term until US Federal Reserve’s pivot on interest rates.

• With ongoing investments to enhance technological capabilities, improve operating efficiency and organisational agility, CI ratio is projected to remain elevated at 58.6% in FY24 (FY23: 60.9%). Thus far, 11 cost reduction initiatives have been identified. The group is aiming for reduction in operating cost of RM25mil in 2024 with a further increase in overhead expenses savings to RM100mil by 2026. With the establishment of core programme to trim opex, the group’s aspirations to lower its CI ratio to 55% in the next 3 years (by FY26) appears achievable in our opinion considering the gradual decline in IT expenses and improvement in total net income towards FY26.

• Newer versions of mobile and internet banking apps for retail banking will be rolled out in FY24. These initiatives are envisaged to enhance the stickiness of CASATIA.

• FY23 saw the financial transaction volumes and number of active users of the group’s digital channels (internet banking, Go Mobile) gaining traction compared to FY22.

• 4Q23 showed an improvement in delinquency rates and decrease in GIL ratio to 0.92% vs. the industry’s 1.65%. Nevertheless, we do not discount upticks in GIL ratio in FY24 due to ongoing macroeconomic headwinds. This is in particularly the asset quality of retail financing after exiting from repayment assistance programmes.

• We remain cautiously optimistic on asset quality with a higher projected credit cost of 29bps in FY24F compared to 26bps in FY23. The group’s financing coverage ratio including regulatory reserves continues to be comforting at 157.2% as at end-Dec 2023, higher than the industry’s 119.2%. As at end 4Q23, the outstanding ECL overlays were RM84.4mil. We do not expect any write-backs of the overlays in FY24F, as BI is likely to utilise the amount for any potential increase in credit risk from prolonged macroeconomic headwinds and uncertainties.

• The group declared an all-cash dividend of 16.81sen/share (payout: 60%) in FY23 without an option for dividend reinvestment plan (DRP) to investors. DRP remains an option open in the future to manage capital position in the future, if necessary, especially for potential changes to Basel III standards where we understand that new guidelines will only be issued in 2026. Capital ratios remain healthy with a CET1/Total capital ratio of 14.1%/19.9% vs. the banking industry’s 15%/18.6%.

• As at end-Feb 2024, foreign shareholdings on the stock have risen slightly to 3.63% compared to 3.19% in Dec 2023.

• The stock is trading at a fair valuation of FY24F P/BV of 0.8x with balance in risk-reward given a lower projected FY24F ROE of 8.2% vs. industry average of 10%-11%. We see its dividend yield of 6.4% as supportive of the share price.

Source: AmInvest Research - 18 Mar 2024