• Bank Islam’s FY23 net profit was 8% above our forecast due to higher non- fund based income and lower financing loss provision (vs. our forecasts).

• We are forecasting an EPS growth rate of 7.8% for Bank Islam in FY24F, underpinned by a 4.7% rise in net financing income.

• Retain Add as we expect a recovery in its financing growth and better NFM trend in FY24F. FY23 dividend yield is attractive at 6.8%.

FY23 net profit above expectations

On a positive note, Bank Islam’s FY23 net profit beat expectations, accounting for 108% of our forecast and 106% of Bloomberg consensus’. The variance to our forecast primarily emanated from higher non-fund based income and lower-than-expected financing loss provisioning (vs. our projection). Bank Islam declared a second interim DPS of 4.2 sen, bringing the total DPS for FY23 to 16.8 sen. This translates to a high dividend payout ratio of 68.3% and an attractive dividend yield of 6.7% for FY23. In our view, this could signify that Bank Islam has joined the bandwagon for capital management, alongside several other banks which have already done so, such as Maybank and Public Bank.

A solid end to FY23

Bank Islam recorded a strong yoy net profit growth rate of 25.9% in 4Q23, underpinned by a 35.8% yoy jump in non-fund based income, 72.6% yoy decline in financing loss provisioning, and the non-recurrence of Cukai Makmur taxation. Another positive take was the gradual improvement in its net financing margin (NFM) from a low of 2.33% in 1Q23 to 2.42% in 4Q23 (although the NFM contracted 1bp qoq in 4Q23).

We project FY24F EPS growth of 7.8%

We are projecting an EPS growth rate of 7.8% for Bank Islam in FY24F, to be underpinned by a 4.7% increase in net financing income.

Increase in projected DPS leading to higher target price

We maintain our FY24-25F EPS forecasts but the high DPS in FY23 prompt us to raise our DPS forecasts for FY24-25F from 11 sen previously to 13-14 sen as we increase our dividend payout ratio assumption from 40% to 50% for both years. Consequently, our DDM-based target price rises from RM2.55 to RM2.83 (cost of equity of 10.3%, terminal growth rate of 4%).

Retain Add on Bank Islam

We retain our Add call on Bank Islam, premised on its attractive dividend yield (6.8% in FY23 and 5.5% in FY24F). Potential re-rating catalysts are a pick-up in loan growth in FY24F, and better trend in NFM relative to its peers in FY24F. Downside risks to our Add call include a further slowdown in its loan growth in FY24-25F, and a material increase in its gross impaired loan ratio.

Source: CGS-CIMB Research - 29 Feb 2024