CGSCIMB remains positive on Bank Islam as it is guiding for a recovery in Net Financing Margin (NFM) in 2Q-4Q23F and Return On Equity (ROE) expansion in the next three years.
“We are not overly concerned about the rise in its gross impaired financing (GIF) ratio from 0.68% at end-Sep 21 to 1.37% at end-Mar 23 as this ratio was still significantly below the industry’s 1.74% at end-Mar 23 and was the third lowest in the sector. Also, the bank aims to keep the ratio below 1.5%, implying it could peak soon, in 2Q23F or 3Q23F, in our view,” said CGSCIMB in the recent Company Note.
Bank Islam is guiding for an expansion in ROE from 7.5% in FY22 to 8% in FY23F and 9- 10% in the next three years. CGSCIMB concurs with the bank’s view although they expect a narrower ROE expansion in the next three years to 8.8% in FY25F.
CGSCIMB sees the potential improvements in its cost-to-income ratio and increase in dividend payout ratio as the possible levers for ROE expansion.
“We reiterate our Add call on Bank Islam as, even after we have cut our Earnings-Per Share (EPS) forecasts, we are projecting an ROE expansion in FY23-25F and a strong 3-year compounded annual growth rate of 9.6% in EPS in FY22-25F,” said CGSCIMB.
Near-term outlook is also bright given the bank’s expected recovery in NFM and stable credit cost in 2Q-4Q23F, in CGSCIMB’s view. They deem its valuations attractive with CY24 price-earnings ratio of 7.6x and CY23F price book value of 0.66x. Key downside risks are such as a drastic slowdown in financing growth and further rise in cost of funds.
