This article first appeared in The Edge Malaysia Weekly on December 18, 2023 - December 24, 2023

BANK Islam Malaysia Bhd is optimistic its net income margin (NIM), which took a hit in the first quarter of this year before going on to improve in the second and third quarter, can keep up the trajectory in the final quarter as the seasonal war for deposits in the industry is not as intense as a year ago.

“There’s always higher competition for deposits in 4Q, but it is not like last year,” group CEO Mohd Muazzam Mohamed tells The Edge.

Rivalry for deposits in 4Q2022 was particularly intense as customers were demanding higher deposit rates, which banks generally accommodated, as there was an assumption that the overnight policy rate (OPR) — on which lending and deposit rates are based — would go up in January and March this year. As it turned out, this did not happen.

Consequently, banks faced substantial margin compression.

“But this year, the consensus — from the perspective of the banks and customers — is that the OPR will remain at its current level. So, with that perspective in mind, that’s how we go to the market.

“Hence, I don’t see this quarter to be as competitive as it was in the same quarter last year. But, obviously, from a seasonality perspective, yes, 4Q is always more competitive,” Muazzam says.

The less intense competition from a year ago, coupled with Bank Islam’s ongoing efforts to better manage funding cost — by chasing more current account and savings accounts from individuals and small and medium enterprises (SMEs) so that it can rely less on relatively more costly placements from institutions and corporates — should help sustain its NIM, he says.

Bank Islam’s NIM — the Islamic banking equivalent of net interest margin — fell by a substantial 19 basis points to 2.06% in 1Q2023 from the earlier quarter, and then improved to 2.11% in 2Q and 2.17% in 3Q of this year.

The early turnaround in NIM was commendable considering that most banks started to show margin improvement only in 3Q2023.

The bank, the country’s largest standalone Islamic lender, guided that NIM would improve to around 2.2% in 4Q2023.

“The aim is for us to maintain our trajectory,” Muazzam says, adding that the bank hopes to at least maintain the previous quarter’s NIM of 2.17% in 4Q2023. “The only thing is that for the full year, our NIM will still be slightly lower than last year’s 2.28%, given that we started the year [weak]. However, in the context of other banks, if you compare us against other banks’ Malaysian operations, I think we did well for the year. We have demonstrated that we’re nimble.”

In order to manage funding pressures, Bank Islam has moderated its financing growth. It recently cut its financing growth target for the year to 4% to 5%, in line with that of the industry, compared with an earlier target of 7% to 8%.

“If we were to push for higher or double the industry average, it will put pressure on our funding and, therefore, the funding cost. So, we’re looking to a more stable financing growth for the year as compared with previous years,” he says.

The group is more optimistic of its earnings prospects in 2024 than this year.

“We are on a better footing to grow in 2024, I would say. For us, it’s going to be responsible growth that we target for 2024. We are aware of weak and vulnerable segments [given the weaker global environment], but within that, there are opportunities too.

“We know where the government wants to put focus on in terms of stimulating the economy — there is the NETR (National Energy Transition Roadmap) and NIMP (New Industrial Master Plan 2030) and all that — and we take heed of that. And from a funding cost perspective, we are at a more comfortable position today than we were, say, in the first quarter [of 2023],” he says.

As for asset quality, he says the bank does not have any specific concerns but continues to monitor the more vulnerable segments amid the macro headwinds.

“On SMEs, there is no concern at this point in time looking at our portfolio because we have always been quite measured and prudent in the way we grow that, and it’s not that large a composition in our balance sheet. Our retail portfolio is also holding up.

“So, there’s really no specific area that we are overly worried about. Naturally, knowing that it is going to be a challenging period, we early-manage all the portfolio, also from a collection perspective,” he says.

The group’s gross impaired financing ratio, which improved to 0.97% in 3Q2023 from 1.03% in 2Q2023, is expected to remain at around the 1% level in 4Q2023. “Our target is just about 1%, around that level. There’s no big one-off that we are anticipating at this point in time, so it should be as per business as usual in terms of provisioning,” Muazzam says.

With that, earnings should be better in 4Q2023.

“We’re targeting for us to be able to at least sustain our [earnings] performance in 4Q2023 [from 3Q2023]. We don’t expect any further deterioration in terms of our asset quality. There will be stiffer competition for deposits, obviously, so it will put a bit of pressure on our NIM, but it’s not going to be at the level observed in 4Q of last year,” he says.

Bank Islam’s 3Q2023 net profit stood at RM141 million, down 2% year on year but up 3% quarter on quarter (q-o-q). This took its nine-month earnings to RM395 million, up 8% y-o-y, and falling in at 77% of consensus estimates for the full year.

“We see Bank Islam as one of the best performers in defending its margins from deposit competition as its [NIM] expanded q-o-q in 2Q and 3Q of 2023,” CGS-CIMB Research says in a Nov 29 report.

Kenanga Research, which has a “market perform” call on the stock, says: “While the stock may see interest from shariah-seeking investors paired by commendable dividend yields of about 7%, we believe it may be fairly valued at current price points given its moderate earnings growth prospects in addition to its lower ROE (return on equity) as compared with its peer average (circa 9%).”

Bloomberg data shows that seven analysts have a “hold” call on the stock while one — CGS-CIMB Research — has a “buy”. Despite that, the bank’s share price has been on an upward trend since mid-June. After shedding 36.4% this year to a low of RM1.71 on June 9, it has since gained 38% to close at RM2.36 on Dec 14, for a market capitalisation of RM5.35 billion. 

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