This article first appeared in The Edge Malaysia Weekly on March 18, 2024 - March 24, 2024

WITH funding cost pressures seen easing from a year ago, Bank Islam Malaysia Bhd is gunning for stronger earnings growth this year, with a target of expanding financing by 7% to 8% compared with last year’s 2.6% growth.

Its target is notably higher than the roughly 5% loan growth that analysts are projecting for the banking industry this year, following the 5.3% expansion last year.

Group CEO Datuk Mohd Muazzam Mohamed tells The Edge in an interview: “We’re aiming for better earnings growth, with a bigger volume of financing.”

Like most lenders, the country’s largest standalone Islamic bank focused on managing its funding cost better last year amid compression of net income margin (NIM) — the Islamic banking equivalent of net interest margin.

The average NIM of the country’s eight banking groups fell 28 basis points (bps) to 2.07% last year, the lowest in more than six years, as lenders grappled with higher funding costs after deposits repriced upwards, following a cumulative 125bps hike in the overnight policy rate since 2022.

To its credit, Bank Islam’s NIM decline of 16bps last year to 2.12%, from 2.28% in 2022, was not as steep as that of many other lenders, thanks to a concerted effort to chase after more deposits from individuals and small and medium enterprises (SMEs), while relying less on relatively more costly placements from institutions and corporates.

Muazzam expects the bank’s NIM to stabilise this year on the back of these continued efforts and on expectations that the overnight policy rate will stay unchanged this year. He aims for NIM to come in at “above 2.1%”, around the same level as last year. It is unlikely that NIM will return to the loftier levels of previous years, given that challenges persist, he says.

“NIM is stabilising, but it doesn’t seem like it will go back to pre-2023 levels. It’s stabilising, but roughly at the current rate that we’re seeing now. We don’t see it getting worse because of what we’ve done last year in terms of [rebalancing] our funding composition,” he says.

Last year, deposits from individuals accounted for 20.1% of the bank’s total deposits and investment accounts compared with 18.8% the year before, while those from government and statutory bodies decreased to 32.6% from 34.9%.

Meanwhile, its CASATIA (current accounts, saving accounts and transactional investment accounts) ratio improved to 39.9% — substantially higher than the banking industry average of 31% — from 36.8% in 2022, and the bank hopes to maintain it at “39% to 40%” this year.

“We’re just going to continue that trajectory. So, that’s why I’m saying that the [funding cost] pressure will not be as intense in 2024 compared to what we experienced towards the end of 2022 and the early part of 2023. Realistically, we’re aiming for NIM of above 2.1% … perhaps 2.1% to 2.2%. Of course, we’ll push for better than that, but we also want to be realistic, looking at how things are,” Muazzam says.

Last year, Bank Islam slowed down its financing growth to 2.6%, from 11.3% in 2022 and 6.5% in 2021, as it chose to prioritise asset yields amid heightened competition in the industry, not only in deposits but also in loans. Competition in the lending market remains stiff, particularly in home financing, bankers say. “We’re not super aggressive in home financing, but there’s always demand for it. So, we are tactical in the segment that we go for there. Our rate is competitive, but we may not be the lowest all the time. We have target pricing, depending on the credit score of the customer and all that,” he says.

“Most importantly, we look at it from the total relationship with the customer. Obviously, when we do home financing, we cannot just look at the yield from that alone, but also from what else we can get from the customer. Do we also get their [deposits], do we get to sell them bancatakaful and so on — that’s always the game for any of the banks,” he remarks.

Bank Islam’s financing growth this year will be driven by both the retail and non-retail portfolios.

He adds: “In non-retail, we see opportunities in climate transition financing. And, in retail, there are opportunities for growth in the segments that we’re still light on. For example, we are strong in the mass market, but we have invested — in terms of resources and infrastructure — in the higher net worth market. So, we expect to see better results coming from this segment in 2024 and going forward. At the same time, we also want to grow our fee-based income from both retail and non-retail.”

As for asset quality, Muazzam says there are no immediate signs of stress on the bank’s financing portfolio. Nevertheless, he remains cautious amid an expected rise in the cost of living in Malaysia as a result of potential fuel subsidy rationalisation later this year, among other reasons.

The bank’s gross impaired financing (GIF) ratio — an indicator of asset quality — improved over the last three quarters to 0.92% as at end-2023 from 1.27% a year earlier, and was much better than the industry’s 1.65%. However, its past-due-but-not-impaired financing (PDNI) ratio moved up slightly to 1.05% from 1.01%.

“This year, we want to keep the GIF ratio below 1.1%, and maintain the PDNI ratio below 1.3%, mindful of the fact that 2024 will continue to be a challenging year. Generally, we know that the cost of living is going to rise. When we do certain [stress] simulations, we know that certain segments of our customers may have some difficulty,” he says.

His concern  lies mainly with the middle 40% income group (M40), rather than the bottom 40% (B40), as the former accounts for a bigger proportion of the bank’s retail financing, at 35.7%.

“So, that’s where we manage it closer. Our B40 [proportion] is small, and most of it is via packaged financing, whereby the customers have a salary deduction arrangement,” he says.

Bank Islam was one of only a few lenders to have surpassed analysts’ expectations in the recent earnings reporting season. Its net profit in the final quarter of the year ended Dec 31, 2023, grew 25.9% year on year and 12.7% quarter on quarter to RM158.3 million, thanks to a strong increase in non-fund-based income and decline in provisions. This raised its full-year net profit up 12.5% to RM553.1 million — the highest since FY2020’s RM565 million and making up 106% of an analysts’ consensus forecast. The bank declared a second interim dividend per share of 4.2 sen for the final quarter, bringing the year’s total to 16.8 sen. The fully cash dividend translated into a higher-than-expected payout ratio of 68.3%.

Asked whether it would be able to maintain a similar payout ratio this year, Muazzam says: “We have a policy of paying out 60% of our net profit; so, we’re sticking to that.” Bloomberg data shows that of the eight analysts who track Bank Islam’s stock, six have a “hold” recommendation and two, a “buy”, with the average 12-month target price at RM2.49. The shares have surged 18.5% this year as at March 14, closing at a 52-week peak of RM2.62, for a market capitalisation of RM5.94 billion.

Interestingly, Bank Islam is one of only a few shariah-compliant stocks in the financial sector. RHB Research says in a March 4 report: “Given its optimistic growth ambitions [this year], we reckon a greater level of capital preservation will be required; thus, management might opt to utilise its dividend reinvestment plan instead of dishing out all-cash dividends. As it stands, Banks Islam’s capital levels remain healthy.”

RHB Research kept its “neutral” call on the stock but raised its target price by 10 sen to RM2.50.

“While our concerns on the bank’s asset quality have dissipated, we keep to our rating, as current valuation appears fair. We also prefer banks with larger business banking exposure in FY2024,” it explains. 

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