This article first appeared in The Edge Malaysia Weekly on June 9, 2025 - June 15, 2025
AN unexpected jump in Bank Islam Malaysia Bhd’s (KL:BIMB) credit cost — that is, provisions set aside to cover potential bad debt — pulled down the earnings of the country’s largest standalone Islamic banking group in the first quarter of this year.
Group CEO Datuk Mohd Muazzam Mohamed is optimistic, however, about keeping a lid on asset quality and is sticking to an expectation that its gross impaired financing (GIF) ratio will be contained at under 1% by the financial year ending Dec 31, 2025 (FY2025).
The GIF ratio, an indicator of asset quality, had deteriorated to 1.08% as at end-March from 1.06% as at end-2024. Nevertheless, it was well below the banking industry average of 1.42%.
Bank Islam’s 1QFY2025 net profit declined by 3.4% year on year and 26.9% quarter on quarter to RM126.27 million, falling short of analysts’ expectations mainly because of an 88.7% increase in net allowance for impairment on financing to RM79.8 million. The earnings accounted for just 22% of the consensus forecast for the full year.
The lender had pre-emptively classified several personal financing accounts as impaired and topped up its management overlays in the quarter by RM14.3 million, lifting total overlays as at end-March to RM44.8 million. (Overlays act as a buffer against any increase in asset quality risks.)
“Higher allowances were made during 1QFY2025, owing to the increase in net new impaired financing accounts and financing growth. This also includes the pre-emptive allowances made for certain personal financing accounts due to the anticipation of potential asset quality deterioration arising from market uncertainties, which may trigger changes in classification and higher allowances,” Muazzam says in an email response to questions from The Edge.
“Although currently the data seems to be positive, we are taking more prudent measures to ensure the preservation of our asset quality. We have revised downwards our credit cost guidance from 0.30% to 0.35% for FY2025, but guidance for the GIF ratio remains below 1%. We are optimistic that the growth in good-quality financing, as well as recoveries and write-backs of the impaired financing during the year, will ensure that the GIF ratio remains below 1% at the end of the year.”
The bank’s credit cost in 1QFY2025 stood at 0.46% compared with 0.25% in the same period a year earlier.
Personal financing accounted for a substantial portion, or 30.5%, of Bank Islam’s gross financing portfolio of RM71.83 billion as at 1QFY2025. It will be interesting to see how this business holds up in the event that macroeconomic conditions worsen.
Muazzam says the group’s exposure to US-imposed tariffs is “insignificant”.
“As Bank Islam is predominantly a retail bank, exposure to financing that may be affected by the US-imposed tariffs is indirect and, from our assessment, it is insignificant at this juncture. With the recent Asean 25 meeting of heads of government, we remain positive about the outlook of the Malaysian economy for 2025,” he adds.
Meanwhile, the group’s net income margin (NIM) — the Islamic equivalent of net interest margin — fell for the third straight quarter to 2.06% in 1QFY2025. It was down by one basis point from the preceding quarter.
“NIM tends to be lower in the fourth quarter, owing to a price war for deposit competition towards the end of the year, and this has spilled over to the first quarter. The pressure on NIM has been manageable and may persist if there is an overnight policy rate (OPR) cut down the line,” Muazzam says.
Nevertheless, he expects Bank Islam to end the year with a NIM of above 2%. “As proven in the past, we do have mechanisms and means to manage our NIM, which was evidenced by our track record in the past two years, thanks to our proactive approach in managing our deposit composition.”
Analysts note that Bank Islam is particularly vulnerable to OPR cuts, given that it has a relatively high proportion (about 86%) of variable-rate loans. Nevertheless, with proper management, a 25 basis point cut in the OPR is likely to result in a 2bps compression in NIM, one analyst says.
The bank’s biggest shareholders are Lembaga Tabung Haji, with a 48.02% stake, Retirement Fund Inc, or KWAP, (17.43%) and the Employees Provident Fund (17.08%).
Bloomberg data shows that of nine analysts who track the stock, seven have a “hold” call while two are calling a “buy”. The average 12-month target price was RM2.49, which suggests further upside from its closing price of RM2.32 last Thursday (June 5) that renders Bank Islam a market value of RM5.26 billion. The stock has gained 2.2% over the last 12 months.
Although analysts expect Bank Islam’s credit cost to come in lower in the following quarters after the spike in 1QFY2025, it will — as for most banks — be higher as a whole this year after last year’s benign credit cost environment.
“We expect credit costs to normalise upwards in FY2025 and, as such, earnings growth will likely be a challenge. Decent dividend yields of 6%, however, should help limit downside risks,” says RHB Research in a June 3 report. The research house, which has a “hold” call on the stock, expects Bank Islam’s net profit to decline to RM542 million in FY2025 from RM571.1 million last year, before improving to RM594 million in FY2026.
In a June 3 note, Hong Leong Investment Bank Research says: “Although its valuation appears undemanding and is supported by a high 6%-to-7% yield, we remain cautious because of its low Common Equity Tier-1 ratio [of 13% at group level and 12.6% at bank level], which could constrain future growth.” It maintained a “hold” recommendation on the stock, with a target price of RM2.40 (from RM2.60 previously), which is based on an implied 0.66 times FY2026 price-to-book value.
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