Bank Islam sees steady growth despite tough times

This article first appeared in The Edge Malaysia Weekly, on December 3, 2018 - December 09, 2018.
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BANK Islam Malaysia Bhd, on track to end the year on a strong note after posting record-high earnings for the first nine months, expects next year to be more challenging as economic growth slows further.

Acting CEO Mohd Muazzam Mohamed is nevertheless optimistic the bank will continue to deliver earnings growth in 2019, for the third consecutive year, as it looks to expand net financing by 7% and drive stronger fee-based income.

The bank is on course to meet its net financing growth target of 8% this year. As at Sept 30, financing growth stood at 7.3% on an annualised basis.

“Our trajectory for fund-based income growth will continue to be there for 2019, but what can help us boost net profit further is growing our fee-based income. We’ve got opportunities there that we may not have exploited fully yet. So, in terms of our focus next year, it will be fee-based activities like bancatakaful, asset management and wealth management,” Muazzam tells The Edge in an interview.

The country’s oldest Islamic bank has forecast that economic growth, which stood at 5.9% last year, will slow down to 4.8% this year and 4.5% next year.

“Based on the economic outlook, our financing growth next year will once again come more from the consumer banking segment than business banking. As for our commercial and SME business, we think we can do better in terms of trade finance. Currently, our customers are mainly import-based, so we have plans to tackle the export-based ones to grow our trade finance business,” Muazzam says.

Bank Islam, which is wholly owned by BIMB Holdings Bhd, reported a 3.8% rise in net profit to RM456.13 million for 9MFY2018, a record high for the period.

The strong performance was due to higher fund-based income, thanks to the increase in the base rate and base financing rate by 25bps effective February. Net financing grew a strong 10.4%, higher than the sector’s 4.7%.

Its third-quarter net profit, at RM167.71 million, was 3.54% lower year on year. This was because in 3Q2017, its net profit had been boosted by a one-off, tax-free bad debt recovery of RM36.7 million. It was from an old loan booked out of Labuan, says Muazzam. Without that, its 3Q2018 profit would have been higher.

The strong performance helped BIMB Holdings, which derives the bulk of its earnings from Bank Islam, post its highest-ever quarterly net profit in 3Q2018. At RM198.62 million, it was an 8.3% increase from a year ago.

BIMB’s nine-month net profit, at RM520.67 million, was above analysts’ expectations, accounting for 82% of consensus estimates for the full year.

Bloomberg data shows that all eight analysts that track the stock have a “buy” call on it. Their 12-month target price for BIMB is RM4.89, which suggests further upside from its closing price of RM3.73 last Thursday.

What surprised analysts was the increase in Bank Islam’s net income margin (NIM). “We were pleasantly surprised by the NIM, which, at 2.65%, was an improvement of 6bps year on year,” MIDF Research says.

Muazzam hopes to sustain NIM at around 2.64% to 2.65% for the full year.  “The fourth quarter will be slightly challenging because, seasonally, it is when we experience higher deposit costs.”

As for asset quality, its gross impaired financing ratio, at 0.97% as at Sept 30, was an improvement over the 1.07% a year ago. Muazzam sees this staying at under 1% for the year.


No M&A or downsizing

According to Muazzam, Bank Islam’s three-year business plan (FY2019-FY2021) does not involve any M&A with rival banks.

The bank is happy to continue on an organic growth path. While it has done a commendable job of cutting costs this year, it has no plan to reduce staff size in the foreseeable future, except in special cases. “For example, staff who fall ill or who may want to pursue other interests, then, on a mutual basis, we will let them go,” he says.

The bank has 4,500 employees and 148 branches. It had managed to bring down its cost-to-income (CTI) ratio to 51.6% as Sept 30 from 55.5% a year ago through cost-containment measures. For the full year, it expects CTI to hover at around 51%.

“What we try to do is increase staff productivity. We have embarked on a staff redeployment exercise — so rather than let people go, we redeploy people from the operations side and put them in sales. In the first six months that we did this, we managed to book in RM260 million new financing just from this new group of people who were moved into sales. So, that has been successful, and will continue,” he says.  

Muazzam is comfortable with the number of branches the group has. “Next year, we won’t increase branches but where we think a branch is underperforming and we can identify a more suitable location for it, we will relocate it.”

He expects the bank to invest about RM150 million in digital banking initiatives and improving IT next year. “We are not there yet but we aspire to be the digital Islamic bank of choice, particularly for the younger customers.”

One of the issues that hang over the bank is a possible restructuring of the BIMB group, which analysts say is likely to involve the transfer of BIMB’s listing status to Bank Islam, and a possible rights issue to repay a shareholder debt of RM1.3 billion.

“A restructuring is something we’re still pursuing, it is just about finding the right timing and structure. Hopefully, we can get a conclusion to it, probably in the latter part of next year … it needs to first go through all the approvals, court process and all that,” Muazzam says.

Formerly the bank’s chief financial officer, Muazzam took on the acting CEO role on July 20 after the previous CEO resigned. Industry sources expect him to be confirmed in the role.

A new chief strategy officer is also expected to join the bank next year to see to its transformation efforts to improve business processes and efficiency.


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