This article first appeared in The Edge Malaysia Weekly on January 31, 2022 - February 6, 2022

BANK Islam Malaysia Bhd’s prospects are looking up as the economy opens further and on the expectation that it will be the financial institution that benefits the most from an anticipated hike in the overnight policy rate (OPR) this year.

The Main Market-listed lender has the highest floating-rate loan ratio in the industry, at about 90.5% as at Sept 30 last year, which works to its advantage when the OPR goes up. Bank Negara Malaysia is widely seen raising the OPR by at least 25 basis points in the second half of this year.

More importantly, analysts say their concerns about the bank’s asset quality are easing now that its exposure to loans under repayment assistance has come down significantly.

“We turn more positive on Bank Islam as we gather the ratio of its financing under repayment assistance has fallen from 42% in mid-2021 to less than 20% now. This signifies an improvement in its overall asset quality and an easing of the upward pressure on its gross impaired financing (GIF) ratio,” CGS-CIMB Research says in a Jan 21 report on the lender.

The research house also notes that the number of applicants under the URUS scheme — a repayment assistance programme that offers interest waivers for B50 (bottom 50% income group) borrowers with a household income of less than RM5,880 — has been small. As at end-2021, the number of applicants approved by the bank for URUS was less than 150.

“On this score, we think the impact on Bank Islam’s net profit from the interest (which is classified as profit in Islamic financing) waiver under the URUS scheme would be minimal,” it says.

It warned, however, that Bank Islam could see chunky provisioning in 4QFY2021 because of a corporate account in the oil and gas sector.

“Notwithstanding this, we do not expect the bank’s FY2021 net profit to be below our forecast [of RM625 million] as we are projecting high financing loss provisioning of RM76.7 million for Bank Islam in 4Q2021, which represents a 125.6% increase from the level of RM34 million in 3Q2021,” it says. The bank’s net profit stood at about RM565 million in FY2020 and RM627.61 million in FY2019.

Bank Islam, which assumed the listing status of BIMB Holdings Bhd on Oct 8 last year upon the completion of a group restructuring, is the country’s first pure-play, full-fledged Islamic bank on Bursa Malaysia.

Bloomberg data shows that out of 10 analysts who track the stock, eight have a “buy” call and two, a “hold”, with the average 12-month target price at RM3.35. The stock, which has gained 8.8% since the listing, closed at RM3.18 last Thursday, giving it a market capitalisation of RM6.85 billion.

Given an expected economic recovery, CGS-CIMB Research is projecting an improvement in Bank Islam’s financing growth from 7.1% in FY2021, to 8.6% in FY2022-FY2023. Financing growth stood at 10.7% in FY2020.

“One of the sweet spots for its financing growth would be SME (small and medium enterprise) loans as the bank targets to increase the proportion of SME loans over its total financing from 3.7% as at end-September 2021 to 5% by FY2023,” says CGS-CIMB Research.

“We maintain our ‘add’ call on Bank Islam as we see the bank as the biggest beneficiary from the expected hike in OPR in 2022. We have factored in an OPR hike of 25bps for our earnings forecasts for Bank Islam; every 25bps hike would raise our projected net profit for the bank by circa 7.1%,” it continues. It has also kept its target price of RM3.46 on the stock.

“The potential rerating catalysts would be an expansion in net interest margin (arising from an OPR hike) and a decline in loan loss provisioning in FY2022-FY2023,” says CGS-CIMB Research.

Bank Islam CEO Mohd Muazzam Mohamed says he expects the repayment assistance numbers to trend lower as the lender moves into a business-as-usual scenario.

“However, we will continue to provide the required assistance into 2022,” he says via email in response to questions from The Edge.

“URUS applications continue to remain benign. Nevertheless, the programme has been extended till March 2022 to cater for customers facing distress, especially due to the recent flood. Regarding the asset quality of the bank, we expect the [GIF] ratio to move closer to the pre-Covid-19 ratio,” he adds.

The bank’s GIF ratio stood at 0.68% as at 3QFY2021, compared with 0.6% a year earlier.

According to Mohd Muazzam, the reopening of the economy bodes well for the bank as it helps improve business and consumer sentiments, which could translate into higher capital expenditure among firms and in household spending. This, in turn, is good news for domestic demand in Malaysia.

Additionally, higher crude oil prices could provide more fiscal space for the government to spend, thus ensuring smooth implementation of fiscal policy, he adds.

“All factors combined, it should be a conducive environment for Bank Islam, especially when Bank Negara is expected to increase the OPR during the year. Nonetheless, given that the recovery process is still at its nascent stage, we will continue to remain vigilant in our credit underwriting standard,” he says.

Asked for an update on its upcoming digital bank for the underserved market, Mohd Muazzam says, “Through our carved-out division, CDX, the digital banking proposition has recently concluded testing. As of now, we are at the tail-end of the discussion with the regulators for launching the digital banking proposition minimum viable product (MVP), which is expected soon.”

He says the MVP will undergo a period of intensive early feedback gathering to validate product-market fit and to ensure that customers have a good experience with the app.

Mohd Muazzam had first spoken about launching a digital bank for the underserved market — which it is allowed to do under its existing banking licence — last October. The development comes as Bank Negara is about to award up to five digital banking licences to successful applicants by end-March that are meant to focus solely on the underserved and unserved markets.

Bank Islam’s digital banking proposition is part of its five-year business strategy, LEAP25, under which one of its aspirations is to have leadership in digital banking and social finance.

In 9MFY2021, the bank’s net profit rose 17.3% to RM454.67 million, on the back of lower net allowance for impairment on financing and advances of RM79.6 million compared with RM212.2 million the year before. Its dividend per share was higher at 10.93 sen compared with 5.55 sen the previous year.

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