HLIB Research starts coverage of Bank Islam with ‘buy’ call

PETALING JAYA: Hong Leong Investment Bank (HLIB) Research has initiated a “buy” call on Bank Islam Malaysia Bhd (BIMB) with a target price (TP) of RM5.00, given its syariah-compliant status and potential proliferation of demand for Islamic products.

It said BIMB is an investment holding company that owns crown jewels in Islamic financial services, namely Bank Islam (100%holding; 80% of revenue) and Syarikat Takaful Malaysia Bhd (60.3% holding; 19.5% of revenue). Other companies in its stable are BIMB Securities (100% holding) and BIMB Ar-Rahnu.

In terms of total assets in the Islamic banking, Bank Islam was ranked third in 2015 with RM57 billion of assets, just behind Maybank Islamic and CIMB Islamic.

The research house expects BIMB to register 13.7%, 4.2% and 2.6% earnings growth for FY16, FY17 and FY18 respectively, driven by continuous income growth from Bank Islam and Syarikat Takaful. All in all, this implies robust three-year earnings compound annual growth rate of 7%.

While Syarikat Takaful sustained its position as the market leader of family takaful business, with 25% of the market share, Bank Islam has consistently delivered top tier return on equity (ROE) with an average of 11% and low guaranteed investment fund (GIF) of 1.1% for the financial year of 2015 (FY15).

HLIB Research highlighted that BIMB consistently delivers top-tier ROE in the industry with an average of 11%, post-Bank Islam stake acquisition. In comparison, only two other banks – Public Bank Bhd and Alliance Financial Group – managed to maintain a double-digit ROE.

Bank Islam also has high current accounts and saving accounts (CASA) ratios of 37% to 47%, higher than the industry average of 25%, which benefit mainly government bodies and agencies and religious associations. Its competitive edge also lies with the lower cost of funds, which accords control over product pricing in order to remain competitive.

As for asset quality, BIMB’s gross impaired financing improved from a high of 22% in FY05 to FY06 to 1.1% in FY15, aided by a cleanup of its balance sheet and substantial writebacks post-turnaround plan.

HLIB Research views that BIMB deserves a premium in the banking industry given it is the only syariah-compliant full-fledged bank listed on Bursa Malaysia, riding on the underserved and rising Islamic finance awareness in Malaysia.