High finance costs may dilute Bank Islam’s loan growth


PETALING JAYA: The impact of Bank Islam Bhd’s potentially stronger loan growth may be diluted by the higher costs of funds amid deposit competition.

CGS-CIMB Research said in a report to clients, following a session with the lender, that the positive takeaway from the meeting was a potentially stronger loan growth for the bank in its financial year 2022 (FY22) versus its guidance of 8%.

“However, we think the positive impact from robust loan growth and overnight policy rate (OPR) hikes would be diluted by the higher cost of funds amid deposit competition,” said CGS-CIMB Research.

Despite the robust loan growth of above 8% in FY22, CGS-CIMB Research has downgraded its Bank Islam call from “add” to “hold” on concerns over the higher cost of funds.

In the report, CGS-CIMB Research said under Bank Islam’s deposit campaign of Term Deposit Tawarruq-i, the lender is offering higher deposit rates of between 4% (for a six-month tenure) and 4.4% (for an 18-month tenure), compared to the normal fixed deposit rates of between 1.85% and 2.85% offered by the bigger banks (for tenures of one month to 12 months).

“We cut our FY22 to FY24 earnings per share forecasts by 1% to 15% as we raise our projected FY22 to FY24 income attributable to depositors by 1% to 11% to reflect the higher cost of funds.

“This brings down our target price for Bank Islam from RM3.23 to RM2.74,” said CGS-CIMB Research.

In the report, CGS-CIMB Research said it was positive on its expectations of a robust loan growth of above 8%, which would be one of the strongest in the sector.

“The stock is supported by a dividend yield of 4.3% for FY22,” added CGS-CIMB Research.

However, it said it preferred RHB Bank Bhd for exposure to the Malaysian financial services sector.

Meanwhile, one of the strengths of Bank Islam is its exposure to consumer financing through the mode of salary deduction (repayments of this form of financing are done via arrangements that deduct from borrowers’ salaries), it said.

“The bank stated that this type of financing accounts for about 60% of its total financing.

“Bank Islam envisages a positive outlook for this type of financing, as its growth could breach 8% in FY22.

“We expects the growth of this financing to remain strong at 7% to 8% in FY23,” said CGS-CIMB Research.

“The financing paid through salary deduction carries lower credit risks, in our view, as the banks are able to draw from borrowers’ salary accounts before they are used for other purposes.”

It added that Bank Islam plans to increase its exposure to small and medium enterprise financing, which accounted for only 3.6% of its total financing at the end of June.

“Bank Islam is currently working on its long-term target for this and is evaluating the risks and rewards of growing this segment.”

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