CGS International Securities Malaysia Sdn. Bhd.
May 30, 2025
Bank Islam Malaysia Bhd: Navigating Growth Amid Higher Provisions, Strong ESG Momentum, and Attractive Dividend Yield
Overview: Mixed 1Q25 Performance Sets the Stage for Recovery
Bank Islam Malaysia Bhd delivered a mixed set of results for 1Q25, with net profit falling below expectations at RM126.3 million, representing just 20.2% of the broker’s full-year estimate. Despite a robust 50.4% year-on-year surge in non-fund based income, the bank’s bottom line was weighed down by an 88.7% increase in financing loss provisioning (FLP) and higher finance costs. The spike in provisions was attributed to a top-up in management overlay, which acts as a buffer for rising credit risks, and is not seen as a sign of underlying asset quality deterioration.
Key Financial Highlights and Guidance
- Net profit (1Q25): RM126.3m (down 3.4% YoY)
- Non-fund based income (1Q25): RM133.7m (up 50.4% YoY)
- FLP (1Q25): RM79.8m (up 88.7% YoY)
- Management overlay: Increased RM14.3m in 1Q25 to RM44.8m
- 2Q25F net profit guidance: RM130m–140m, driven by expected lower FLP
EPS and Target Price Adjustments
The report notes an upward revision of 0.5–0.8% in net financing income projections for FY25–27, reflecting the recent statutory reserve requirement cut. However, the effect is outweighed by 23–38% higher FLP and 23–29% higher finance costs forecasts, resulting in a 6.2–6.4% reduction in EPS estimates for FY25–27. The dividend discount model (DDM)-based target price has been lowered from RM3.13 to RM2.92, with a cost of equity of 10.9% and a terminal growth rate of 4%.
Investment Thesis: Growth, Yield, and Downside Risks
CGS International maintains an Add rating on Bank Islam, citing:
- Above-industry financing growth: 7% forecast vs. 4.5–5.5% for the sector
- Attractive dividend yield: 6.4% forecasted for FY25
- Potential re-rating catalysts: Recovery in profit as provisions normalize, continued loan expansion
Risks include weaker-than-expected financing growth, rising cost of funds, and a significant increase in the gross impaired financing ratio.
Shareholder and Market Snapshot
- Major Shareholders:
- Lembaga Tabung Haji: 48.5%
- Employees Provident Fund Board: 15.8%
- Amanah Saham Bumiputera: 6.6%
- Market Cap: RM5,485m (US\$1,293m)
- Shares Outstanding: 3,889m
- Free Float: 29.1%
- Current Price: RM2.42
- Target Price: RM2.92 (20.7% upside)
Financial Performance: Key Metrics and Trends
|
Dec-23A |
Dec-24A |
Dec-25F |
Dec-26F |
Dec-27F |
| Net Interest Income (RMm) |
2,071 |
2,177 |
2,266 |
2,422 |
2,554 |
| Total Non-Interest Income (RMm) |
403 |
398 |
401 |
409 |
428 |
| Operating Revenue (RMm) |
2,474 |
2,575 |
2,668 |
2,831 |
2,982 |
| Total Provision Charges (RMm) |
(175) |
(95) |
(180) |
(182) |
(183) |
| Net Profit (RMm) |
553 |
571 |
586 |
623 |
668 |
| Core EPS (RM) |
0.25 |
0.25 |
0.26 |
0.27 |
0.29 |
| Dividend Yield (%) |
6.59 |
6.25 |
6.41 |
6.81 |
7.30 |
| ROE (%) |
7.79 |
7.59 |
7.46 |
7.58 |
7.82 |
| P/BV (x) |
0.74 |
0.72 |
0.68 |
0.66 |
0.63 |
1Q25 Results Breakdown
- Gross financing growth: 7–8% targeted for FY25F (6% in 1Q25)
- Gross impaired financing ratio: Targeted below 1% (actual 1.08% in 1Q25)
- Net income margin: Above 2% (2.06% actual)
- ROE: Above 7.5% (7% actual, affected by higher provisions)
- Credit charge-off rate: 47bp (annualized) in 1Q25, expected to normalize to 35bp for FY25F
Quarterly Performance Table
|
Mar-24 |
Jun-24 |
Sep-24 |
Dec-24 |
Mar-25 |
| Net Financing Income (RMm) |
528.9 |
542.6 |
545.6 |
532.5 |
539.9 |
| Non-Fund Based Income (RMm) |
88.9 |
86.8 |
83.7 |
165.1 |
133.7 |
| Total Income (RMm) |
617.8 |
629.4 |
629.3 |
697.6 |
673.6 |
| Overhead Expenses (RMm) |
(371.3) |
(379.7) |
(379.8) |
(442.8) |
(385.2) |
| Pre-Provision Profit (RMm) |
246.5 |
249.7 |
249.5 |
254.8 |
288.4 |
| Loan Loss Provisions (RMm) |
(42.3) |
(35.2) |
(38.0) |
20.9 |
(79.8) |
| Pretax Profit (RMm) |
176.1 |
186.4 |
175.7 |
234.7 |
168.1 |
| Net Profit (RMm) |
130.7 |
137.2 |
130.4 |
172.6 |
126.3 |
Loan Portfolio: Growth and Sectoral Composition
- Total loans (Mar-25): RM71.8bn, up 6% YoY (industry growth: 5.2%)
- Loan composition by sector (Mar-25):
- Household: 76.1%
- Finance: 9.6%
- Utility: 3.8%
- Transport, storage & communication: 2.9%
- Agriculture: 0.7%
- Strongest growth: Finance (+25.1% YoY); Household sector remains the largest segment
ESG Leadership: Value-Based Intermediation and Green Financing
Bank Islam’s ESG strategy is anchored on Value-based Intermediation (VBI) guidelines set by Bank Negara Malaysia. Key sustainability commitments include:
- Mitigating exposure to high-sustainability-risk sectors (e.g., coal) by 2030
- Doubling Shariah-ESG assets, with the FY25F target raised from RM4bn to RM28bn
- Achieving carbon neutrality in operations by 2030 and net zero by 2050
- Fostering community upward mobility through entrepreneurship and social finance
- Embedding a value-based culture across the organization
Notably, Bank Islam had already surpassed its original RM4bn green financing target for FY25F by FY24, booking RM4.9bn, and has since raised its 2025 goal to RM28bn as it expands into renewable energy, waste management, public infrastructure, and education financing. In FY24, approved financing included RM763m for renewables, RM131.2m for hybrid/electric vehicles, and RM26.5m for public infrastructure.
ESG-aligned transactions accounted for 80% of its investment banking activities, with RM7.5bn in UNSDG-linked Sukuk exposure and RM496.5m invested in Shariah-compliant SRI funds (49.2% of AUM). The bank also achieved a 59% reduction in carbon emissions at its eco-friendly branches and plans to expand this initiative.
Sector Comparison: Regional Bank Valuations and Metrics
| Company |
Ticker |
Rec. |
Price (local) |
Target Price |
Market Cap (US\$m) |
Core P/E CY2025F |
P/BV CY2025F |
ROE CY2025F |
Div Yield CY2025F |
| DBS Group |
DBS SP |
Add |
44.99 |
47.90 |
99,256 |
11.3 |
1.86 |
16.2% |
6.8% |
| OCBC |
OCBC SP |
Hold |
16.39 |
17.20 |
57,289 |
10.0 |
1.25 |
12.6% |
6.4% |
| United Overseas Bank |
UOB SP |
Add |
35.84 |
38.60 |
46,427 |
10.0 |
1.16 |
11.5% |
6.9% |
| Bank Islam Malaysia Bhd |
BIMB MK |
Add |
2.42 |
2.92 |
1,293 |
9.4 |
0.68 |
7.3% |
6.4% |
| CIMB Group Holdings Bhd |
CIMB MK |
Add |
6.88 |
9.00 |
17,431 |
8.8 |
0.99 |
11.5% |
6.8% |
| Malayan Banking Bhd |
MAY MK |
Add |
9.87 |
13.00 |
28,101 |
10.8 |
1.10 |
10.6% |
6.6% |
| Public Bank Bhd |
PBK MK |
Add |
4.31 |
5.77 |
19,716 |
11.4 |
1.37 |
12.2% |
5.3% |
Key Ratios, Risk Metrics, and Outlook
- Loan growth: 7.0% projected for 2025
- Gross impaired loan ratio: 1.1% (stable outlook)
- Loan loss coverage: Projected to rise to 156% in 2025
- Cost-to-income ratio: 59.5% for 2025, expected to decline further
- Common equity Tier-1 capital ratio: Healthy at 13.6% for 2025
- Return on equity: 7.5% for 2025, with an upward trend
- Net dividend payout ratio: 60% for 2025
Conclusion: Solid Fundamentals with Growth and ESG Tailwinds
Bank Islam Malaysia Bhd stands out in the Malaysian banking sector for its above-industry loan growth, robust dividend yield, and leadership in Shariah-compliant ESG financing. While elevated provisions and finance costs have pressured short-term earnings, the bank’s proactive overlay and strong capital position provide confidence in its risk management. As provisions normalize and loan growth remains resilient, the bank is well positioned for a profit rebound in the coming quarters. Its aggressive sustainability agenda and strong retail focus further enhance its appeal to investors seeking both financial and ESG returns.
Stock Ratings Distribution and Investment Banking Exposure
- Add: 71.0%
- Hold: 20.9%
- Reduce: 8.2%
- Investment banking clients: Add (1.3%), Hold (0.7%), Reduce (0.4%)
Recommendation
Bank Islam Malaysia Bhd is rated Add, with a target price of RM2.92, offering a 20.7% upside from the current level and a compelling forecast dividend yield of 6.4%. Investors are advised to watch for further improvements in earnings quality as provisions decline and to monitor sector-wide competitive dynamics and macroeconomic risks impacting cost of funds and asset quality.
