KUALA LUMPUR: Strong asset quality, high provision levels, and a comfortable capital position will provide Bank Islam Bhd decent valuations and attractive dividend yields.
Maybank Investment Bank Bhd (Maybank IB) analyst Desmond Ch'ng said Bank Islam is the only listed Islamic bank at the moment with decent valuations.
He said the stock trades at the prospective financial year of 2022 price by volume (PBV) of just 0.9 times for a return on equity (ROE) of 10.3 per cent and attractive yields at 4.8 per cent for the financial year of 2021.
"BIMB Holdings Bhd recently completed restructuring exercise. As a result, Bank Islam can now be evaluated on its own as a standalone entity.
"This does not diminish the fact that it continues to have a bancassurance agreement with its sister company, Syarikat Takaful Malaysia Keluarga Bhd (Takaful Malaysia) that will provide it with a steady source of fee income," he said in a research note today.
Ch'ng said Bank Islam provides investors with exposure to the fourth largest Islamic bank in the country regarding asset size and the only one directly listed on Bursa Malaysia.
"Bank Islam is very much a retail bank, with consumer financing comprising 76 per cent of total financing portfolio.
"Lending predominantly to government civil servants and government-linked companies employees on a salary deduction basis," he said.
Maybank IB said bank Islam's asset quality has been very stable, with its gross impaired loans (GIL) ratio declining further to 0.72 per cent end-Jun 2021 from 0.86 per cent end-Sep 2019 (pre-Covid).
"We recommend a Buy call on Bank Islam with a target price of MYR3.80, pegging the stock to a prospective financial year of 2022 PBV of 1.1 times (ROE: 10.3 per cen).
"We have conservatively assumed a lower dividend payout ratio of 45 per cent from 50 per cent previously, and the prospective financial year of 21 dividend yield of 4.8 per cent is attractive."
Meanwhile, he said Bank Islam financing loss coverage has since risen to 235 per cent from 179 per cent, over the same period.
Other positives include a current account savings account (CASA) ratio of 38.6 per cent (industry: 31.7 per cent) and a comfortable Common Equity Tier 1 (CET1) ratio of 13.8 per cent.
He said any slowdown in the domestic economy would have a negative impact on the bank's earnings, as it would result in a pick-up in deposit rate competition.
Meanwhile, a deterioration in asset quality, particularly concerning its exposure to the B40 segment, could result in higher-than-expected provision levels.