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Press Release
27 Mar | Tuesday
RAM Ratings: Islamic banks driving Malaysian banking sector growth

RAM Ratings highlights that the Islamic banking industry recorded a healthy 10.3% financing growth in 2017, substantially ahead of conventional banks’ 1.7% growth in the same period. “Our analysis shows that Islamic financing has overtaken conventional loans as the growth driver for the domestic banking system in recent years. Islamic financing accounted for 71% of the increase in the banking system’s financing in 2017, as several major players’ Islamic First strategy gained further traction,” observes Wong Yin Ching, RAM’s Co-Head of Financial Institution Ratings.

The strong growth momentum for Islamic financing is expected to continue in 2018 – with expansion coming in at the mid-to-high teens, premised on improving consumer sentiment and steady business optimism. Our growth target also factors in Malaysia Building Society Berhad’s Islamic financing portfolio (through Asian Finance Bank Berhad), which will augment the Islamic banking system’s financing by some 7%.

In conjunction with the publication of RAM’s annual Islamic Banking Bulletin: Engine of Growth, we reiterate the stable outlook on the Malaysian Islamic banking system. Our expectations for 2018 are summarised as follows:

• Islamic financing growth in the mid-to high teens.
• Asset quality to stay resilient.
• Funding profile to strengthen in the lead-up to the NSFR requirement.
• Mild pressure on net financing margins and earnings.
• Capitalisation to remain sturdy.

Islamic banks’ asset quality continued to be resilient with a healthy gross impaired financing (GIF) ratio of 1.2% as at end-January 2018 and an annualised credit-cost ratio of 19 bps in 9M 2017. The adoption of MFRS 9 should lead to an uptick in steady-state credit costs, although the impact is expected to be manageable – particularly for banks with strong asset quality. Islamic banks’ GIF coverage had strengthened to 108% as at end-January 2018 (end-December 2017: 89%), due to the incremental impairment provisions arising from the implementation of MFRS 9 in 2018, as banks with December financial year-ends have already adopted this standard. The first-day capital impact was negligible; Islamic banks common equity tier-1 capital ratio remained unchanged m-o-m at a sturdy 12.5% as at end-January 2018.

Islamic banks’ deposits expanded a commendable 14.2% y-o-y in 2017 (2016: +3.8%), largely due to stronger corporate earnings and a major player’s shift in priority to focus on deposit mobilisation instead of investment accounts (IAs). Although IAs are capital-efficient, they attract higher funding costs as they are uninsured; this requires Islamic banks to strike a balance between capital savings and margin protection. “We envisage some degree of margin compression as banks continue to compete for retail and SME deposits in the lead-up to the net stable funding ratio requirement. This, coupled with our anticipation of an uptick in credit costs, underpins our softer earnings outlook for Islamic banks this year,” explains Sophia Lee, RAM’s Co-Head of Financial Institution Ratings.

In its latest move to steer players towards sustainable intermediation, Bank Negara Malaysia introduced the value-based intermediation (VBI) principles in a strategy paper released in July 2017; this was subsequently finalised in March 2018. VBI aims to deliver the intended outcomes of Shariah through practices, conduct and offerings that generate a positive and sustainable impact on the economy, community and environment – without compromising the financial returns to shareholders and their long-term interests. The implementation of these principles necessitates a paradigm shift in how banks provide financing and other financial services, as well as changes in business processes. At present, nine Islamic banks have committed to adopting the VBI principles in their business strategies; implementation will be in phases, with each bank determining its own timeline.

Analytical contact
Loh Kit Yoong
(603) 7628 1031
kityoong@ram.com.my

Wong Yin Ching, CFA
(603) 7628 1117
yinching@ram.com.my

Sophia Lee
(603) 7628 1189
sophia@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my

Date of release: 27 March 2018

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2018 by RAM Rating Services Berhad’s

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