RAM: Islamic banks to grow faster than conventional peers

PETALING JAYA: RAM Ratings said its analysis revealed that the expansion of domestic Islamic financing surpassed conventional banking loans in 2016, despite weaker economic conditions.
In a statement yesterday, the rating agency said the growth of Islamic financing clocked in at RM45 billion against the RM32 billion achieved by the conventional banking sector.
“We anticipate rapid advancement for the Islamic banking sphere as major banking groups in Malaysia are prioritising the growth of syariah-compliant assets,” RAM co-head of financial institution ratings Sophia Lee said.
Bank Negara Malaysia has targeted Islamic financing to constitute 40% of the domestic banking system’s loans by 2020, from the current 29%.
RAM noted that strong regulatory backing and industry innovation have led to considerable traction for Islamic banking in recent years, adding that Malaysia’s commitment to maintaining its position as a significant Islamic finance hub is likely to propel the industry towards meeting Bank Negara’s 40% goal.
RAM said it has maintained a stable outlook on the Malaysian Islamic banking sector.
Having emerged from the challenging operating environment of slower growth and weaker sentiment in 2016, RAM said, the sector has held steady with sturdy asset-quality indicators and healthy capital reserves.

“The 11 Islamic banks in our rating portfolio (out of 16 in the entire industry), which account for more than 90% of the system’s Islamic assets, have remained resilient to date; we anticipate the same for the current fiscal year.
“Our key expectations for 2017 include the following: financing growth to pick up to 13%-14%; asset quality to stay strong despite some potential weakening; liquidity to remain healthy; some pressure on profits amid increased funding costs; and sturdy capitalisation,” it added.
In addition, owing to the rapid growth of its financing base, RAM said, the gross impaired-financing (GIF) ratio of the domestic Islamic banking system has been kept low through the last decade.
“Having said that, we observe some weakness in the finance and insurance and construction sectors, which had led to a higher GIF ratio of 1.3% as at end-December 2016 (end-December 2015: 1.2%).
“Some seasoning effects from earlier periods of prolific growth are also expected to come into play. However, we do not expect any significant deterioration given the prudent underwriting standards of banks in Malaysia”, Lee said, adding that on the household-financing front, asset-quality indicators have stayed strong.
Furthermore, RAM said, the liquidity of Malaysian Islamic banks has remained healthy, although funding conditions have tightened, in which the liquidity coverage ratio of the sector stood at 125% as at end-December 2016.
Moreover, it said, keen competition for deposits is likely to persist as banks emphasise stronger liquidity buffers.
RAM said the financing-to-deposits (including investment accounts) ratio of the Islamic sector was further lifted to 87.6% as at the same date, as financing growth continued to outpace that of deposits and investment accounts.
However, the rating agency added, given the expectation of increased funding pressures, the profit performance of banks may continue to soften this year.
“Nonetheless, domestic Islamic banks are still well capitalised, with respective common-equity tier-1 and total capital ratios of 12.1% and 15.8% as at end-December 2016,” RAM said.