Analysts: Islamic banks perform as expected

Loans growth strengthens but Q2 provision for loan losses higher

PETALING JAYA: The recent financial performance of Islamic banks, although relatively weaker than in previous years due to the challenging economic conditions in the past 12 months, remains in line with expectations, according to analysts.

An analyst with a local stockbroking firm saw improvement in net profit year-on-year and quarter-on-quarter due to higher income.

Loans growth also strengthened in the second quarter with CIMB Islamic Bank Bhd recording growth of 21.9% over the previous quarter, followed by Maybank Islamic Bhd (+7.1%), Alliance Islamic Bank Bhd (+6.5%), RHB Investment Bank Bhd (+6%) and Public Islamic Bank Bhd (+5.1%).

However, the analyst noted that Islamic banks’ provisions for loan losses had risen in the second quarter with the possibility of further increases going forward.

She pointed out that allowance for losses on financing and advances of Islamic banks in the second quarter jumped some 56% to RM279.7mil versus the previous corresponding period.

“However, non-performing assets ratio has improved to an average of 1.95% in the second quarter against 2.24% in the first quarter,” she said.

Malaysian Rating Corp Bhd (MARC) vice-president/head of financial institutions ratings Anandakumar Jegarasasingam noted that financing activities by Islamic banks continued to register double-digit growth of 11.5% during the first seven months of 2009 compared with the low 3.6% posted by the commercial banking sector.

“Given the increased popularity of the Islamic banking model and its still relatively small size in the broader financial sector, this growth trend is expected to continue into 2010,” he said.

As for profitability, Anandakumar pointed out that income from financing activities had increased in tandem with growth in financing activities but non-financing-based income, such as fees and commissions, were impacted by the decline in business activities.

Provisions made in 2008 and the first half of 2009 were generally higher for most Islamic banks.

Anandakumar said the Islamic banking sector’s loss coverage of non-performing financing facilities increased from 65% at end-December 2006 to 83% at end-December 2008, and remained at that level at end-July 2009.

“This increase in provisions could be attributed to the banks’ desire to shore up their loss reserves as a buffer against an anticipated increase in delinquencies that are likely in view of the weak economic conditions and, in the case of some of the newer banks, as a result of the seasoning in their financing portfolio,” he added.

He expects some increase in delinquencies over the next two to three quarters.

This, in tandem with the likely pressure on income streams due to competition and lower macro interest rates, is likely to impact expansion in profitability.

On propects for Islamic banking, analysts expect such operations to continue to improve in the country as banks are putting more emphasis on growing the division.

A banking analyst with another research arm said: “The Islamic banking business has helped pull up the financials of banks such as AMMB Holdings Bhd, Malayan Banking Bhd and Public Bank Bhd in the recent second-quarter results.

“Moreover, there is strong interest for issuance of sukuk as an alternative to funding. I expect stronger contributions from this division going forward.”

Link: http://biz.thestar.com.my/news/story.asp?file=/2009/9/7/business/4654872&sec=business