Islamic banks’ financing growth to fall below 5%, RAM says

KUALA LUMPUR: RAM Ratings expects financing growth of Islamic banks to decline to below 5% in fiscal 2020, from 8.3% in 2019 due to the fallout from the Covid-19 pandemic.

Sophia Lee, RAM Ratings’ co-head of financial institution ratings said on Monday the decline tooked into account its expectation of a steep moderation of economic growth.

RAM said the rapid spread of the Covid-19 pandemic and its far-reaching effects on the domestic and global economy, are anticipated to dampen credit demand and affect the performance of Islamic banks this year.

The rating agency maintained a stable outlook on the Malaysian Islamic banking sector due to the industry’s sturdy fundamentals, although it cautioned that Islamic banks will face heightened uncertainties and challenges in the still-evolving economic landscape.

Key expectations for the industry in 2020, as stated in its annual publication, “Islamic Banking Insight”, include asset-quality indicators may weaken after financial relief measures end; comfortable liquidity; headwind to profitability due to margin compression and higher impairment charges but capitalisation to stay healthy

RAM said Islamic banks’ asset quality remains healthy although its gross impaired financing (GIF) ratio edged up to 1.4% as at end-December 2019 (end-December 2018: 1.3%) due to a couple of lumpy corporate accounts.

The system’s credit cost ratio declined to an annualised 17 bps in the nine months of 2019 (2018: 22 bps), aided by non-recurring items of a few banks.

Excluding the affected banks, credit cost ratio would stand at a higher 27 bps.

Wong Yin Ching, RAM’s co-head of financial institution ratings pointed out the reported asset quality indicators of Islamic banks should stay manageable in 2020, chiefly supported by the recent financial relief measures initiated by Bank Negara Malaysia in response to the outbreak.

“That said, these indicators may not be reflective of the actual credit quality of the Islamic banking system. We are mindful that default incidences and provisioning needs may rise next year if borrowers’ weaknesses stretch beyond the six-month moratorium, ” Wong said

In light of Bank Negara’s announcement, Malaysian banks will be granting an automatic moratorium on all financing repayments (except credit card balances) by individuals and SMEs for six months, with effect from April 1,2020, benefitting around 70% of the Islamic banking industry’s total financing.

Banks will also convert credit card balances into term loans for cardholders who have failed to meet minimum repayments consecutively for the last three months while facilitating requests from corporates for deferments or restructuring.

Meanwhile, liquidity of Islamic banks is still comfortable, with the industry’s liquidity coverage ratio (LCR) clocking in at 151% as at end-January 2020.

As part of the regulatory relief measures, banks are allowed to operate below the minimum LCR threshold of 100% given the reduction in cashflow during the moratorium period.

Bank Negara will also continue to supply daily ringgit liquidity to banks via various tools under its open market operations.

Growth of customer funding (deposits and investment accounts, +8.5%) kept pace with overall financing growth in 2019, although parental funding and liquidity support in the form of restricted profit sharing investment accounts and interbank funding remained important for Islamic banks.

RAM foresees headwinds to earnings, given further margin pressure subsequent to the twin OPR cuts in early 2020 and higher credit costs expected going forward.

Islamic banks continued to boast healthy financing-loss buffers, as reflected in the system’s strong common equity tier-1 capital ratio of 13.6% as at end-January 2020.

In addition, the GIF coverage ratio (including regulatory reserves) of the sector was a sturdy 116% as at end-September 2019.

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