Business sentiment continues to be weighed down by US-China trade tensions and global development
by NG MIN SHEN / pic by TMR FILE
LOCAL Islamic financial institutions could see weaker than projected growth in financing and earnings this year due to global trade tensions and weaker expansion across economies worldwide.
Despite continued support from growth in residential financing and purchase of securities, business sentiment continues to be weighed down by US-China trade tensions and global development.
“Although some early signs of trade diversion benefits have emerged, the overall level of optimism remains subdued as reflected by the RAM Business Confidence Index for the third quarter of 2019 (3Q19) to 4Q19.
“As such, RAM Rating Services Bhd (RAM Ratings) expects some downward bias to its 10% to 11% financing growth projection for the Islamic banking industry in 2019,” its co-head of financial institution ratings Wong Yin Ching told The Malaysian Reserve in an email response last week.
The latest RAM Business Confidence Index continues to indicate subdued levels of optimism for the second half of 2019 as firms mostly still believe the next six months will remain challenging amid lingering economic ambiguity.
Earlier this year, RAM Ratings and Fitch Ratings Inc said in separate reports that Islamic finance is expected to continue anchoring the growth of the overall banking sector after posting a 11% growth last year compared to a 3.3% expansion of conventional lending.
“Coupled with the more moderate financing growth, we expect Islamic banks’ earnings to be under some pressure going forward.
“Most banks are putting strong emphasis on non-financing income, cost efficiency, as well as collection efforts to ensure that credit costs are contained at the current benign level,” Wong added.
She said financing growth of the Islamic banking industry moderated to 9% year-on-year (YoY) in May this year, compared to the 11% registered in the full-year 2018.
Business financing decelerated more sharply at 4.7% YoY (2018: 8.3%) compared to that of the household sector at 11.9% YoY (2018: 13%).
Household financing growth was underpinned by residential property mortgages, followed by financing for the purchase of securities — in line with the increased number of Islamic banks appointed as agent banks that are authorised to offer Amanah Saham Nasional Bhd unit trusts.
According to RAM Ratings’ March 2019 note, Islamic financing comprised 32% of the overall system’s loans as at end-January this year.
Slower growth momentum not withstanding, the ratings firm continues to hold a stable outlook on the Islamic banking industry, consistent with its view on the overall domestic banking system.
“Islamic banks’ asset quality has been resilient,” Wong said, adding that the gross impaired financing (GIF) ratio stood at 1.38%, though this was an increase from the 1.28% as at the end of 2018.
“GIF coverage including regulatory reserves is above 100%, providing a healthy buffer against potential credit losses. While the difficult operating landscape may affect some borrowers’ repayment capabilities, we do not expect Islamic banks’ asset quality metrics to deteriorate significantly,” she added.
Impaired financing of the overall Islamic banking system stood at RM7.89 billion in May this year — up 10.8% from RM6.94 billion in December 2018, statistics from Bank Negara Malaysia show.
The bulk of non-performing or impaired loans at both commercial and Islamic banks came from loans for purchase of residential property, which hit RM6.03 billion in 1Q19, marking a 7.3% rise from RM5.62 billion the year prior.
However, this also includes the non-performing loans of conventional banks, which typically would see a larger catchment than Islamic lenders.
Islamic lenders won’t be spared either from the race for deposits, ahead of the implementation of the Net Stable Funding Ratio (NSFR) — a liquidity measure that requires banks to focus on long-term stable funding — in 2020.
“Competition for retail and small and medium enterprises deposits is likely to heat up again as banks brace for the implementation of the NSFR which would squeeze banks’ net financing margins,” Wong said.
Acquiring more retail deposits is one way for lenders to boost long-term stable funding. However, this has also resulted in net interest margin (NIM) squeezes at most banks.
Malayan Banking Bhd, South-East Asia’s fourth-largest lender, has guided for NIM compression of up to five basis points (bps) in 2019, while RHB Bank Bhd — Malaysia’s fourth-biggest bank — is expecting up to 3 bps compression in its NIM this year.