Corporate sukuk to grow slow in 2020


DOMESTIC corporate sukuk are in a better position than during the global financial crisis or the Asian financial crisis supported by moderately leveraged balance sheets.

Going into the current crisis, corporate sukuk had relatively stable cashflow metrics, said Malaysian Rating Corp Bhd’s (MARC) chief ratings officer Rajan Paramesran.

“This allows for some headroom to absorb immediate performance weakness without putting their credit profiles at risk.

“Nonetheless, on a longer term, corporates’ ability to withstand the impact would depend on the duration and severity of the economic crisis,” he said in a webinar titled “Impact of Coronavirus on Islamic Finance — Focus on Malaysia” yesterday.

Rajan said for now, the current low interest-rate environment has seen a spate of sukuk issuances for refinancing and restructuring activities.

“Government-supported transport projects, state-backed water infrastructure projects and solar power plant projects have recently been and will be key sources for sukuk issuances,” he added.

Rajan said the catalyst for the growth in the Islamic debt market continues to be government incentive on susuk issuances such as tax reduction in line with government effort to promote the country as an Islamic financial hub.

“There is also significant demand for Shariah-compliant investments within the country and from abroad,” he said.

Based on MARC’s data, corporate sukuk issuance by the end of July 2020 amounted to RM34.3 billion, which is the lowest to date over the last 10 years and dampened by the Covid-19 pandemic.

“For 2020, our forecast for corporate sukuk issuance is a low of between RM60 billion and RM70 billion, closer to ultimate years of global financial crisis,” he said.

According to a Moody’s Investors Service Inc’s report titled “Cross-sector—IslamicFinance”, issuances from Malaysian entities fell 9% to US$32.8 billion (RM137 billion) in the first half of 2020 (1H20).

Yet, Malaysia remained the world’s leading issuer, with a 42% share of the total in 1H20, versus a 41% share during the same period last year.

In a separate report, Moody’s said Malaysian Islamic banks are expected to remain resilient amid the Covid-19 outbreak, underpinned by heavy concentration on retail financing.

Moody’s analyst Tengfu Li said retail financing is less vulnerable to an economic downturn than business financing partly because retail financing is secured by either residential properties, cars or low-risk unit trusts.

He said Malaysian banks in general have prudent underwriting practices for retail financing, thanks to regulatory guidelines for “responsible” financing.

“Retail current account savings account (CASA) deposits will drive overall deposit growth as consumers are wary of spending their funds, while financing demand will remain weak.

“Deposits at Islamic banks will continue to grow faster than conventional deposits due to the popularity of Shariah-compliant financial products and the Islamic drive by financial groups,” Li said in a report titled “Structural Features will Underpin Islamic Banks’ Resilience against Coronavirus Fallout”.

Islamic banks will still have higher financing-to-deposit ratios than conventional banks, but funding risks are mitigated by the large shares of government deposits in their funding mixes.

This reflects the strong support from the Malaysian authorities in developing the Islamic banking sector.

Increasing furloughs and unemployment will raise the risk of delinquencies on retail financing, which is largely made up of home, auto and unsecured personal financing.

As of end-2019, seven large Islamic banks and the conventional businesses of five financial groups accounted for about 80% and 73% of total Islamic and conventional banking assets respectively. Li said Islamic banks are also well-positioned to defend profitability because they will see limited impairment losses as their asset  quality holds up.

“Financing growth at Islamic banks will decline, but remain higher than at conventional banks as a result of financial groups’ efforts to expand Islamic banking and increasing acceptance of such products by consumers.

“Islamic banks will keep their operating expenses low as they continue to leverage their parents’ infrastructure,” Li added.

Impairments at Islamic banks generally remained stable in the first quarter of 2020, when the coronavirus outbreak started to disrupt global trade and the Malaysian economy.

Large increases in impairments at the conventional operations of Malayan Banking Bhd and CIMB Bank Bhd, the two-largest financial groups in the country, were mainly driven by overseas corporate loans.

Margins for banks in Malaysia will contract due to a slowdown in financing and aggressive policy-rate cuts by the central bank.

A reduction in reserve requirement and declines in funding costs — due to reductions in time deposit rates and an acceleration of growth in CASA deposits amid spending cuts by consumers — will alleviate pressure on margins, but only to an extent.

Banks will incur a one-time modification loss from the waiver of income on auto and fixed-rate Islamic financing during the repayment moratorium period, although income from the rest of retail and small and medium enterprise financing will continue to accrue.

At the same time, margins for Islamic banks will be supported by financial groups’ efforts to expand Islamic banking, which will help financing growth rates at Islamic banks remain higher than loan growth rates at conventional banks.

Moody’s expects that Islamic banks will be able to keep their capitalisation at current levels in the next 12-18 months, as a slowdown in capital consumption offsets a deterioration of profitability that will weaken capital generation.

As for provision coverage, the local accounting board has temporarily relaxed provisioning requirements to soften the impact of the coronavirus outbreak, but the rating agency expects banks to proactively set aside sufficient provisions.

“Funding for Islamic banks will remain well-supported by their parents, given large Islamic banks are either subsidiaries of the strongest financial groups in Malaysia or indirectly owned by the Malaysian government.

“The parental support is mainly in the form of deposits, investment accounts and sukuk,” Li said.