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Islamic Banking

Islamic Banking Islamic banking

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#1
Mansoor

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    V A L U E S E E K E R

    Monday, January 12,2015

    3QCY14 Islamic Banking Industry:

    Review & Outlook

    State Bank of Pakistan (SBP) has recently issued Islamic Banking Bulletin for 3Q ended Sep'14. In today's Value Seeker we discuss major developments in Islamic Banking industry and outlook of the same going forward.

    Profitability up by mammoth68%YoY
    Net profit of the Islamic banking industry grew by 68%YoY to Rs9.4bn as against Rs5.6bn during same period last year. Similarly Profit before Tax has almost doubled on YoY basis to Rs12bn at 3Q end. Improved assets quality, lowered provision against bad debts and rising spreads between deposit and lending were the main reasons behind this profitability growth. Better earnings growth also positively impacted the ROE and ROA of Islamic banking sector where the same depicted a YoY growth of 510bps and 30bps to 16.7% and 1.2%. However operating expense to gross income ratio of Islamic banks was 65.6% as on Sep'14 which was 10.8% higher than the banking industry.

    Expanding core operations
    Total assets of Islamic banking witnessed an increase of 19%YoY and settled at Rs1102bn as against Rs926bn during same period last year. Resultantly, market share of Islamic assets in total banking industry has jumped to 9.9% as on Sep'14 compared to 9.5% in Sep'13. Similarly Islamic deposits grew by 20%YoY to Rs934bnas against Rs775bn duringsame period lastyear.We ascribe thisgrowth to rapidly growing Islamic banking branch network & customers' preference of shariah compliant banking operations. However, net financing and investments of Islamic banks plunged by 2.6%YoY to Rs693bn v/s Rs711bn during same period last year. Total number of Islamic branches stood at 1423 as on Sep'14 which were 1161 on Sep'13; 23% growth YoY.

    Outlook: Positive growth to continue
    Islamic banking industry is on its upward trajectory which is very likely to continue as more conventional banks are trying to establish Islamic subsidies or pursuing Islamic conversion. Similarly the existing Islamic banks are also adding more branches every year. We expect, the size of Islamic banking will be double in next five year.


    Investcap Research
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    #2
    Mansoor

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    Limited Investment Opportunities Shadow IBs Performance

    Ø The asset and deposit size of Islamic Banks (IBs) have registered a 4-yr cumulative annual growth of 23% each, outpacing the industry growth of 13% and 12% respectively. IBs hold a total asset size of PkR929bn (7.01% share in total industry) and a total deposit base of PkR791bn (8% share in total industry) respectively.


    Ø The IBs have invested 36% in Islamic Financing (net) whereas 28% and 21% in lending to FIs and Investments respectively. This is in sharp contrast to 17% parked as lending to FIs in Dec’14.


    Ø The continued reduction in discount rate has enhanced pressure on Islamic banks to park their surplus funds at competitive rates - due to a severe lack of new Sukuk issues - unlike conventional banks where a significant portion has already been invested in Pakistan Investment Bonds at much higher yields.


    Ø With credit offtakes expected to grow by 10-12% in FY16, the excess liquidity along with a CAR of 14.6% as of Jun’15 provides the launchpad for financing for the IBs.


    Ø It is pertinent to mention here that the largest Islamic bank i.e Meezan Bank (MEBL) is running with a Capital Adequacy Ratio (CAR) of 11.9% (Dec’14) vs. 10% minimum required and 14.6% reported in Jun’15 by Islamic Banking Industry. Thus, it could restrict MEBL to expand its financing base more aggressively than its peers. The net financing by the bank have registered a 4-yr growth of 19.7% vs. 26.8% achieved by the IBs overall.


    Ø Therefore, we highlight the risk associated with the lack of investment avenues available for funds deployment for the IBs. Currently, MEBL is trading at a P/B of 2.05x vs. 5-yr average of 1.63x above the banking industry average of 1.87x. Moreover, its P/E have risen to 10.40x vs. 5-yr average of 8.18x and market P/E of 9.93x.




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