This article first appeared in The Edge Malaysia Weekly on September 13, 2021 - September 19, 2021

BANK Muamalat Malaysia Bhd is confident of its ability to keep growing, particularly in the retail segment, even though the Islamic banking market remains highly competitive. President and CEO Khairul Kamarudin says mergers and acquisitions (M&A) do not currently feature in the group’s five-year strategic plan that runs until 2024.

“There is still room for Bank Muamalat to grow in the market. It may seem saturated, but the industry growth is encouraging. So, [M&A] is not something we would touch for now,” he tells The Edge when asked if the small-sized lender could continue on a standalone basis without having to resort to M&A. The bank, with total assets of RM25.79 billion, is one of the smaller Islamic lenders among the 16 in the country.

S&P Global Ratings recently noted that the Islamic banks that come under the eight local banking groups alone accounted for more than 76% of the domestic Islamic financing market share as at end-2020, up from 67% in 2010. This highlights how competitive the market is and how much tougher it is for smaller standalone banks to hold their own against the larger players.

According to Khairul, the bank’s focus for now is to grow on the back of its own strengths, while increasingly tapping digital technologies. Bank Muamalat is 70%-owned by DRB-Hicom Bhd, a conglomerate controlled by prominent businessman Tan Sri Syed Mokhtar Albukhary, while the remaining 30% is held by Khazanah Nasional Bhd.

“For now, it’s about ensuring we come out [of the Covid-19 pandemic] in good shape, ensuring we grow sustainably and setting the culture in the right direction. And maybe, later in the future, if the question [of M&A] arises by virtue of the bank being [attractive], then I cannot say yes or no … it’s a shareholder decision,” Khairul says.

The question of M&A has also persistently hovered over Bank Muamalat because Bank Negara Malaysia requires DRB-Hicom to pare its stake in the bank to at least 40%. That was the condition set by the central bank when it gave the go-ahead for DRB-Hicom to buy a 70% stake from Bukhary Capital Sdn Bhd — an entity also controlled by Syed Mokhtar — in a RM1.069 billion deal in November 2008.

After more than 12 years, the condition has yet to be met, with the central bank giving several extensions. Past moves by DRB-Hicom to sell a strategic stake or merge the lender with another —including Malaysia Building Society Bhd, Affin Bank Bhd and Bank Islam Malaysia Bhd — have fallen through.

The bank is understood to have since considered a listing as a pare-down option, but there have been no developments on that front either.

Asked for an update on the pare-down situation, Khairul says “that is a shareholders’ matter”.

“But if you look at our numbers today, we’ve managed to bring down our gross impaired loan ratio to 1.08% from 1.32% in December 2019, we’re doing double-digit growth [in financing], our net financing margin (NFM) is at 2.5%. ROE (return on equity), we’re on track for close to 10% [on a pre-tax basis] by year end from 6.8% last year. I think, those are the key areas that the shareholders are focused on right now — to improve the bank’s key ratios.”

Khairul, who was CEO of BIMB Holdings Bhd from June 2017 to August 2018, took on the top job at Bank Muamalat in November 2019, a few months before the pandemic hit. In June last year, Datuk Seri Tajuddin Atan became the bank’s chairman. Tajuddin was formerly CEO of Bursa Malaysia Bhd and RHB banking group.

Bank Muamalat made a net profit of RM172.86 million for the financial year ended Dec 31, 2020 (FY2020), against RM98.81 million in the nine-month period of FY2019. (It changed its financial year end from March to December in FY2019.)

Providing a like-for-like comparison in its latest annual report, it said profit before tax and zakat in FY2020 fell by 23.7% year on year to RM174.77 million. The decline in profit was because it had incurred a modification of loss (ML) of RM42 million from the financing payment moratorium, higher pre-emptive provisions and lower margin from the impact of a series of cuts in the overnight policy rate that year.

Based on the unaudited financial statements posted on its website, Bank Muamalat made a net profit of RM46.61 million in 2QFY2021, an increase of 168.3% y-o-y and 26.5% quarter on quarter. Allowance for impairment on financing stood at RM18.01 million, higher than the RM8.62 million in the year-ago period but less than the RM25.65 million in 1QFY2021.

This took its first-half earnings to RM83.44 million, up by a sterling 835.9%, given the absence of ML. Total net income grew 34.2% to RM342.88 million.

Khairul is optimistic that the worst is behind the group, given the expected improvement in the economy following the aggressive rollout of the vaccination programme. He anticipates the bank doing better in FY2021 in terms of earnings, before a stronger recovery next year.

“I am optimistic that we can only move upwards,” he says, adding that the bank’s monthly financing disbursements in the recent lockdowns were nowhere as severe as the first one in March last year.

One of the reasons for this is the fact that people have been increasingly open to using digital channels.

“After the Covid-19 outbreak last year, we quickly developed a digital Muamalat application platform that customers could just scan on their phone and apply for  facilities. We have been getting good traffic from that particular channel since July last year. We’re now getting about 100-plus applications per day through that channel for household facilities like home financing and personal financing.

“So, with the digital channel, we have had a steady flow of customers, while our staff have also been kept safe as they aren’t required to meet customers face to face. That’s something we are happy to report,” he adds.

Khairul expects the bank’s financing growth to come in at a slower pace of “just above 10%” this year.

Another reason he expects stronger earnings is that the ML this year, to be incurred in the second half of the year, is unlikely to be as substantial as last year’s RM42 million, given that the latest moratorium is being offered on an opt-in — as opposed to blanket — basis.

Additionally, he does not anticipate provisions in 2HFY2021 to be as strong as in the first half of the year. As at June, “about 20%” of the bank’s RM19.47 billion financing book was under targeted repayment assistance.

“We think we’ve already made sufficient pre-emptive provisions. Internally, we are looking at a K-shaped [economic] recovery, where some segments will take a longer time to recover. So, that would generally include the tourism and tourism-related financing sector, for example, which we actually don’t have much of. But we’ve taken the necessary steps to put in an overlay of provision,” he assures.

Of the bank’s RM19.47 billion gross financing as at end-June, the bulk is in home financing (RM5.28 billion) and personal financing (RM5.96 billion). “On the personal financing side, our exposure is largely to the civil servants and government-linked company sector, which have not seen a massive [deterioration],” Khairul says.

Khairul says Bank Muamalat will continue to focus on retail financing, and will increasingly lend to micro- and small-sized enterprises. It hopes to launch its first credit card later this year, and is looking to develop equities-based Islamic products based on the Mudharabah concept.

It also hopes to grow its Islamic pawnbroking, or Ar-Rahnu, business. The business is currently small, accounting for just 1.36% of its financing.

“We will look at opportunities in the market to expand the Ar-Rahnu portfolio because we see it as a good way for micro, small and medium enterprises (MSMEs) to have access to fast funding. We saw encouraging demand after the first Movement Control Order last year because it offers the easiest financing access for those without credit history,” he says.

Citing sources, The Edge reported in June that Pos Malaysia Bhd — also under the DRB-Hicom group — was in talks to sell its Islamic pawnbroking business to Bank Muamalat.

“We don’t comment on speculation,” Khairul says, when asked about the report. “There are many cooperatives that own Ar-Rahnu businesses and we can expand that way through partnerships with these cooperatives. That’s something that we are looking at.”

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