This article first appeared in The Edge Financial Daily on July 12, 2017 - July 18, 2017

KUALA LUMPUR: Competition for deposits among smaller Islamic banks in Malaysia will intensify if the merger between Malaysia Building Society Bhd (MBSB) and Asian Finance Bank Bhd (AFB) materialises, Moody’s Investors Service says.

Such a deal will also likely lead to the larger of the two financial institutions, MBSB, emerging as the surviving entity, the rating agency added.

Moody’s vice-president and senior analyst Simon Chen is of the view that the entry of MBSB into the current and savings account deposit market will further intensify competition for low-cost deposits among institutions that are not part of big integrated banking groups.

However, while competition among Islamic banks is growing, he still expects their profitability to remain robust.

Chen also expects MBSB’s credit profile to be enhanced because the acquisition of AFB and its Islamic banking licence will give MBSB access to cheaper funding and broaden its revenue stream.

“Broader sector consolidation is unlikely for now because the favourable operating environment will allow stand-alone Islamic institutions to fare well on their own,” he said in his report titled “Islamic Banking — Malaysia: Potential merger is credit positive for MBSB but will raise funding pressure on sector” released yesterday.

He believes that the proposed MBSB-AFB merger is driven by unique circumstances that are not shared by other Islamic banks in Malaysia.

Chen said the growth potential for Islamic banks in Malaysia remains strong, given the availability of well-established infrastructure and growing consumer awareness of syariah-compliant products. “The stable macroeconomic environment is also supportive of credit demand for all banks in the country.”

On June 19, MBSB announced that it had submitted an application to Bank Negara Malaysia for approval of its proposed merger with AFB, putting non-bank lender MBSB within closer reach of obtaining full Islamic banking status.