SINGAPORE (July 9): It may take up to five years for Malaysia’s Islamic banks to enhance their funding profiles, according to a report by S&P Global Ratings recently.
“The funding profiles of Malaysia’s Islamic banks will likely stay weaker than that of the overall sector, reflecting structural weakness in attracting low-cost retail deposits,” said S&P Global Ratings credit analyst Nikita Anand.
Islamic banks’ funding costs are highly sensitive to rate increases due to their lower share of low-cost demand and savings deposits, and higher share of pricier wholesale deposits, Anand noted.
Islamic banks’ profitability might remain lower than the sector’s in 2024, affected by elevated deposit rates and intense competition in Malaysia’s banking sector.
The report said the banks’ savings deposits are 27% lower compared with the sector’s 31%, while they have a higher share of costlier wholesale deposits (71% compared with the sector’s 64%).
Standalone Islamic banks face higher funding risks compared to subsidiaries of large banking groups, which benefit from intra-group funding..
“The sector has also been gradually diversifying its funding sources; for example, by increasing funding from investment accounts,” Anand said.
Management actions and promotional efforts are being ramped up to grow Islamic deposits and address funding challenges, the report added.
Sharper contraction in net financing margins
Islamic banks saw a sharper contraction in net financing margins in 2023 than conventional banks, said the S&P report.
This was due to the upward repricing of term deposits and intense competition of deposit rates.
The decline was sharper than the contraction in net interest margins at conventional banks.
“For the Islamic bank subsidiaries of rated Malaysian banks, margins contracted 34 basis points on average, compared with 27 basis points at the group level,” it added.
S&P noted that profitability of Malaysian Islamic banks is generally in line with that of the overall banking sector, but in 2023, the gap had widened, with return on assets of 1.0% versus 1.2% for the sector.