Structural features help Islamic banks' withstand Covid-19 fallout, says Moody's

KUALA LUMPUR: A concentration on retail financing and other structural features will help Islamic banks withstand economic disruptions caused by the Covid-19 outbreak, Moody’s Investors Service said.

Moody’s in its latest report said the seven largest Islamic banks in Malaysia, five of which are subsidiaries of domestic banking groups with conventional operations, have a heavy concentration on retail financing which is less vulnerable to an economic downturn compared to business financing.

“Islamic banks are also well-positioned to defend profitability because they will see limited impairment losses as their asset quality holds up,” it said.

In addition, the rating agency said financing growth at Islamic banks would be supported by efforts of financial groups to expand Islamic banking and increase the acceptance of such products by consumers.

“Also, Islamic banks will continue to keep their operating expenses low as they leverage on their parents’ infrastructure,“ it said.

Moving forward, Moody’s said it expects Islamic banks to maintain their capitalisation in the next 12-18 months as a slowdown in capital consumption offsets a deterioration in profitability.

“Their funding and liquidity should remain stable, underpinned by retail deposit growth, weak financing demand and support from the government and parent groups,“ it said.

Meanwhile, its analyst Tengfu Li said declining economic growth and increasing unemployment would raise the risk of delinquencies in retail financing but the impact on losses would be limited as most of it is secured by residential properties, cars or low-risk unit trusts.

In addition, he said, Malaysian banks generally have prudent underwriting practices for retail financing thanks to regulatory guidelines for ‘responsible’ financing, which added to their asset quality.

He said retail current and savings account deposits would drive overall deposit growth as consumers wary of spending save their funds, while financing demand will remain weak.

“While deposits at Islamic banks in general will continue to grow faster than conventional deposits due to the popularity of Sharia-compliant financial products and the Islamic drive by banking groups.

“And continued support from the government and parent groups, mainly in the form of deposits, investment accounts and sukuk will also mitigate funding risks,“ he added. - Bernama

source https://www.thesundaily.my/business/structural-features-help-islamic-banks-withstand-covid-19-fallout-says-moody-s-ID3423129