Structural features underpin Malaysian Islamic banks' resilience against coronavirus fallout: Moody's

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Moody’s said it expects that the Islamic banks will maintain their capitalisation in the next 12-18 months, as a slowdown in capital consumption offsets a deterioration in profitability. Meanwhile, their funding and liquidity should remain stable, underpinned by retail deposit growth, weak financing demand and support from the government and parent groups.
AUGUST 11, 2020 - 4:58 PM

A concentration on retail financing and other structural features will help Malaysian Islamic banks withstand economic disruptions caused by the coronavirus outbreak, said Moody's Investors Service in a new report. 

Retail financing is less vulnerable to an economic downturn than business financing; 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. 

"Declining economic growth and increasing unemployment will raise the risk of delinquencies in retail financing, but the impact on losses will be limited as most of it is secured by residential properties, cars or low-risk unit trusts,” said Tengfu Li, a Moody’s Analyst.

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

Moody’s said it expects that the Islamic banks will maintain their capitalisation in the next 12-18 months, as a slowdown in capital consumption offsets a deterioration in profitability. Meanwhile, their funding and liquidity should remain stable, underpinned by retail deposit growth, weak financing demand and support from the government and parent groups.

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"Retail current and savings account deposits will drive overall deposit growth as consumers wary of spending ... while financing demand will remain weak. 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,” said Mr Li.