Malaysia Industry Focus
Islamic Banks
Refer to important disclosures at the end of this report
ed-CK / sa- WMT, PY
STOCKS
Mkt Cap Target Price Performance (%)
3 mth
12 mth
US$m
RM
Price
RM
Maybank
BIMB Holdings
Bursa Malaysia
Malaysia Building
Society Berhad
8.46 19,363
4.43 1,629
8.81 1,061
1.15 1,497
7.50
5.00
10.00
NA
10.2
4.5
3.0
27.8
(1.2)
25.5
5.3
(14.5)
Rating
HOLD
BUY
BUY
NOT
RATED
Source: DBS Bank, Bloomberg Finance L.P.
Closing price as of 17 Feb 2017
Financing growth for Islamic banking to outpace conventional
banking in Malaysia
RM bn
%
2,000
30
25
1,500
20
1,000
15
10
500
5
Islamic banking
Conventional banking growth
Total banking system growth
2020F
2019F
2018F
2017F
0
2016
-
2015
Profit-sharing principle of banking. Islamic banking is based
on Islamic principle transactions of which profit (and loss) sharing
is a major feature ensuring justice and equity in an economy. The
financial relationships established are deemed to be participatory
in nature. Islamic banking technically bans the receipt and
payment of interest in any of its operations. In the most basic way,
this sets Islamic banking apart from conventional banking. To
realize the full potential of demand for Islamic banking from
sizeable Muslim population and other Muslim-dominant countries,
issues to overcome include non-uniformity in Shariah views,
establishing an even playing field, and strengthening resources
and awareness are among the key issues for this segment.
Product innovation to be the game-changer for industry.
Given the knowledge and expertise acquired through actively
pioneering initiatives and delivering solutions in the Islamic
banking industry, Malaysia is indisputably making inroads to
becoming the global hub for Islamic finance. We expect domestic
Islamic financing growth to continue outpacing conventional loan
growth with a 4-year CAGR of 12% over FY15-20F, as opposed to
2% for conventional loans. This is mainly underpinned by a
growing push by the banks to fulfil BNM’s target of 40%
proportion of Islamic financing to total system loans. Further
upside to this could come from improvement in financial inclusion
and regionalisation of Islamic finance. In order to achieve this, we
believe Islamic banks should differentiate itself from their
conventional peers through product innovation.
BIMB, the main Islamic banking proxy in Malaysia. We like
BIMB (holding company of Bank Islam) for its deep-rooted
expertise in the industry, which we believe forms a strong
competitive advantage as it positions them as a likely leader in
product innovation. Maybank Islamic complements the Islamic
banking scene for its size and established regional presence which
will work to its advantage in competing on the global front. A new
wave of M&A activities in the Islamic banking space is plausible
although the timing remains the key risk. Potential M&A
candidates include MBSB (whose appeal lies in its lucrative
personal financing business and sizeable Islamic banking asset;
featured as an Equity Explorer in this report) and unlisted
MUAMALAT (from a long-awaited pare-down in stake by its
largest shareholder, DRB). Albeit more indirectly, Bursa Malaysia is
an indirect proxy as transactions on its commodity trading platform
are expected to increase in conjunction with Islamic financing
growth.
Sue Lin LIM +65 8332 6843
[email protected]
2014
•
Analyst
Lynette CHENG +60 32604 3907
[email protected]
2013
•
KLCI : 1,707.68
2012
•
Domestic Islamic financing growth expected to
continue outpacing conventional loan growth,
driven by regulatory push for internationalization
of Islamic finance
Hopes for further growth pinned on increase in
financial inclusion through product innovation
Main Islamic banking proxy – BIMB – as the
largest Bursa-listed Shariah compliant financial
institution with strong potential to lead product
innovation
Traction on BURSA’s commodity trading platform
makes it an indirect proxy; MBSB is a potential
M&A play
2011
•
2010
The unconventional banking aspect
20 Feb 2017
2009
DBS Group Research . Equity
Conventional banking
Islamic banking growth
Source: BNM, DBS Bank, AllianceDBS
Maybank Islamic and BIMB among the biggest global Islamic
banks
BANK ISLAM (MY)
CIMB ISLAMIC (MY)
TURKIYE FINANS (TU)
KUWAIT TURKISH (KU)
BANK AL-JAZIRA (SA)
ALINMA BANK (SA)
MASRAF AL RAYAN (QA)
ALBARAKA BANKING (BAH)
BANK RAKYAT (MY)
QATAR ISLAMIC (QA)
ABU DHABI ISLAMIC (UAE)
DUBAI ISLAMIC (UAE)
MAYBANK ISLAMIC (MY)
KUWAIT FINANCE HOUSE (KU)
AL RAJHI BANK (SA)
13.3
13.6
14.5
14.6
16.9
21.5
22.8
23.6
24.6
32.2
34.9
36.4
40.8
54.5
84.1
0
10
20
30 40 50 60
Total Assets (US$ bn)
70
80
90
Source: World Islamic Banking Conference Leaderboard, DBS Bank,
AllianceDBS
Industry Focus
Islamic Banks
Table of Contents
Malaysia’s journey to becoming the Global Hub for Islamic Finance
3
Unleashing the potential
9
Two of a kind
12
Opportunities in Islamic Financing
17
Challenges for the industry
20
Industry players at a glance
21
Islamic banking proxies
22
Conclusion
24
Company profiles
25
BIMB Company Guide
26
Bursa Malaysia Company Guide
34
Malaysia Building Society Equity Explorer
42
Maybank Islamic
50
Bank Rakyat
52
Bank Muamalat
54
Appendix:
Page 2
OIC members: Selected economic data points
57
Industry benchmarking
58
Islamic Banking: Definition of terms
61
Industry Focus
Islamic Banks
413
Saudi Arabia
Islamic Funds
104
23
Bangladesh
Takaful
54.5
84.1
0
10
20
30 40 50 60
Total Assets (US$ bn)
70
80
90
Source: World Islamic Banking Conference Leaderboard
Malaysia: Asset size of Islamic banks
156
RM bn
180
160
140
120
11
10
7
3
KFH
ALLCE ISL
Al-Rajhi
AFB
13
11
AFFIN ISL
SC SAADIQ
19
0
15
HSBC AMAN
20
OCBC AL-…
26
23
HL ISL
41
38
MBSB
AMISL
40
Muamalat
46
44
RHB ISL
60
PUBLIC ISL
57
55
BIMB
80
CIMB ISL
100
450
400
350
300
250
200
150
100
50
0
Other
40
Indonesia
73
Bahrain
Sukuk
54
87
Qatar
OIFI
Turkey
98
Kuwait
UAE
Iran
161
Islamic Banking
32.2
34.9
36.4
40.8
Source: Companies, DBS Bank, AllianceDBS
345
415
450
400
350
300
250
200
150
100
50
0
Malaysia
Total Assets (US$ bn)
Global Islamic finance assets – Top 10 countries
13.3
13.6
14.5
14.6
16.9
21.5
22.8
23.6
24.6
92
Targets for 2020. To take advantage of this strong footing
gained, the government has set the targets for the industry to
achieve by 2020. This includes: (1) increasing the global share of
Islamic banking assets from 8% in 2009 to 13% in 2020, (2)
increasing the global share of takaful (insurance based on
Islamic principles) contribution from 11% in 2009 to 20% in
2020, (3) increasing Islamic financing’s share of total financing
in Malaysia from 29% in 2010 to 40% in 2020, and (4)
propelling at least one Islamic financial institution to become
one of the global top 10 players by asset size by 2020.
BANK ISLAM (MY)
CIMB ISLAMIC (MY)
TURKIYE FINANS (TU)
KUWAIT TURKISH (KU)
BANK AL-JAZIRA (SA)
ALINMA BANK (SA)
MASRAF AL RAYAN (QA)
ALBARAKA BANKING (BAH)
BANK RAKYAT (MY)
QATAR ISLAMIC (QA)
ABU DHABI ISLAMIC (UAE)
DUBAI ISLAMIC (UAE)
MAYBANK ISLAMIC (MY)
KUWAIT FINANCE HOUSE (KU)
AL RAJHI BANK (SA)
MAY ISL
Malaysia is the global leader in Islamic finance. Malaysia is the
global leader in Islamic Finance, with Saudi Arabia and Iran
trailing just behind. Although Malaysia ranks third by Islamic
banking assets, Malaysia’s runaway success in the sukuk market
boosted its global position by finance assets to the top of the
table. Four Malaysian banks (Maybank Islamic, Bank Rakyat,
CIMB and Bank Islam) are ranked among the top 15 largest
Islamic banks (by assets). The roadmap to success was not
without a great deal of effort. Malaysia’s competitive advantage
in the sector was driven by strong government support, which
brought about among others, regulatory changes, tax incentives
and expanded educational resources to promote growth in the
industry.
Global: Asset size of major Islamic Banks
BANK RAKYAT
MALAYSIA’S JOURNEY TO BECOMING THE GLOBAL HUB
FOR ISLAMIC FINANCE
No of Islamic FIs (RHS)
Source: Thomson Reuters Islamic Finance Development Report 2015
Page 3
Industry Focus
Islamic Banks
Global: Top Islamic economies
Country
Global
Islamic
Finance
Assets
Islamic
Banking
Assets
USD mil
USD mil
Islamic
Financial
Institutions
Number
of Islamic
Banks/
Windows
Takaful /
Retakaful
Assets
Number
of
Takaful /
Retakaful
Operators
USD mil
Other
Financial
Institutions
Assets
Number of
Other
Financial
Institutions
USD mil
Value of
Outstanding
Sukuk
Net
Asset
Value of
Islamic
Funds
USD mil
USD mil
1,814,086
1,345,891
1,143
436
33,390
308
83,916
399
295,094
55,794
Malaysia
Saudi
Arabia
415,418
173,956
77
38
8,205
21
48,204
18
167,256
17,797
412,955
325,394
105
16
12,380
40
4,928
49
46,890
23,363
Iran
345,447
328,777
82
39
8,180
27
6,833
16
120
1,538
UAE
161,443
127,281
85
24
1,792
17
5,158
44
26,885
328
Kuwait
97,576
87,749
100
9
132
15
7,645
76
814
1,236
Qatar
86,524
71,620
38
8
323
19
756
11
13,566
259
Bahrain
72,825
68,367
59
32
450
10
415
17
3,585
9
Turkey
53,883
44,597
5
4
-
-
-
1
9,283
3
Indonesia
40,396
21,711
145
33
933
63
428
49
16,425
898
Bangladesh
23,150
22,471
42
26
608
15
71
1
-
-
Pakistan
18,279
12,563
57
23
127
6
541
28
4,058
990
Egypt
13,487
12,869
26
9
-
8
377
9
-
242
Sudan
10,651
10,651
44
28
-
14
-
2
-
-
Jordan
8,219
7,872
12
3
48
3
170
6
120
9
Switzerland
6,885
-
3
1
-
-
6,879
2
-
6
Source: Thomson Reuters Islamic Finance Development Report 2015
How did Malaysia get here? The evolution of Islamic finance in
Malaysia began as early as 1963 with the establishment of the
Pilgrims Management and Fund Board (Lembaga Tabung Haji).
In 1980, a seminar on National Development from Islamic
Perspective proposed the establishment of Bank Islam. Three
years later, Bank Islam opened its doors for business once
Malaysia passed the Islamic Banking Act. Takaful companies
were incorporated under the Takaful Act 1984 subsequent to its
enactment. In 1991, Bank Islam was listed on the stock market.
The second Islamic bank, Bank Muamalat was established in
1999.
Dual financial system structure. Conventional financial
institutions were then allowed to create Islamic “windows”
which enabled them to offer Shariah-compliant banking
products and services. This further facilitated the creation of a
dual-financial system, in which Islamic finance operates
alongside the conventional financial system. In 1993, the Islamic
Interbank Money Market was launched, which continued to
lend support to the Islamic banking industry. A Shariah Advisory
Page 4
Council was established in 1997 by BNM, to ensure the
conformity of Islamic banking and takaful products to the
Shariah principles.
Creation of sukuk market. An important agreement was signed
in 2001 between institutions in Bahrain, Indonesia, Sudan, Saudi
Arabia, and Malaysia to create the International Islamic Financial
Market (IIFM) which strived to develop an international
secondary market for the trading of sukuk and other Islamic
financial instruments. To facilitate liquidity management further,
International Islamic Liquidity Management Corporation (IILM)
was established in Malaysia in 2010 to create and issue shortterm Shariah-compliant financial instruments.
Invitation to foreign Islamic banks to operate in Malaysia. The
industry progressively liberalised, as licenses were granted to
three foreign banks – AFB, Al-Rajhi and KFH – in 2003 to allow
more foreign participation. Towards this end, the requirements
imposed include a minimum capital of RM300m as well as
submissions of a sound business plan and ownership structure
to BNM. Islamic Financial Services Board (IFSB) started operations
Industry Focus
Islamic Banks
in Malaysia in 2003, to serve as an international standard-setting
body of regulatory and supervisory agencies. In 2006, the
Malaysia International Islamic Financial Centre (MIFC) initiative
was launched with the aim of providing a platform for
participants in the industry to communicate with each other.
International Centre for Education in Islamic Finance (INCEIF)
was established in Malaysia to develop and nurture talents and
experts for the global Islamic finance industry. Two new Islamic
banking licences were offered in 2009, with the requirement of
paid-up capital of at least USD1bn. Finally, the Islamic Financial
Service Act (IFSA) was passed by Parliament in 2013.
Malaysia: Evolution of Islamic banking
Year
1963
1980
1983
1984
1991
1993
1997
1999
2001
2003
2003
2006
2009
2010
2013
Milestones
Establishment of Lembaga Tabung Haji
The Seminar on National Development from Islamic
Perspective (1980) proposes the establishment of Bank
Islam
Malaysia passes the Islamic Banking Act
Bank Islam begins operations in 1 July 1983
Enactment of Takaful Act 1984
Bank Islam is listed in the Stock Market
Interbank Money Market is established
BNM establishes Shariah Advisory Council
The second Islamic bank is established, Bank Muamalat
Establishment of International Islamic Financial Market
Islamic Financial Services Board (IFSB) started operations
in Malaysia
Licences are given to three foreign banks – AFB, Al-Rajhi
and KFH
The Malaysia International Islamic Financial Centre (MIFC)
initiative is launched and International Centre For
Education In Islamic Finance (INCEIF) was set up
Two new Islamic banking licenses offered
International Islamic Liquidity Management Corporation
(IILM) was established
Islamic Financial Service Act 2013 is passed by Parliament
establishing a separate regulatory framework that harmonised
the Shariah principles, ensured a competitive playing field for
Islamic banks to operate in and fostered an enabling
environment to nurture more talent development (more on
page 20).
A giant leap with IFSA 2013. The regulatory environment for
Islamic banks found itself at a crossroad when the Islamic
Financial Services Act (IFSA) was implemented in 2013. This
supersedes the Islamic Banking Act 1983 and the Takaful Act
1984, while incorporating elements of the Payment System Act
2003 and the Exchange Control Act 1953. The IFSA enforced
enhanced requirements for Shariah Governance by requiring
Islamic banks to comply with the Shariah and operational
standards issued by Bank Negara Malaysia (BNM) and the
International Shariah Research Academy in all aspects of their
business objectives and operations. By doing so, BNM aspires to
elevate the operationalization of Shariah contracts/concepts,
ensure higher compliance standards and ensure global
acceptability of Malaysian financial products. The introduction of
new standards remains an ongoing process. To date, there have
been 14 new standards issued since 2013. In our view, the
enactment of the IFSA 2013 clearly illustrates BNM’s intention to
encourage the industry to move to a risk-sharing model as
opposed to a risk-transfer model. We believe this encourages
more product innovation within the industry, thus allowing
Islamic finance players to differentiate their products from
conventional ones.
Source: Companies, DBS Bank, AllianceDBS
Rising to the challenges. Malaysia has successfully addressed the
key issues confronting the Islamic banking sector. This includes
Page 5
Industry Focus
Islamic Banks
Malaysian Islamic banking: IFSA 2013
Is la mic Fina nce :
Islamic banks conduct financial intermediation functions using Shariah contracts
Distinct risk and reward profiles based on Shariah contracts
End-to-e nd S ha ria h complia nce unde r the Is la mic Fina ncia l S e rvice s A ct 2013
S ha ria h S ta nda rds
Ope ra tiona l S ta nda rds
Ove rs ight Functions
Re s olution
Compliance with fundamental
Strengthened risk
Codification of the role of the Priority of payment reflective of
requirements of respective
management, governance,
Shariah committee and board
underlying Shariah contracts
Shariah contracts
transparency and disclosure,
of directors of financial
market conduct and other
institutions in ensuring Shariah
operational aspects of applying
Compliace
Shariah standards.
S a le s Ba s e d
Murabahah
Istisna'
Ijarah
Tawarruq
A S S ET S
Equity Ba s e d
Mudharabah
Musharakah
Fe e Ba s e d
Is la mic De pos its
Wakalah
Kafalah
Rahnu
Wadi'ah
Qard
Tawarruq
LIA BILIT IES
Inve s tme nt
Inve s tme nt
A ccounts ( Equity) A ccounts ( Othe r)
Wakalah
Mudharabah
Musharakah
Source: BNM
Malaysian Islamic banking: Shariah Governance framework
Shariah as overarching principle in Islamic finance
BOARD RI S K
MANAGE ME NT
COMMI T T E E
BOARD
Overall oversight on Shariah governance
structure & Shariah Compliance
S HARI AH COMMI T T E E
BOARD AUDI T COMMI T T E E
Oversight accountability
on Shariah related
matters
MANAGE ME NT
Ensure executions of business &
operations are in accordance with the
Shariah principles
Provide necessary support to the Shariah
Committee
S ha ria h Risk Ma na ge m e nt
Co nt ro l Funct io n
S ha ria h Re vie w Funct io n
S ha ria h Re se a rch
Funct io n
S ha ria h Audit Funct io n
Identify, measure, monitor, report &
control Shariah non-Compliance risk
Review business operations on
a regular basis to ensure
Shariah compliance
Conduct in-depth Shariah
research prior to
submission to the
Shariah Committee
Provide independent assessment
& objective assurance designed
to value add & improve IFI's
compliance with Shariah
S ha ria h Co m plia nce a nd re se a rch funct io ns
Source: BNM
Page 6
Industry Focus
Islamic Banks
Malaysia: Islamic Finance Tax Neutrality
Tax neutrality
The equal footing provision in the Income Tax Act ensures that the Islamic financial transactions are not taxed differently from conventional
financing transactions, regardless of the fundamental differences between the two. This means that, for tax purpose, profits received in Shariahcompliant transactions are treated in the same way as interest rate gains in conventional finance. Conversely, the payment of profits (equivalent to
the payment of interest in conventional finance) by the borrower is treated as interest costs from a tax perspective.
Similarly, partnerships formed under the Shariah concept of a joint venture entailing the sharing of profits and/or losses are not recognised as
partnerships from a tax perspective.
The equal footing provision in the Stamp Act ensures that Islamic banking and investment products, which require additional sales and purchases
of the underlying assets due to the profit-and-loss sharing agreements, are as attractive and cost-efficient as their conventional counterparts. The
provision ensures that where assets are required to be transferred (which would not otherwise be necessary under conventional financing
schemes), the transferor is not subject to balancing adjustments on the sale/purchase and thus the transaction remains tax neutral. Similarly,
partnerships formed under the Shariah concept of a joint venture entailing the sharing of profits and/or losses are not recognised as partnerships
from a tax perspective.
Source: IMF Working Paper
Malaysia ranks highly in terms of governance index globally. The
efforts in developing strong regulations have resulted in
Malaysia becoming one of the strongest countries in terms of
governance index ranking globally. This is supported by a
whopping number of Shariah scholars in the country (at 203)
and an average disclosure index of 47 as at 2015.
Average percentage of liquid assets available for investing (%)
50
46
45
40
35
35
30
25
20
Islamic finance governance index – Top 10 countries
15
0
Number of Shariah Scholars
Centralised/National Shariah Board present
Regulation strength indicator:
● Strong
Sudan
50
0
Kuwait
50
UAE
100
Indonesia
100
Qatar
150
Pakistan
150
Bahrain
200
Malaysia
200
Maldives
250
Oman
250
5
0
GCC
Malaysia
Others
Source: Thomson Reuters
Average percentage of liquid assets available for investing (%)
100%
90%
80%
31
27
52
70%
Average Disclosure Index
● Medium
12
10
60%
50%
● Weak
Source: Thomson Reuters Islamic Finance Development Report 2015
23
22
40%
30%
20%
25
46
51
22
10%
BNM successfully spearheaded the resolution to Islamic banks’
problem of lack of high-quality liquid assets (HQLA) by
becoming the largest issuer of short-term sukuk (BNM switched
to other instruments for liquidity management in 2015). To
date, Malaysia remains one of the few countries with an active
and liquid Islamic money market. Malaysian Islamic institutions
have a higher percentage of liquid assets available for investing
at 46% vs 35% and 12% for the GCC and other regions,
respectively. Malaysia’s deep suite of products and instruments
available in the domestic market also increased the Malaysian
Islamic institution’s concentration of short-term assets, which
make up more than half of their total assets.
0%
GCC
Short term
Malaysia
Medium term
Other
Long term
Source: Thomson Reuters
Creating a level playing field in Malaysia. As evidenced by the
competitive rates offered for Islamic banking products vis-à-vis
conventional banking products, Islamic banks have established a
level playing field in Malaysia. To enhance the attractiveness of
Islamic banking products, on top of ensuring tax neutrality in
Islamic financing transactions, regulators have introduced
incentives to facilitate growth in this nascent industry. This
includes granting tax exemptions to several facets in the Islamic
finance industry, including financing, sukuk, fund management
and stock broking.
Page 7
Industry Focus
Islamic Banks
MY: Islamic Finance Tax Incentives
Tax incentives
Tax exemption for profits derived from sukuk
10-year tax exemption for Islamic banks and Islamic insurance companies on income derived from business conducted in foreign
currencies, including transactions with Malaysian residents. This exemption was given to encourage foreign participation in
Malaysia’s Islamic finance and to encourage Islamic financial institutions to transact internationally in making Malaysia an
international Islamic financial hub.
10-year income tax exemption for domestic and foreign fund managers who manage Islamic funds for foreign investors.
3-year stamp duty exemption of 20% on instruments related to Islamic financing.
Tax deductions on expenses incurred in establishing an Islamic stock broking firm.
Tax exemption on profits paid by licensed Islamic banks in Malaysia to non-resident customers
Source: IMF Working Paper
Topping the table for efforts in spreading awareness. Indeed,
the Malaysian regulatory support in creating a level playing field,
along with efforts in spreading awareness of Islamic financing
have spurred the take-up of Islamic products by non-Muslim
consumers. Malaysia has the most number of conferences (at
24) and seminars (at 27) held on Islamic banking and second
highest amount of news reported on the topic (at 3,900; just
behind UAE at 3,944) - as at 2015. Once again, this has
propelled Malaysia to becoming the top ranked country globally
in terms of awareness indicator.
20
10
Conferences (LHS)
Seminars (LHS)
Turkey
Indonesia
UK
Qatar
Oman
Saudi Arabia
Bahrain
Pakistan
Malaysia
UAE
0
News (RHS)
Source: Thomson Reuters Islamic Finance Development Report 2015
Shortage of talent is one of the most frequently mentioned
challenges within the Islamic banking industry. To address this,
the government has lent strong support to the provision of
education on Islamic finance. In 2005, BNM set up the
International Centre for Education in Islamic Finance (INCEIF) to
offer postgraduates studies in Islamic Finance. The intensive
focus on providing quality education and research has led to
Malaysian institutions such as International Islamic University,
University Sains Islam Malaysia, International Shariah Research
Academy for Islamic Finance and Insaniyah University College to
the top of the table in terms of Islamic Finance education and
research. Unsurprisingly, Thomson Reuters’ ranked Malaysia as
Page 8
400
300
Degrees
Courses
Jordan
India
Bahrain
UAE
USA
Indonesia
Pakistan
UK
0
Saudi Arabia
30
500
Malaysia
40
600
100
4500
4000
3500
3000
2500
2000
1500
1000
500
0
50
Islamic finance knowledge indicator - Top 10 countries
200
Islamic finance awareness indicator – Top 10 countries
60
the top country under its knowledge indicator, attributable to
the vast number of degrees and courses (at 30 and 16,
respectively) as well as published research paper (at 522) on
Islamic finance compared to its global peers – as at when 2015.
Research papers
Source: Thomson Reuters Islamic Finance Development Report 2015
Discrepancy in Shariah practices still a hurdle. Nevertheless, a
key challenge to the industry in Malaysia lies with the lack of
uniformity in Shariah views because of the differing views
among religious scholars. For instance, particularly in Malaysia,
commodity murabahah is widely used, but its compliance with
Shariah remains a debatable issue. To this end, a call to establish
a global Shariah body has been made, which can then address
the issue of inconsistencies in practices across the region. While
the Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI) and Islamic Financial Services Board (IFSB)
have provided some Shariah standards and governance
guidelines, the level of compliance to these standards differ
across the region. Regulators in Bahrain, Qatar, Sudan, and Syria
have made the AAOIFI standards mandatory for Islamic financial
institutions while most other countries have considered these
standards as recommendations.
Industry Focus
Islamic Banks
%
30
2,500
25
2,000
20
1,500
15
1,000
10
5
-
37
63
2020F
35
65
2019F
33
67
71
2016
2018F
73
2015
31
75
2014
69
25
77
2013
2017F
23
79
2012
29
21
80
2011
Islamic banking
Source: Companies, BNM, DBS Bank, AllianceDBS
3,000
500
27
18
82
2010
Conventional banking
Malaysia: Asset growth in conventional and Islamic banking
RM bn
20
17
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
83
We expect domestic Islamic financing growth to continue
outpacing conventional banking loan growth, driven by the
regulatory push to fortify domestic Islamic banking entities to
enhance global competitiveness. To that end, we envisage
Islamic financing growth to reach a 4-year CAGR of 12% from
FY16 to FY20F, as opposed to 2% for conventional banking
loan growth. This is underpinned by the assumption that system
loan growth stands at a 4-year CAGR of 5% and the proportion
of Islamic financing to the total system grows from 29%
currently to 37% in 2020F (note that BNM’s target is 40%).
2009
Malaysia: Proportion of conventional and Islamic banking
financing
UNLEASHING THE POTENTIAL
Limited room to grow without substantially increasing financial
inclusion. Given that seven out of the eight major banks in
Malaysia have yet to reach BNM’s targeted Islamic financing to
total loan proportion of 40%, we believe there is still room for
Islamic financing growth to continue outpacing conventional
loan growth. However, we feel that an increase in financial
inclusion would have to materialize for further boost in growth.
0
2009
2010
2011
2012
2013
2014
2015
2016
Malaysia: Major banks’ proportion of Islamic financing to total
domestic loans
Conventional banking
Islamic banking growth
Islamic banking
Conventional banking growth
Total banking system growth
60
Source: BNM, DBS Bank, AllianceDBS
53
50
RM bn
32
30
%
2,000
30
25
1,500
20
1,000
BNM 's target @ 40%
40
Malaysia: Financing growth in conventional and Islamic
banking
15
26
25
25
18
20
16
13
10
MAY
AMMB
RHB
CIMB
AFFIN
AFG
HLB
PBK
Source: Companies, DBS Bank, AllianceDBS
10
500
5
Islamic banking
Conventional banking growth
Total banking system growth
Source: BNM, DBS Bank, AllianceDBS
2020F
2019F
2018F
2017F
2016
2015
2014
2013
2012
2011
2010
0
2009
-
Conventional banking
Islamic banking growth
What does this mean to the players in the industry? We view
Islamic product offerings as complementary to the product suite
of a bank, especially in Muslim-majority countries such as
Malaysia. Banks without Islamic product offerings risk forfeiting
the portion of the market with a natural bias towards Islamic
products. Malaysian banks appear to be well aware of the said
risk, as evidenced by the availability of Islamic product offerings
across all banks.
Page 9
Industry Focus
Islamic Banks
Challenging to improve financial inclusion with current product
offering. According to the Global Findex by World Bank, while
the percentage of Malaysian population that owns an account
in financial institutions stands at 81%, the percentage of
Malaysian population that has borrowed from a financial
institution is only at 20% in 2014. We believe further
improvement in access to borrowing is challenging, as the
current product offering has limited suitability for the remaining
portion of the unserved population. However, product
innovation could act as the game changer in this aspect as new
offerings could increasingly meet the different risk and return
requirements of this dissimilar segment of consumers.
Product innovation will be the game changer for the Islamic
banking industry... Currently, Islamic products largely mirror
their conventional equivalents, rendering minimal product
differentiation between the two models. However, since the
implementation of IFSA 2013 which encouraged a move
towards a risk-sharing model (from risk-transfer model), we
have seen some developments on the product innovation
aspect. For example, a new guideline on distinguishing Islamic
deposits and investment accounts was introduced in early 2013,
with the aim of improving the alignment of the salient features
of Shariah contracts to its legal recognition. Consequently,
Islamic banks now offer investment accounts as an additional
alternative on top of the typical current account, savings
account and term deposit products.
..especially with sufficient consumer education. Insufficient
education on these products could result in customers finding
difficulty in accepting the differences of the new product
offerings. In the case of investment accounts, despite higher
returns to compensate for the higher risk assigned, differences
such as the absence of principal guarantee, loss of insurance
deposit coverage and the additional disclosure requirements and
terminologies pose a risk of a customer exodus back to more
familiar conventional products. Nonetheless, in our view, it is
crucial for Islamic banks to take this risk in order to enable
differentiation from banks operating under the conventional
model. Hence, the ability of Islamic banks in executing this is the
critical success factor of the industry. We expect the industry’s
ability to offer a wider range of products to meet risk and return
requirements of consumers, to serve as a stepping-stone in
producing “real growth” (as opposed to displacement of
conventional loan growth) in Islamic financing. Hence, we advise
investors to keep a lookout for developments in this space.
Digital disruption or enabler? Digital disruption has indeed
intensified in the past few years, with services such as
crowdfunding and peer-to-peer lending gradually creeping into
the banking industry. Notably, these alternatives are based on a
Page 10
risk-sharing model, which overlaps with the premise of Islamic
banking. In peer-to-peer lending and crowdfunding, lenders are
matched directly to the borrowers. To that end, we opine that
these new digital innovations have opened up more alternatives
for the Islamic banks, in particular to embark on more product
innovation and align its products and services more towards the
true spirit of Islamic banking.
Case in point: Investment account platform. We have seen
Islamic banks riding the digital wave through the launch of the
Investment Account Platform (IAP; more on page 13). The IAP
works in the same vein as a crowdfunding platform where
investors can participate in the funding of ventures or projects
by making monetary contributions to the projects listed on the
platform. The key factor distinguishing IAP from other
technology-based fund raising platforms lies in the
intermediation roles played by the Islamic banks (for e.g., duediligence, performance monitoring, suitability assessment and
investment management). While other fund raising platforms
largely feature ventures by SMEs and start-ups, the IAP also
includes ventures by listed companies and multinational
companies. Independent ratings are also provided to facilitate
the users’ investment decisions.
IAP yet to gain traction. There are four sponsoring banks (MAY
ISL, AFFIN ISL, Bank Islam, Bank Muamalat) involved in the IAP,
but to date, only three projects have been listed on the IAP
(since its launch in Feb 2016). Nevertheless, we expect this
platform to gain traction in the near future as participating
banks have expressed keen interest in improving the flow of
project listing.
Regionalising Islamic banking products and services is the other
engine to fire up. Another growth lever for Islamic finance lies in
the ability of Islamic banking players to leverage on the strong
regulatory support from domestic authorities, to extend their
presence regionally to countries whose Islamic finance industry
remains under-developed and banking penetration remains low.
Consistently, we still expect the successful aforementioned
product innovation to be the key success factor in fuelling
substantial growth traction within the region.
Case in point: Indonesia. The closest market for the Malaysian
Islamic bank players to explore is the Indonesian market. With
13% of the world’s Muslim population, Indonesia is the world’s
most populous Muslim nation (209.1m Muslim population as at
2010). Banking penetration in terms of both conventional and
Islamic is low (13% of population have borrowed from a
financial institution, 5% of total banking assets are Islamic), thus
implying ample room for growth.
Industry Focus
Islamic Banks
Top 10 countries with the largest Muslim populations, 2010 and 2050
Country
2010 population % of world's
Country
(mil)
Muslim
Indonesia
India
Pakistan
Bangladesh
Nigeria
Egypt
Iran
Turkey
Algeria
Morocco
Subtotal
Subtotal for rest of world
World total
209.1
176.2
167.4
134.4
77.3
77.0
73.6
71.3
34.7
31.9
1,053.0
546.7
1,599.7
13.1
11.0
10.5
8.4
4.8
4.8
4.6
4.5
2.2
2.0
65.8
34.2
100.0
India
Pakistan
Indonesia
Nigeria
Bangladesh
Egypt
Turkey
Iran
Iraq
Afghanistan
Subtotal
Subtotal for rest of world
World total
Projected 2050
population (mil)
% of world's
Muslim
310.7
273.1
256.8
230.7
182.4
119.5
89.3
86.2
80.2
72.2
1,701.1
1,060.4
2,761.5
11.2
9.9
9.3
8.4
6.6
4.3
3.2
3.1
2.9
2.6
61.6
38.4
100.0
Source: The Future of World Religion by Pew Research Centre
Islamic banking has yet to take off in a meaningful way in
Indonesia. Based on Otoritas Jasa Keuangan’s (OJK) observation,
challenges in developing Islamic banking in Indonesia include (1)
the lack of coordination between the government and
authorities in Islamic banking development, (2) the inability to
establish a level playing field, causing the industry to be dragged
by inadequate scale and efficiency, high cost of funds as well as
insufficient depth in product offerings, (3) shortage of resources
(human resource and information technology) to support
growth, (4) low consumer awareness, and (5) suboptimal level
of regulation and supervision within the industry.
Under the roadmap of Indonesian Islamic banking, OJK has
expressed willingness to address the issues at hand. Within 2015
to 2019, OJK aspires to implement seven policy directions and
41 priority programmes to develop the industry in Indonesia.
Among the measures listed by OJK are the inclusion of Islamic
investment banks in financing government projects, establishing
a research and development centre of Islamic banking, further
spread Islamic finance financial literacy and introduce incentive
framework to encourage the expansion of productive financing
in infrastructure and corporate sectors to improve the funding
structure.
Drawing support from home market. While we believe these
initiatives may take time as financial inclusion sits higher on the
priority list for OJK, the Malaysian Islamic banking players are in
a better position to make inroads in the industry, as they are
able to leverage on their home market’s rich expertise and deeprooted knowledge in Islamic banking. For instance, MAY has
successfully rolled out Islamic financial services in Singapore and
Indonesia in the past three years, with the support of its Shariah
Centre of Excellence based in Malaysia.
Challenges rest on extent of foreign bank participation in
Indonesia. OJK stated it would not grant new permits for
foreign bank branches. However, it will allow the current
foreign bank branches to operate as they are. Going forward, a
foreign entity can only penetrate the Indonesian banking
industry through ownership in a limited liability (PT/perseroan
terbatas) legal entity. While there are no caps on foreign
ownership, a single entity is prohibited from holding more than
40% ownership of a bank, although this will be subject to any
further approvals by OJK. The regulation was effective after
2012 and was not applied retroactively. In that vein, MAY and
CIMB have the upper hand given their existing presence in the
Indonesian market through Maybank Indonesia and CIMB
Niaga, respectively.
Page 11
Industry Focus
Islamic Banks
TWO OF A KIND
What makes Islamic banking different? Islamic finance refers
to the provision of financial services according to Islamic
jurisprudence (Shariah). Islamic finance differs from the
conventional banking model due to the prohibition of:
(1) Interest or Riba
•
As it represents an increase in wealth that is not related
to engaging in any productive activity
(2) Excessive uncertainty or Gharar
•
To honour principles of fair treatment and the sanctity of
contracts by reducing information asymmetry (for e.g.,
contract ambiguity or elusiveness of payoff)
(3) Short-selling
•
Based on the principle of ownership where it is believed
that one should not “sell what one does not own”
(4) Financing activities considered harmful to the society (for
e.g., gambling)
How does the banking model fit in Shariah? To ensure a link
between financing activities and real activities, return on
capital is legitimised by risk-taking. Return is then determined
ex post based on asset performance or project productivity.
Asset-based financing establishes the link between financing
activities and real activities, hence overcoming the issue of
prohibition of short-selling.
How is this executed? Islamic finance products are contractbased and can be classified into three broad categories:
(1) Profit-and-loss-sharing (PLS) financing
•
PLS financing is based on the core principles of equity
and participation, deeming it the closest to the spirit of
Islamic finance. Examples of PLS financing include
musharakah (equity-like financing of project and with
pure profit-and-loss sharing) and mudarabah (profits
shared, but losses borne by financier)
(2) Debt-like financing
•
Refers to contracts of exchange. The four debt-like
financing instrument include:
o Murabahah: Cost-plus agreement with buyers
making deferred payments
o Salam: Forward agreement where the Islamic
financial institution act as the buyer of goods on
behalf of the customer, with deferred delivery of the
products
o Istisna: Forward agreement where the Islamic
financial institution act as the buyer of a project on
behalf of the customer, with the completion and
delivery of the project on a later date
o Ijarah: Lease contract with the sale of the right to
use an asset for a period of time
(3) Fee-based products
•
Refers to contracts of safety and security, such as Wadiah
(safe-keeping contracts) and Wakalah (agency contracts)
Neutral treatment for conventional and Islamic financing
ensures similar returns. The underlying principles of banking
between the two models are vastly different, and deliberately
so. However, consumers should not confuse the seemingly
higher level of intricacy in Islamic financing transactions to
higher costs, as regulatory support in Malaysia has ensured
neutrality in treatment for conventional and Islamic products.
This is further supported by the similar returns offered for
conventional and Islamic products in Malaysia.
Islamic banking: Key differences in concept
CONVENTIONAL MODEL
Lender and borrower
Interest-based deposits
Interest-based financing
Functions and operating models based on manmade principles
(capitalism theory)
Governance as per conventional model
Financial Services Act
Lenders/Investors are guaranteed of a predetermined rate of interest or
returns
Time value is the basis of charging interest on capital
Source: Alliance Islamic Bank, AllianceDBS
Page 12
ISLAMIC MODEL
Custodian, entrepreneur, financier
Safe custody, investment
Debt financing, equity financing
Functions and operating models based on Shariah Law
Governance inclusive of Shariah Governance Framework requirements
Islamic Financial Services Act
Profit/Risk is shared between capital provider (investor) and user of funds
(entrepreneur)
Profit on trade of goods or charging on providing service is the basis for
earning profit
Industry Focus
Islamic Banks
Islamic banking: Types of Shariah contracts being applied to products
S ha ria h Contra cts
Profit and loss sharing
Fee-based products
Debt-like financing
Musyarakah
Immediate Payment
Deferred Payment
Rahnu
Mudarabah
Bai' Sarf
Bai' Murabahah & Bai' Bithaman Ajil
Kafalah
Mudarabah
Bay' Dayn
Bai' Tawliyyah
Wakalah
Bai' Salam
Wadi'ah
Bai' Istisna'
Qardh
Bai' Istijrar
Hiwalah
Bai' Inah
Tabarru', Waqf & Hibah
Ijarah /Al-ijarah thumma al-bai' (AITAB) / Ijarah muntahia bi altamlik (IMBT)
Ibra' & Muqasah
Source: Bank Islam, IMF, BNM, DBS Bank, AllianceDBS
Deposits
No rate differential in deposit products. Typically, Islamic
deposits apply safekeeping or Wadiah contract. While term
deposit rates vary according to promotional rates, we see
minimal difference in rate between conventional and Islamic
deposit products across most banks, as exemplified by the rates
offered by Alliance Bank shown in table below. Nonetheless,
documentation-wise, a declaration form appointing the bank as
an agent to sell and purchase commodities is required to be
signed, for deposits under commodity murabahah.
Investment accounts are specific to Islamic banks, and differ
from the typical Islamic deposit accounts mainly on the type
of Shariah contract involved, guarantee of principal and
availability of PIDM protection (see table below). The
introduction of investment accounts stemmed from BNM’s
initiative to enhance the legal clarity on the application of
Shariah contracts. The investment account is further
separated into two types, i.e. the unrestricted investment
account (URIA) and the restricted investment account (RIA).
The key difference between the two is on the mandate
where URIA, the investment account holder, allows the bank
to make the ultimate investment decision without posing any
restrictions or conditions while in RIA, the investment
account holder provides a specific investment mandate
(purpose, asset class economic sector, period of investment).
Indicative returns for investment accounts are typically
higher, which are commensurate with the higher risk to
consumers (no principal guarantee and deposit insurance
protection). Consumers should also bear in mind that the
indicative returns shown at inception is not a guaranteed
rate, as profit rates are determined ex post, based on the
performance of the asset or project tagged to the account.
Financing rate is also dependent on the pre-agreed profit
sharing ratio. Thus, while profits are distributed according to
the pre-agreed ratio, the same applies to losses incurred by
the asset or project.
Investment Account Platform, a new avenue to participate in
investment accounts. While retail investors can enquire on
investment accounts through Islamic bank branches, an
alternative way to participate in restricted investment
accounts is via the Investment Account Platform (IAP). Here,
individual investors register themselves as an IAP user
through the designated website and select their preferred
venture to invest in. First- time users are given a suitability
assessment to ensure investors are choosing ventures that
are within their risk tolerance. The suitability assessment is a
requirement by BNM for individual investors for evaluating
investors based on their financial capabilities, investment
Page 13
Industry Focus
Islamic Banks
needs and appetite, and investment knowledge and
experience. Institutional investors are not required to take
the suitability assessment as they are deemed to have
sufficient resources to make an informed investment
decision. Upon completion of the suitability assessment, the
results are compared against the chosen venture. Investors
who have chosen ventures beyond their risk tolerance will be
alerted and asked to seek additional consultation at
dedicated branches of participating Islamic banks before
proceeding with the chosen venture. Once the investor
declares an understanding of the risk involved and agrees to
proceed with the investment, the Islamic bank creates the
investment account for the investor and sends periodical
reports on the venture.
Impact to the banks. Although banks provide better returns
to the customers under the investment accounts, the
benefits to the bank comes in the form of (1) savings from
non-payment of Malaysia Deposit Insurance Corporation
(PIDM) premium, (2) more effective capital management as
tagged assets are excluded from capital adequacy ratio
calculation, and (3) reduced regulatory cost as investment
accounts are excluded from Eligible Liabilities base for the
purposes of statutory reserve requirement computations.
AFG deposits: Key features similar for conventional and Islamic products
Product Name
Type
Initial/ Minimum deposit
Tenure
Profit/Interest rate
Basic savings
Basic savings
Term deposits
Term deposits
Conventional
Islamic
Conventional
Islamic
RM20
RM20
RM500
RM500
N/A
N/A
12 months
12 months
0.25% - 1.00%
0.25% - 1.00%
3.15%
3.15%
Source: Alliance Islamic Bank, DBS Bank, AllianceDBS
Comparison of investment account and conventional Islamic deposit accounts
Shariah
contracts
Principal
guarantee
None
Islamic products
Islamic deposit
Investment account
Sum of money accepted or paid in
Money is paid and accepted for the
accordance with Shariah
purpose of investment in accordance
with Shariah
Wadiah, Tawarruq, Bai' 'Inah
Mudarabah, Musharakah, Wakalah
Will be repaid in full on maturity and/or
on demand
Will be repaid in full on maturity and/or
on demand
Deposit
insurance
protection
Yes
Yes
Nature of
deposit
Conventional product
Conventional deposit
Sum of money accepted or paid not in
accordance with Shariah
No expressed or implied obligation to
repay the money in full and/or on
demand (Principal and/or profit)
No
Source: BIMB, DBS Bank, AllianceDBS
Comparison of unrestricted and restricted investment accounts
Withdrawal
Maturity
Unrestricted Investment Account
General mandate (allows the bank to
make ultimate investment decision
without restriction or any conditions)
Unlimited
Mismatch
Balance Sheet
treatment
On-balance sheet (subject to compliance
with principles of FRS 10)
Mandate
Source: BIMB, DBS Bank, AllianceDBS
Page 14
Restricted Investment Account
Specific Investment Mandate/Asset Class
Fixed tenure
Redemption upon maturity of assets; or redemption only upon realisation of
underlying assets to a third party; or redemption only upon finding replacement
of funds from other Investment Account Holder (other than the Bank)
Off-balance sheet
Industry Focus
Islamic Banks
Financing
Similar reference rate used. Islamic banks use the Base Rate
(BR) and Base Financing Rate (BFR; conventional banks
equivalent to Base Lending Rate or BLR) as the reference rates
in pricing their financing products. Typically, banks with both
conventional and Islamic arms use the same rate for BR and
BLR/BFR.
Unique features of Islamic financing. In principle, Islamic
financing offers a rebate (also known as Ibra) on early
settlement, termination or maturity of an account. Islamic
financing also places a ceiling on financing rate, protecting
consumers from paying high interest rates in the event of a
steep increase in the Base Rate. In accordance with BNM’s
guideline, Islamic banks can impose late payment charges, but
the amount recognised as income is limited to the
administrative cost incurred to manage the late payment. The
remaining portion must be channelled to charitable
organizations.
Mortgage loans under Islamic financing offer additional
incentives. Mortgage under Islamic principles similarly offer
rates that are competitive relative to those of conventional
loans. On top of the salient features mentioned above,
additional incentives for mortgages under Islamic principles
come in the form of the discounts on stamp duty charges.
There is a 20% discount for consumers taking a new or topup loan, as well as a full discount for refinancing a
conventional loan to Islamic financing. To enjoy these
benefits, customers are merely required to complete two
additional documents (vs conventional loans) for mortgage
financing based on Bai’ Bithaman Ajil (BBA or sale contract
based on deferred payment at certain price), i.e. Asset
Purchase Agreement (APA) and Asset Sale Agreement (ASA)
in the solicitor’s office. For mortgage loans under Tawarruq
(or commodity murabahah) contract, the process is similar to
a conventional mortgage loan application, except that the
document would contain an additional agency agreement
(appointing the bank as an agent to sell and purchase
commodities). Meanwhile, the application for car financing
requires customers to submit two agreements - Al-Ijarah
Contract (hiring agreement) and Al-Bai’ Contract (purchasing
agreement) - as opposed to just one HP agreement under
conventional loans.
AFG mortgage loans: Key features similar for conventional and Islamic products; stamp duty more advantageous in Islamic product
Feature
i-Wish Home Financing-I (Islamic)
Home Loan (Conventional)
Stamp Duty
1. New & Top Up: 20% discount
Full
2. Refinancing: Waived (100% discount) for
Full
refinancing cases (i.e. Conventional loans from other
financial institutions to Islamic financing)
Margin of Finance
90% + 5% MRTT and/or Financing Entry Cost
90% + 5% MRTA and/or Financing Entry Cost
Tenure
35 years/70 years of age
35 years/70 years of age
Source: Alliance Islamic Bank, DBS Bank, AllianceDBS
Mortgage loans under BBA: Two additional documentation requirement under Islamic financing
Islamic
Conventional
1. Product Disclosure Sheet (PDS)
1. Product Disclosure Sheet (PDS)
2. Application Form
Sales/Branch Staff
2. Application Form
3. Letter of Offer (LO)
3. Letter of Offer (LO)
4. Sales and Purchase Agreement (SPA)
Customer
4. Sales and Purchase Agreement (SPA)
5. Asset Purchase Agreement (APA)
5. N/A
6. Asset Sale Agreement (ASA)
6 . N/A
Solicitors Office
7. Facility Agreement (FA)
7. Facility Agreement (FA)
8. Other Documents
8. Other Documents
The documents MUST be executed in the particular order above at different intervals i.e. the time must not be the same.
Source: Alliance Islamic Bank, DBS Bank, AllianceDBS
AFG hire purchase loans: Key features similar for conventional and Islamic products
Margin of finance
Tenure
Islamic Hire purchase
90% of total value of car
Max 9 years
Conventional Hire Purchase
90% of total value of car
Max 9 years
Source: Alliance Islamic Bank, DBS Bank, AllianceDBS
Page 15
Industry Focus
Islamic Banks
Islamic financing provided to listed companies aiming to
attain Shariah-compliant status. While the terms of business
loans are negotiated on a case-by-case basis between the
bank and customer, we understand that banks generally do
not practice price discrimination whether the loans are under
conventional or Islamic. However, listed companies seeking to
attain Shariah-compliant status should apply for lines under
Islamic banks. Shariah-compliant status are granted to listed
companies provided that (1) contribution of Shariah noncompliant activities to the overall revenue and profit before
tax is below the 5% benchmark (20% for activities such as
hotels and resorts, stock broking and share trading), (2) the
company’s ratio of cash (placed in conventional accounts and
instruments) over total assets does not exceed 33%, and (3)
the company’s ratio of debt (under conventional financing)
over total assets does not exceed 33%. Listed companies are
generally inclined to seek Shariah-compliant status in order to
attract a larger pool of investors. Other incentives offered
include waiver of commitment fees for the unutilised portion
of the facility limit and full exemption of stamp duty for
refinancing of conventional financing facility to Islamic facility.
Page 16
Industry Focus
Islamic Banks
OPPORTUNITIES IN ISLAMIC FINANCING
Natural bias to Islamic financing under homogeneous pricing.
Banking penetration (defined as percentage of adults with an
account at a formal financial institution) remains low within the
Organisation of Islamic Cooperation (OIC) member countries
and the Muslim population as a whole, with an average of
around 32% and 29%, vs the global average of 62%.
According to findings by the World Bank, the main reason to
the low banking penetration rate is attributable to insufficient
money to use an account, whereas the expensiveness of
financial service comes in second as the most frequently cited
barrier. Only 7% of adults in OIC countries cited religious
reasons to resisting financial services. Hence, we believe Muslims
do not reject conventional finance solely due to religious
reasons. Nonetheless, in an environment of homogeneous
pricing (between conventional and Islamic banking products), in
our opinion, Muslims will have a natural bias to Islamic banking
products given the ability to fulfil their religious duties
concurrently.
Banking penetration comparison
94
69
Global average = 62%
51
51
Size and projected growth of major religious groups
Projected
2010
2050
population
% of population
(mil)
world
(mil)
Christians
2,168.3
31.4
2,918.1
Muslims
1,599.7
23.2
2,761.5
Unaffiliated
1,131.2
16.4
1,230.3
Hindus
1,032.2
15.0
1,384.4
Buddhists
487.8
7.1
486.3
Folk religions
404.7
5.9
449.1
Other religions
58.2
0.8
61.5
Jews
13.9
0.2
16.1
World total
6,895.9
100.0
9,307.2
% of
world
31.4
29.7
13.2
14.9
5.2
4.8
0.7
0.2
100.0
Source: The Future of World Religion by Pew Research Centre
46
34
32
Fertility rate by religion
29
14
Middle East
Muslims
OIC
Sub-Saharan
Africa
South Asia
Latin America &
Caribbean
Europe & Central
Asia
High-income
OECD economies
Muslims
East Asia & Pacific
%
100
90
80
70
60
50
40
30
20
10
-
woman vs the global average of 2.5) and comparatively high
concentration of children as of end-2010 (34% for Muslims vs
global average of 27%). Populations that begin with a larger
proportion of people who are in or soon will enter their prime
childbearing years are expected to grow faster than a
population that begins with a larger proportion of people that
are beyond their prime reproductive years. The Pew Research
Centre also accounts for other factors such as life expectancy,
religious conversion and migration in its growth projections.
Caveats to the findings of the Pew Research Centre include
changes in current trends that could alter the trajectories.
Source: World Bank, Global Findex database
3.1
Christians
2.7
World
2.5
Hindus
2.4
Jews
2.3
Folk religions
1.8
Unaffliated
1.7
Other religions
Fast growing Muslim population. Given that the Muslim
population makes up more than 20% of the global population
and banking penetration is low within the OIC countries, we
opine that attending to the needs of the underserved Muslim
population is the low-hanging growth driver for Islamic banking.
The Muslim population is also projected (by Pew Research
Centre) to be the fastest growing religious group up to year
2050. The proportion of Muslims to the global population is
expected to hit 30% in 2050, closing the gap to that of the
Christian population, which stands at 31%. The key drivers
underpinning the strong growth in the Muslim population
include the higher-than-average fertility rate (3.1 children per
1.7
Buddhists
1.6
0
0.5
1
1.5
2
2.5
3
Source: The Future of World Religion by Pew Research Centre
Page 17
3.5
Industry Focus
Islamic Banks
Age distribution by religious group in 2010
World
27%
62%
Unaffliated
19%
68%
Buddhists
20%
65%
Jews
21%
Other religions
21%
Folk religions
22%
Christians
15%
59%
20%
65%
14%
67%
27%
Hindus
20%
Age 0-14
14%
62%
34%
0%
11%
60%
30%
Muslims
11%
13%
8%
60%
40%
60%
Age 15-59
7%
80%
100%
Age 60+
Source: The Future of World Religion by Pew Research Centre
Projected age distribution by religious group in 2050
World
58%
20%
22%
Buddhists
14%
54%
32%
Unaffliated
14%
54%
32%
Other religions
15%
56%
Folk religions
17%
Hindus
18%
Jews
19%
23%
24%
0%
20%
53%
28%
56%
21%
60%
20%
Age 0-14
Global sukuk issuance
29%
62%
Muslims
Sizeable global Islamic economies. At USD6.9tr, the 57 mostly
Muslim-majority member countries of the OIC represented
9.5% of the global GDP in 2014. Although growth prospects
for several OIC economies have dimmed due to lower oil prices,
these economies remain a significant portion of global GDP.
Note that nine out of the top 15 oil-exporting countries are
members of the OIC. Notwithstanding the correction
experienced by the sukuk market in 2015 (caused by BNM’s
decision to stop the issuance of short-term sukuk and switch to
other instruments for liquidity management for Islamic financial
institutions), the sukuk market has experienced strong growth
thanks to the rise of infrastructure projects and the need for
large corporate exercises to seek funding from investors in the
Gulf States and other Islamic countries which require the
products to be Shariah compliant.
29%
54%
Christians
Muslim consumers that would be agreeable to adopting Islamic
banking products.
40%
Age 15-59
16%
60%
80%
100%
Age 60+
Source: The Future of World Religion by Pew Research Centre
Source: International Islamic Financial Market
Young Muslim population an attractive market to the banks.
Despite projections of a narrowing proportion of global
population under the age of 60, the Muslim population is
expected to remain relatively youthful as the said proportion is
expected to remain higher than the global average (84% vs
78%). A young market is beneficial to the banks as the
financing needs of this group of consumers have yet to peak,
implying room for banks to grow further in the long term.
Attracting the non-Muslim market is the cherry on the cake.
Although Islamic banking is based on Islamic teachings, many of
these values may also appeal to non-Muslims given the risksharing and ethical nature of its business model. In our view,
two factors – pricing and awareness – remain the key
determinants to favourable take-up by the non-Muslim market.
Given the slight incentives offered by Islamic products (lower
late payment charges, ceiling rates), we believe that with
sufficient education on Islamic banking products, there are non-
Page 18
Top 15 crude oil exporting country, in barrels per day (bbl/day)
Country
Saudi Arabia
Russia
Canada
United Arab Emirates
Nigeria
Iraq
Kuwait
Angola
Kazakhstan
Venezuela
Iran
Qatar
Mexico
Norway
Algeria
Note: OIC members highlighted
Source: The World Factbook
bbl/day
7,658,000
4,594,000
2,900,000
2,500,000
2,411,000
2,390,000
1,824,000
1,815,000
1,365,000
1,358,000
1,322,000
1,232,000
1,220,000
1,218,000
1,158,000
% of world
17.3
10.4
6.6
5.7
5.5
5.4
4.1
4.1
3.1
3.1
3.0
2.8
2.8
2.8
2.6
Industry Focus
Islamic Banks
Growing intra-OIC trade. The clear drive to develop Intra-OIC
trade is also facilitating the development of the Islamic
economic sectors. The Intra-OIC trade among the member
countries has grown from 13% in 2005 to 19.9% in 2014, close
to the OIC’s 2015 target of 20%. Under the OIC’s ten-year
programme of action leading up to 2025, the target for intraOIC trade is to hit 6% north of 2015 levels.
Intra-OIC merchandise exports and imports (USD bn)
Source: OIC Economic Outlook 2015
Page 19
Industry Focus
Islamic Banks
CHALLENGES
Regulatory gap. Existing legal and regulatory frameworks should
take into consideration the value propositions promulgated by
Shariah. For instance, the legal definition of banking and
financial services in certain jurisdictions does not recognise
Islamic financial transactions, which leads to potential conflict
and adverse legal effects. The government should also be
supportive in granting neutral tax treatments for Islamic financial
transactions to ensure that Islamic banking products are cost
efficient.
Establishing an even playing field. To avoid an exodus back to
conventional finance, at the very least, there is a need for Islamic
products to be on par with conventional products in terms of
diversity, cost effectiveness, ability to meet the risk and return
requirement of investors as well as the service level, while
remaining Shariah compliant. On the other hand, to get one up
on conventional banking, these Islamic products are expected to
be superior to their conventional peers in these aspects.
Liquidity management. Liquidity problems exist in the Islamic
capital market due to the lack of derivatives and an organised
secondary market for dealing with Islamic instruments. An early
exit may be difficult or costly for an investor without an effective
secondary market where financial instruments are easily
tradable. In addition, most central banks have not been very
active in issuing short-term sukuk, limiting the availability of
high-quality liquid assets (HQLA) in Islamic finance.
Lack of awareness. Despite the strong presence of Islamic
finance in the Gulf Cooperation Council (five out of the six
member countries are among the top 10 Islamic economies),
findings by PWC show that residents in this region lack
familiarity with Islamic banking. 56% of the Muslim respondents
believe that they are familiar with Islamic banking while 64% of
non-Muslims cited insufficient knowledge of Islamic financial
products as the reason for not using Islamic financial services.
Page 20
Talent shortage. Islamic financial industry requires a specific set
of competencies and skills, such as Shariah understanding and
market insight. The shortage of talents, especially on the expert
level such as Shariah scholars, may impede the growth of Islamic
finance, as the views of these scholars are highly valuable in
product development and innovation. On an extreme case,
scarcity in talent may also cause inflated salaries and lead to a
drag on the cost structure of the Islamic banks. Hence, the
abundance of educational institutions focusing on Islamic
banking is crucial for the development of the industry.
Lack of uniformity between Shariah’s views. Different
interpretations of the Shariah lead to different practice and use
of concepts across jurisdiction. Certain products may be
accepted in some jurisdictions but not in others, thus this may
impede the growth and internationalisation of Islamic finance.
Differences in opinion among religious scholars regarding the
Shariah compliance of specific financial arrangements can
expose Islamic banks to the risk of non-compliance with Shariah
principles, which may have serious implications on the industry.
Harmonising differences in the Shariah compliance of different
instruments would reduce uncertainty and foster industry
growth. It also ensures that Islamic banks are able to capture
opportunities from the entire Muslim market, instead of being
sidelined by a portion who perceive Islamic banks are not true to
Shariah values. By the same token, the Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI) and
Islamic Financial Services Board (IFSB) have provided some
Shariah standards and governance guidelines.
Industry Focus
Islamic Banks
INDUSTRY PLAYERS AT A GLANCE
23 key players in the Islamic banking industry. The key players in
the industry can be segregated to three broad categories, i.e.
full Islamic banks, Islamic bank subsidiaries and development
banks or financial institutions that offer Shariah-compliant
products (see table below for banks under the respective
categories). Comparison of the financials of the key players in
the industry can be found in the Appendix. We used the latest
published financial year numbers for all key players. Apart from
BIMB that we have used financial holding company numbers,
the numbers of the other entities reflect the Islamic banking unit
individually. In our analysis, we included only one development
bank, Bank Rakyat which boasts a sizeable market share.
MY: Key players in the industry
Type
Full Islamic banks
Islamic bank subsidiaries
Development
banks/financial
institutions that offer
Shariah-Compliant
Products
Bank
Bank Islam
Bank Muamalat
Asian Finance Bank
Al Rajhi Bank
Kuwait Finance House
Maybank Islamic
AmIslamic
AffinIslamic
Alliance Islamic Bank
CIMB Islamic
Public Islamic
Hong Leong Islamic
Standard Chartered Saadiq
HSBC Amanah
RHB Islamic
OCBC Al-Amin
Bank Rakyat
Agro Bank
Bank Simpanan Nasional
SME Bank
EXIM Bank
Bank Pembangunan Malaysia
Malaysia Building Society
MAY ISL stands head and shoulders above peers. Similar to its
positioning in conventional banking space, MAY ISL takes the
lead in terms of asset size. In fact, MAY ISL, Bank Rakyat and
Bank Islam are among the top global Islamic banks by asset size.
While MAY ISL and Bank Rakyat remain at the top of the table
when ranked by loans and deposits, CIMB ISL trumps BIMB’s
position as the third largest in these aspects. Meanwhile, foreign
Islamic banks, which are imposed operational restrictions such
as branch openings and ATM installations, are typically on the
other end of the spectrum.
Paltry earnings by Middle Eastern Islamic banks. Due to the
relatively small balance sheet and operational restrictions,
Middle Eastern Islamic banks struggle in building scale which
reflects its growth (lower-than-average loan growth) and
profitability (higher-than-average cost-to-income). BIMB has the
highest ROE in the industry, thanks to its higher yielding loans
and strong CASA. Similarly, MBSB and Bank Rakyat enjoy high
NIMs as their portfolios are skewed towards personal financing.
However, the CASA ratios of MBSB and Bank Rakyat are lower
than the industry as exempt finance companies are restricted
from accepting demand deposits (current accounts). Banks that
are heavier on mortgage financing (e.g. MAY ISL, HL ISL) tend to
have NIMs below 2%. Financing-to-deposit ratio is highest at SC
Saadiq (more than 200%) as it is able to tap interbank funding
by its parent through its profit-sharing investment accounts
(PSIA). Inclusive of the PSIA placements, the ratio would be
lower.
Weak asset quality at KFH and MBSB. Banks with strong credit
culture (PBK, HLB) congruently have low NPL ratios for their
Islamic banking arm. MBSB's impaired financing ratio increased
due to its impairment programme. KFH's asset quality is
impacted by high impaired financing in the manufacturing
sector. KFH and MBSB booked high credit cost, in line with its
high impaired financing ratios. All Islamic banks are sufficiently
capitalised, with the Middle Eastern Islamic banks registering
higher capital ratios compared to peers.
Source: BNM, DBS Bank, AllianceDBS
MY: Asset size of Islamic banks
156
RM bn
180
160
140
11
10
7
3
KFH
ALLCE ISL
Al-Rajhi
AFB
13
11
AFFIN ISL
SC SAADIQ
19
MAY ISL
BANK RAKYAT
0
15
HSBC AMAN
20
OCBC AL-…
26
23
HL ISL
41
38
MBSB
AMISL
40
Muamalat
46
44
RHB ISL
60
PUBLIC ISL
57
55
80
BIMB
100
CIMB ISL
92
120
Source: Companies, DBS Bank, AllianceDBS
Page 21
Industry Focus
Islamic Banks
ISLAMIC BANKING PROXIES
MAY ISL: Proportion to MAY’s domestic financing
RM m
MAY ISL is well-positioned to lead in the internationalisation of
Islamic finance as it is the nation’s biggest bank (both Islamic
and conventional) with the most extensive regional reach. In
2011, MAY ISL rolled out the “Islamic First” strategy in
Malaysia, where customers were offered Islamic banking
products as the first choice. Their efforts came to fruition as
MAY ISL’s proportion of financing to the group surpassed the
50% mark in FY15 (from 39% in FY13). MAY ISL emulated the
“Islamic First” strategy in Indonesia in 2014. This, along with
initiatives such as increasing the awareness of Shariah products
and services, a revamp of the Shariah offerings and expansion of
distribution network (through conversion of conventional-only
branches to dual branches offering both conventional and
Shariah products), improved Bank Maybank Indonesia Unit
th
th
Usaha Shariah industry ranking from 12 in FY13 to 5 in FY15,
in terms of asset size. Over in Singapore, MAY ISL pioneered
several products in the market such as a special savings account
for the Hajj pilgrimage, Islamic Auto Finance, Malaysia
Residential Property Financing and Malaysia Commercial &
Industrial Property Financing in 2013, and Islamic Business Term
Financing and Islamic trade facilities and foreign currency
deposits in 2014.
Page 22
%
140,000
50.7
120,000
44.5
80,000
25.6
40
30.8
29.1
30
20
131,123
108,540
86,879
61,998
52,369
20,000
38,710
60,000
40,000
60
50
38.7
100,000
10
Financing (LHS)
2015
2014
2013
2012
0
2011
2010
BIMB, the Islamic banking champ. As the nation’s longest
standing Islamic bank, BIMB’s (the holding company of Bank
Islam and Syarikat Takaful) expertise in the industry is
undisputable. With its experience and expertise in Islamic
Finance, BIMB would be able to step in to meet the growing
demand of Islamic finance (domestic and/or abroad). This could
be through strategic partnerships or technical collaborations. A
strategic partnership could involve taking a strategic stake in the
host country bank or a merger or acquisition. For example, Bank
Islam assisted in setting up the first Islamic bank in Sri Lanka
(Amana Bank Ltd) and acquired a strategic interest in the bank
in Feb 2011. Such initiatives strengthens Bank Islam’s size and
market share and drives growth further. While Bank Islam’s
attempt to pursue a controlling stake in PT Bank Muamalat in
Indonesia was to no avail, we would not discount possibilities of
another pursuit in the longer term given that Indonesia continue
to pack vast potential for Islamic financing growth as the
world’s most populous Muslim nation.
% to domestic financing (RHS)
Source: Company, DBS Bank, AllianceDBS
Global Sukuk League table
Bank
CIMB
Maybank
Standard
Chartered Bank
RHB
HSBC
Dubai Islamic
Bank
AmInvestment
Bank Bhd
JP Morgan
National Bank
of Abu Dhabi
Emirates NBD
PJSC
Amount
(USD m)
2015
Market
share (%)
Amount
(USD m)
2016
Market
share (%)
5,234.7
15.0
5,329.5
12.8
2,959.8
8.5
4,602.4
11.0
2,255.0
6.5
3,878.4
9.3
3,300.1
9.5
3,037.5
7.3
4,453.0
12.8
2,905.4
7.0
1,302.6
3.7
2,636.2
6.3
1,914.3
5.5
2,633.9
6.3
1,483.0
4.3
1,464.8
3.5
1,181.9
3.4
1,463.7
3.5
664.8
1.9
1,389.8
3.3
Source: Bloomberg L.P Finance
Potential M&A candidates, MBSB and Bank Muamalat. Banks to
watch in the M&A space include Malaysia Building Society
(MBSB MK Equity) and Bank Muamalat (subsidiary of DRB MK
Equity). In our view, MBSB remains an attractive M&A target,
thanks to its lucrative personal financing business and sizeable
Islamic banking assets. Furthermore, MBSB’s commitment
towards “closing the gap” between it and the banks would
further elevate its attractiveness, as it lowers the hurdle to
integration. Based on current fundamentals, we believe current
valuation is rich for the stock given its weak ROE traction of sub5% in the near term (FY16- FY17). Nonetheless, in the event of
an M&A (which in our view, will be increasingly imminent in
FY18), we believe MBSB can fetch a higher valuation of 1.1x BV
(refer to MBSB Equity Explorer).
Industry Focus
Islamic Banks
MUAMALAT, a long awaited M&A play. While MUAMALAT is a
relatively small entity, M&A talks have surfaced several times as
its largest shareholder, DRB-HICOM (which has a 70% stake in
MUAMALAT), had been required by BNM to pare down its
significant stake to 40%. Alternatively, the pare down in
shareholding could take the route of an initial public offering
(IPO). In such a case, we expect the bank to fetch a valuation
that is comparable to Affin (closest comparable to its ROE
profile). At a conservative valuation of 0.5x BV, Bank Muamalat
could be listed at a market capitalisation of close to RM1bn.
BIMB (2011), Affin (2013) and MBSB (2016) had made an
attempt to acquire MUAMALAT, but no firm developments have
materialised to date
Quest for the next mega Islamic bank. Talks of a mega Islamic
bank surfaced as early as 2010 when the Central Bank was said
to be issuing two mega Islamic bank licences to foreign players
with the condition of having a minimum RM1bn in paid-up
capital. M&A spin-offs in the Islamic banking space are
plausible, in our view, potentially creating a new wave of M&A
activities in the Islamic banking space. In 2014, MBSB was
involved in talks to merge with CIMB and RHB. Together, the
merged entity was expected to displace MAY from its #1
ranking in Malaysia by asset size. More interestingly, MBSB was
slated to remain listed and to act as a vehicle for any proposed
mega Islamic Bank, i.e. the banking operations of CIMB Islamic
and RHB Islamic would be injected into MBSB if the three-way
merger were to succeed.
Page 23
Industry Focus
Islamic Banks
CONCLUSION
The path to success of Islamic banking is a long and winding
one. In our view, the Islamic banking industry remains a nascent
industry, which still has plenty of hurdles to clear. There is
indeed sufficient demand, from the large and fast-growing
Muslim population and sizeable Islamic economies to justify the
need for Islamic banking, but for the industry to enter into the
attractive growth stage, the foundations of the industry need to
be further strengthened. The challenges that are crucial for the
industry to address include harmonising differences in Shariah
compliance across jurisdictions, establishing an even playing
field, strengthening the resources (human capital, technology,
liquidity management tools) and promoting Islamic banking
literacy to the public.
Malaysia is in a unique position as the country is at the forefront
of the industry. Undeniably, Malaysia has pioneered plenty of
Islamic banking initiatives on the global stage, which have
deepened the country’s knowledge and expertise. The country is
a natural candidate to lead the industry to the next stage,
especially with the strong support of regulators. Product
innovation will be the transformative factor for the industry, in
our view, as it enables the Islamic banks to step up their game
against its conventional counterparts. In that vein, we believe
developments in this space are a crucial factor to monitor in
identifying the next growth cycle for the industry.
BIMB could lead the path. We like BIMB for its rich experience in
the industry, which we believe forms a powerful competitive
advantage for them to lead the avant-garde movement in
product innovation given its superior knowledge in Islamic
banking. MAY ISL complements the Islamic banking scene for its
size and established regional presence which will work to its
advantage in competing on the global front. MAY ISL and CIMB
ISL are also global sukuk players.
A new wave of M&A activities in the Islamic banking space is
plausible, although timing remains the key risk. Potential M&A
candidates include MBSB (whose appeal lies in its lucrative
personal financing business and sizeable Islamic banking assets)
and unlisted MUAMALAT (from a long awaited pare down in
ownership by its largest shareholder, DRB). Albeit indirect, Bursa
is also a proxy to growth in Islamic banking as transactions on its
commodity trading platform, Bursa Suq al-Sila (BSAS), are
expected to increase in conjunction with Islamic financing
growth.
Malaysian Banks: Peer comparison
Banking Group
Affin Holdings
Alliance*
AMMB
CIMB Group
Hong Leong
Maybank
Public Bank
RHB Bank
Market
cap
(US$bn)
Price
(RM/s)
Target
Price
(RM/s)
Rating
1,104
2.53
2.00
FULLY
VALUED
1,332
3,100
10,116
6,165
19,363
17,341
3,514
3.89
4.58
5.08
13.38
8.46
20.00
5.09
NA
5.00
4.80
15.00
7.50
22.50
5.40
NA
BUY
HOLD
BUY
HOLD
BUY
BUY
Weighted average
Weighted average (ex-Public Bank)
Simple average
Simple average (ex-Public Bank)
BIMB
Hong Leong Financial
Group
1,629
3,909
4.43
15.20
5.00
17.00
BUY
BUY
* Based on Bloomberg consensus
^ Refers to a 2-year EPS CAGR for CY15-17F
Source: Companies, Bloomberg Finance L.P., DBS Bank, AllianceDBS
Page 24
CY15A
PE (x)
CY16F
CY17F
^ (%)
CY15A
CY16F
CY17F
CY16F
Net div
(%)
CY16F
13.3x
11.5x
9.8x
15.1x
13.8x
11.8x
15.3x
9.5x
9.9x
11.5x
10.9x
12.2x
13.9x
14.1x
14.9x
10.3x
9.7x
11.1x
10.1x
11.1x
12.2x
12.7x
14.2x
9.2x
17.3
1.7
-1.3
16.8
6.3
-3.7
4.0
1.5
0.6x
1.3x
0.9x
1.1x
1.5x
1.3x
2.5x
0.9x
0.6x
1.2x
0.9x
1.0x
1.3x
1.3x
2.3x
0.8x
0.6x
1.2x
0.8x
0.9x
1.2x
1.3x
2.1x
0.8x
5.8%
11.1%
8.5%
8.6%
10.5%
10.0%
15.3%
8.6%
4.1%
4.2%
4.1%
3.9%
3.0%
5.5%
2.8%
3.2%
13.3x
12.5x
12.5x
12.1x
13.5x
12.9x
12.2x
11.8x
12.4x
11.7x
11.3x
10.9x
3.7
3.6
5.3
5.5
1.6x
1.2x
1.3x
1.1x
1.5x
1.1x
1.2x
1.0x
1.4x
1.1x
1.1x
1.0x
11.1%
9.5%
10.1%
9.5%
4.0%
4.5%
3.9%
4.0%
2.0x
1.2x
1.8x
1.1x
1.7x
1.0x
12.3x
11.2x
12.4x
11.6x
CAGR
11.2x
10.2x
2.8
4.4
P/BV (x)
ROE (%)
17.2%
10.5%
3.3%
3.0%
Industry Focus
Islamic Banks
Company Profiles
Page 25
Malaysia Company Guide
BIMB Holdings
Version 6
Refer to important disclosures at the end of this report
| Bloomberg: BIMB MK | Reuters: BIMB.KL
DBS Group Research . Equity
20 Feb 2017
BUY
Islamic banking champ
Last Traded Price ( 17 Feb 2017): RM4.43 (KLCI : 1,707.68)
Price Target 12-mth : RM5.00 (13% upside) (Prev RM4.80)
Main Islamic banking proxy, BUY. We believe BIMB is the main
proxy to ride on the superior growth in Islamic financing. Apart
from being the only Bursa-listed Shariah-compliant financial
institution, BIMB's deep-rooted expertise and experience in the
industry positions it as the prime candidate to lead the market in
product innovation. Thus far, investment accounts are the only
new product launched, but we see potential for more to come,
thanks to regulatory push to move towards the risk-sharing
model (vs risk transfer model). The successful deployment of
new products could potentially increase financial inclusion,
leading to further growth.
Standing tall. Islamic business aside, BIMB's superior financial
metrics in growth, liquidity and asset quality make it a force to
be reckoned with in the Malaysian banking space. BIMB has an
arsenal of tools to lean on to weather the current soft operating
environment – a niche in Islamic banking (which supports
financing growth momentum), high CASA ratio and liquid
balance sheet (to stave off net financing margin compression) as
well as high financing loss coverage (to buffer against potential
deterioration in asset quality).
Raise earnings by 2-4% as we lower our credit cost assumption
to 31/39bps across FY17-18F (from 39/42bps previously), to
better reflect BIMB’s robust asset quality position. BIMB’s
personal financing portfolio continues to command robust asset
quality, with its low impaired financing ratio of less than 1%,
thanks to stringent credit assessment processes. Although we
would not discount potential asset-quality deterioration going
forward, we take comfort in BIMB’s high financing loss coverage
ratio which mitigates risk to its earnings.
Valuation:
Our revised RM5.00 TP is derived from the Gordon Growth
Model (assumes 16% ROE, 4% long-term growth and 10%
cost of equity) and implies 1.9x FY17F BV. We believe its
current valuation presents a good opportunity to gain an
inexpensive entry into a solid Islamic banking franchise.
Key Risks to Our View:
Asset-quality deterioration amid challenging operating
environment could result in higher-than-expected provisions.
Potential Catalyst: Positive turn in consumer sentiments
Where we differ: Our valuation is higher than consensus as we believe
its strong growth deserves a higher premium
Analyst
Lynette CHENG +60 32604 3907 [email protected]
Sue Lin LIM +65 8332 6843 [email protected]
What’s New
•
•
•
•
Prime candidate to ride on superior Islamic
financing growth
Poised to lead market in product innovation,
thanks to well-developed know-how in Islamic
banking
Lower credit cost assumptions led to upward
revision in earnings by 2-4%
Maintain BUY with higher TP of RM5.00
Price Relative
RM
Relative Index
210
5.2
190
4.7
170
4.2
150
3.7
130
3.2
2.7
Feb-13
110
Feb-14
Feb-15
BIMB Holdings (LHS)
Forecasts and Valuation
FY Dec (RMm)
Pre-prov. Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (sen)
EPS Pre Ex. (sen)
EPS Gth Pre Ex (%)
Diluted EPS (sen)
PE Pre Ex. (X)
Net DPS (sen)
Div Yield (%)
ROAE Pre Ex. (%)
ROAE (%)
ROA (%)
BV Per Share (sen)
P/Book Value (x)
90
Feb-17
Feb-16
Relative KLCI (RHS)
2015A
992
547
547
2.8
36.1
36.1
1
35.5
12.3
12.2
2.8
17.2
17.2
1.1
221
2.0
Earnings Rev (%):
Consensus EPS (sen):
Other Broker Recs:
2016F
1,110
561
561
2.5
35.8
35.8
(1)
35.3
12.4
13.1
3.0
15.5
15.5
1.0
240
1.8
2017F
1,237
638
638
13.6
39.5
39.5
10
39.0
11.2
14.4
3.3
15.8
15.8
1.1
261
1.7
2018F
1,400
692
692
8.5
41.6
41.6
5
41.0
10.6
15.2
3.4
15.4
15.4
1.1
282
1.6
0
36.8
B: 5
4
38.0
S: 0
2
41.0
H: 4
At A Glance
Issued Capital (m shrs)
Mkt. Cap (RMm/US$m)
Major Shareholders (%)
Tabung Haji (%)
EPF (%)
KWAP (%)
Free Float (%)
3m Avg. Daily Val (US$m)
ICB Industry : Financials / Banks
1,638
7,255 / 1,629
50.8
12.4
5.5
21.1
0.84
Source of all data on this page: Company, AllianceDBS, Bloomberg
Finance L.P.
ASIAN INSIGHTS
ed: CK / sa: WMT, PY
VICKERS SECURITIES
Company Guide
BIMB Holdings
WHAT’S NEW
At the forefront of Islamic banking
Islamic banking champ
Undisputed proxy to ride on the growth in Islamic banking.
Due to strong regulatory push for the Islamic banking
agenda, we believe financing and deposit growth will
continue to outpace its conventional peers. As the oldest
Islamic bank in Malaysia, we believe BIMB is the prime
candidate to ride on this exciting growth. Indeed, BIMB’s
financing growth outpaced the system’s financing growth
since 2012 and grew relatively similar to the Islamic financing
growth (see Chart 1). Furthermore, with its deep-rooted
expertise and rich experience in the sector, we believe BIMB is
poised to be the market leader in product innovation of
Islamic banking offerings. This was evident when the
Investment Account was first introduced, as BIMB took the
lead in providing consumer education on the product. Further
aiding this is the support from government-linked companies
(GLCs), whose personnel serve as an avenue for BIMB to roll
out salary deduction schemes for personal financing.
Further re-rating catalyst could come from spreading its
wings regionally. Although this agenda may be placed in the
back burner in the near term due to the challenging
operating environment, we believe this remains a potential
growth lever for BIMB in the long term. This could be through
strategic partnerships or technical collaborations. A strategic
partnership could involve taking a strategic stake in the host
country bank or a merger or acquisition. For example, Bank
Islam assisted in setting up the first Islamic bank in Sri Lanka
(Amana Bank Ltd) and acquired a strategic interest in the
bank in Feb 2011. Such initiatives can strengthen Bank Islam’s
size and market share, and can help accelerate its growth.
While Bank Islam’s attempt to pursue a controlling stake in PT
Bank Muamalat in Indonesia was to no avail, we would not
discount the possibility of another pursuit in the longer term
given that Indonesia continues to hold vast potential for
Islamic financing growth as the world’s most populous
Muslim nation (refer to Chart 3).
Impaired financing ratio of personal financing portfolio
remains low at less than 1%. While challenges are abound on
the retail segment (amid rising cost of living and weak
consumer sentiments), BIMB’s retail portfolio have thus far
remained resilient. 90% of its personal financing portfolio
(which makes up 30% of its financing book) is structured
under packaged financing scheme, where customers repay
their financing either through a salary-deduction or salarytransfer mechanism. Under the salary-deduction mode,
salaries of customers are paid into Bank Islam accounts, and
the Bank directly debits repayment once their salaries have
ASIAN INSIGHTS
been credited. Under the salary-transfer mechanism,
employers deduct repayments from the salaries of their
employees and subsequently remit payments to Bank Islam.
While the risk attached to this lies in the change in
employment of the customer (thus, turning into a nonpackaged customer), we understand that BIMB’s experience
with non-packaged financing customers have still been
encouraging so far. The low impaired financing ratio of less
than 1% is testament to the resiliency of BIMB’s personal
financing portfolio.
Asset quality indicators remain supportive of strong growth
potential. Personal financing aside, BIMB has also been
growing mortgage financing with a discipline of avoiding
speculative spaces. Hence, the typical mortgage customers for
BIMB are first time home buyers. 75% of its mortgage
portfolio is extended for landed properties. Meanwhile, oil
and gas exposure to BIMB stands at 10%, inclusive of its
retail portfolio. Its banking peers reported less than 5%
exposure to oil and gas, but does not include its respective
retail exposure. While oil and gas remains a keenly watched
segment for BIMB, the portfolio has held up thus far, with no
alarming trends noted by management. We understand that
BIMB exposure is largely for contract financing and does not
have any exposure to the upstream space.
Raise earnings by 2-4% as we lower our credit cost
assumption to 31/39bps across FY17-18F (from 39/42bps
previously), to better reflect BIMB’s robust asset quality
position. Although we would not discount potential assetquality deterioration going forward, we take comfort in
BIMB’s high financing loss coverage ratio which mitigates risk
to its earnings (refer to Chart 2). BIMB’s financing loss
coverage ratio is able to stay within 100%, even if impaired
financing increases by a whopping 70%.
Valuation and recommendation
Maintain BUY with higher TP of RM5.00 post earnings
adjustment. Our TP implies 1.9x BV, which we believe is fair
for a franchise delivering ROEs of more than 15% and betterthan-industry metrics. A restructuring exercise to collapse the
financial holding structure of BIMB could be in the cards to
remove double leverage ratio concerns. In our previous
report, we expressed preference towards keeping STMB
under Bank Islam as it provides better potential gain. For the
full analysis, please refer to the report dated 22 Dec 2016 in
this link.
VICKERS SECURITIES
Page 27
Company Guide
BIMB Holdings
Chart 1: BIMB financing growth vs system financing growth
Chart 2: Financing loss coverage vs impaired financing ratio
40
Impaired financing ratio
35
5.0%
Financing loss coverage
176%
4.5%
30
4.0%
25
3.5%
20
3.0%
2.0%
10
1.5%
5
1.0%
2011
2012
2013
BIMB Financing growth
Islamic banking financing growth
2014
2015
2016F
Conventional loan growth
Total system loan growth
BIMB’s financing growth outpaced system financing growth since
2012
Source: Company, AllianceDBS, DBS Bank
200%
180%
160%
140%
112%
120%
100%
2.6%
80%
77%
60%
1.5%
0.5%
0
175%
143%
4.5%
2.5%
15
170%
175%
40%
1.2%
1.1%
1.1%
1.0%
2013
2014
2015
2016F
0.0%
20%
0%
2010
2011
2012
Financing loss coverage
Impaired financing
Solid asset quality indicators with high financing loss coverage ratio
and low impaired financing ratio
Source: Company, AllianceDBS, DBS Bank
Chart 3: Indonesia potential addressable market
Country
Indonesia
India
Pakistan
Bangladesh
Nigeria
Egypt
Iran
Turkey
Algeria
Morocco
Subtotal
Subtotal for rest of
world
World total
2010
population (mil)
209.1
176.2
167.4
134.4
77.3
77.0
73.6
71.3
34.7
31.9
1,053.0
% of world's
Muslim
13.1
11.0
10.5
8.4
4.8
4.8
4.6
4.5
2.2
2.0
65.8
546.7
1,599.7
34.2
100.0
Country
India
Pakistan
Indonesia
Nigeria
Bangladesh
Egypt
Turkey
Iran
Iraq
Afghanistan
Subtotal
Subtotal for rest of
world
World total
Projected 2050
population (mil)
310.7
273.1
256.8
230.7
182.4
119.5
89.3
86.2
80.2
72.2
1,701.1
% of world's
Muslim
11.2
9.9
9.3
8.4
6.6
4.3
3.2
3.1
2.9
2.6
61.6
1,060.4
2,761.5
38.4
100.0
Source: The Future of World Religion by Pew Research Centre, Company, AllianceDBS, DBS Bank
ASIAN INSIGHTS
Page 28
VICKERS SECURITIES
Company Guide
BIMB Holdings
Margin Trends
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
NFM to remain under pressure, although we expect the
quantum to be less compared to the year before, as the
intensity of deposit competition has lessened. Positively, BIMB’s
high CASA ratio could slightly ease the pressure on net
financing margin (NFM). BIMB’s CASA ratio is currently at the
mid-30% range and the bank intends to maintain it at this level.
RM m
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2014A
2.65%
2.60%
2.55%
2.50%
2.45%
2.40%
2.35%
2.30%
2.25%
2.20%
2015A
2016F
Fund based income (LHS)
Moderating financing growth. We forecast 12% financing
growth for BIMB in FY17F. Targeted areas of growth include the
affordable housing segment for its retail segment, while on the
corporate segment BIMB favours the infrastructure sector.
Among its banking peers, BIMB has one of the strongest
financing growth. BIMB is also targeting to grow its floatingrate financing to achieve a portfolio mix of floating-to-fixed-rate
financing of 80:20.
Targeting to grow investment accounts. A mandate to
distinguish Islamic deposits and Islamic investment accounts was
released in 2013, requiring the transition to commence in June
2015. In line with that, BIMB aspires to shore up investment
accounts to RM2bn in FY16. BIMB does not expect any
significant earnings impact from this transition as the higher
cost of funds is expected to be offset by the benefits reaped
from the favourable treatment of these accounts in terms of
Statutory Reserve Requirement, liquidity and capital.
2017F
2018F
Net financing margin (RHS)
Gross Financing & Growth
RM m
55,000
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
30%
25%
20%
15%
10%
5%
0%
2014A
2015A
2016F
Gross Financing (LHS)
2017F
2018F
Gross Financing y-o-y Growth (RHS)
Customer Deposit & Growth
RM m
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
50,000
40,000
30,000
20,000
10,000
Owns 60% of STMB, a key Takaful player. Syarikat Takaful
Malaysia Berhad (STMB) provides insurance protection based on
Shariah principles. Its main distribution channel is its agency
force which currently boasts 2,700 agents. Contribution from
STMB makes up slightly less than 70% of BIMB’s non-fund
based income.
Stable cost-to-income ratio. BIMB expects it to keep its cost to
income ratio at mid-50%. Management expects provision
charge-off rate to be similar to the FY15 level (20bps), but we
have conservatively assumed charge-off rate of 30/31/39bps
across FY16-18F.
At the forefront of Islamic finance. As the pioneer of Islamic
banking in Malaysia, BIMB is poised to leverage on the deep
growth potential of Islamic finance due to the large Muslim
population within the region. On top of opportunities arising
from the Malaysian government’s initiatives to develop Islamic
banking, another potential growth area for BIMB lies with
Indonesia as it is the world's most populous Muslim nation.
Although BIMB has expressed interest in making its mark in
Indonesia, nothing substantial has materialised yet.
0
2014A
2015A
2016F
2017F
2018F
Customer Deposits (LHS)
Customer Deposits Growth (%) (YoY) (RHS)
Financing-to-Deposit Ratio Trend
RM m
55,000
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2014A
2015A
Financing (LHS)
2016F
Deposit (LHS)
2017F
2018F
Financing to deposit ratio (RHS)
Cost & Income Structure
RM m
3,500
58%
3,000
56%
2,500
2,000
54%
1,500
52%
1,000
50%
500
0
48%
2014A
2015A
2016F
Fund based income (LHS)
Cost-to-income ratio (RHS)
2017F
2018F
Non-fund based income (LHS)
Source: Company, AllianceDBS
ASIAN INSIGHTS
VICKERS SECURITIES
Page 29
Company Guide
BIMB Holdings
Balance Sheet:
Stable asset quality. BIMB has improved its asset quality over the
years, exemplified by the lowering of its gross impaired
financing ratio to 1% from 13% back in 2009. Management
aims to keep asset-quality deterioration at bay and maintain its
gross impaired financing ratio within the current level. BIMB’s
coverage ratio is high, at close to 170%.
Asset Quality
RM m
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
High capital ratio. BIMB’s CET-1 ratio is at 12%, which is higher
compared to its banking peers. To ensure sustainable levels of
capital, BIMB rolled out its Dividend Reinvestment Plan in Aug
2014. Separately, STMB’s capital ratio is well above the
minimum requirement of 130%.
0.00%
2014A
2015A
2016F
2017F
2018F
Provision charge-off rate
Impaired financing ratio
Capitalisation (%)
16.0%
15.5%
15.0%
Share Price Drivers:
Trading lower than mean P/BV multiples. BIMB is trading at 1.7x
FY17F BV, which is below the 5-year mean valuation of 2x. We
believe the market is not attributing sufficient premium to the
arsenal of tools that BIMB has built up to prevail in the current
tough operating environment.
Key Risks:
Softer consumer financing growth. Consumer financing make
up just over 60% of BIMB’s financing portfolio, with the bulk
being personal and housing financing. Given the high
proportion of consumer financing, softer growth in this
segment would be unfavourable for BIMB.
Tightening measures by BNM. Although the growth in
household debt has moderated over the years, thanks to
responsible lending measures administered by BNM, household
debt-to-GDP ratio remains high at 89% in 2015. More
tightening measures could dampen the robust growth
momentum in the personal financing segment.
Asset-quality deterioration amid challenging operating
environment could result in higher-than-expected provisions.
14.5%
14.0%
13.5%
13.0%
12.5%
12.0%
11.5%
11.0%
2014A
2015A
2016F
Tier-1 CAR
2018F
ROE (%)
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2014A
2015A
2016F
2017F
2018F
Forward PE Band (x)
(x)
18.0
16.0
+2sd: 14.8x
14.0
Company Background
BIMB Holdings Berhad provides all aspects of Islamic banking
services and is the only listed Shariah-compliant bank in
Malaysia. Through its subsidiaries, the bank also underwrites
family and general Takaful (Islamic insurance) and provides
stockbroking and other related services.
2017F
Total CAR
+1sd: 13.3x
12.0
Avg: 11.8x
-1sd: 10.4x
10.0
-2sd: 8.9x
8.0
Feb-13
Feb-14
Feb-15
Feb-16
PB Band (x)
(x)
2.9
2.7
2.5
+2sd: 2.55x
2.3
+1sd: 2.28x
2.1
Avg: 2.01x
1.9
-1sd: 1.74x
1.7
1.5
1.3
Feb-13
-2sd: 1.47x
Feb-14
Feb-15
Feb-16
Source: Company, AllianceDBS
ASIAN INSIGHTS
Page 30
VICKERS SECURITIES
Company Guide
BIMB Holdings
Key Assumptions
FY Dec
2014A
2015A
2016F
2017F
2018F
Gross Financing Growth
Customer Deposits Growth
Yld. On Earnings Assets
Avg Cost Of Funds
24.2
10.2
4.3
2.2
16.1
7.7
4.4
2.5
12.0
2.0
4.4
2.4
12.0
6.0
4.4
2.5
12.0
6.0
4.4
2.5
Income Statement (RMm)
FY Dec
2014A
2015A
2016F
2017F
2018F
1,280
824
2,105
(1,165)
940
(56.3)
(68.2)
0.0
815
(228)
(54.6)
0.0
532
532
1,320
947
2,267
(1,275)
992
(73.8)
(83.4)
0.0
834
(221)
(65.7)
0.0
547
547
1,402
1,056
2,458
(1,348)
1,110
(119)
(100)
0.0
891
(258)
(71.3)
0.0
561
561
1,510
1,153
2,663
(1,426)
1,237
(136)
(120)
0.0
981
(265)
(78.5)
0.0
638
638
1,648
1,261
2,908
(1,509)
1,400
(191)
(144)
0.0
1,064
(287)
(85.1)
0.0
692
692
10.1
108.3
3.1
2.8
6.2
2.5
7.7
13.6
9.1
8.5
2.1
2.6
55.3
1.9
2.5
56.3
1.9
2.4
54.9
1.9
2.3
53.5
1.9
2.3
51.9
60.8
25.8
7.7
5.7
58.2
28.4
8.5
4.9
57.0
28.8
8.2
5.9
56.7
29.2
8.0
6.1
56.6
29.4
7.7
6.2
18.8
18.8
1.1
1.1
17.2
17.2
1.1
1.1
15.5
15.5
1.0
1.0
15.8
15.8
1.1
1.1
15.4
15.4
1.1
1.1
Fund-based Income
Non-fund based Income
Operating Income
Operating Expenses
Pre-provision Profit
Provisions
Associates
Exceptionals
Pre-tax Profit
Taxation
Minority Interests
Preference Dividend
Net Profit
Net Profit bef Except
Growth (%)
Net fund based Income Gth
Net Profit Gth
Margins, Costs & Efficiency (%)
Spread
Net Financing Margin
Cost-to-Income Ratio
Business Mix (%)
Net fund based Inc / Opg Inc.
Non-fund based Inc / Opg inc.
Fee Inc / Opg Income
Oth Non-Int Inc/Opg Inc
Profitability (%)
ROAE Pre Ex.
ROAE
ROA Pre Ex.
ROA
Expect ROE to stay in the
range of 15%.
Source: Company, AllianceDBS
ASIAN INSIGHTS
VICKERS SECURITIES
Page 31
Company Guide
BIMB Holdings
Quarterly / Interim Income Statement (RMm)
FY Dec
3Q2015
4Q2015
Net fund-based Income
Non-fund based Income
Operating Income
Operating Expenses
Pre-Provision Profit
Provisions
Associates
Exceptionals
Pretax Profit
Taxation
Minority Interests
Net Profit
337
205
542
(321)
221
5.34
(22.0)
0.0
204
(69.3)
(14.9)
120
336
277
613
(367)
246
(23.2)
(22.8)
0.0
200
(22.0)
(16.4)
162
1Q2016
2Q2016
3Q2016
344
270
615
(339)
276
(34.9)
(28.3)
0.0
213
(59.1)
(18.2)
135
361
264
625
(341)
284
(30.3)
(28.2)
0.0
226
(63.4)
(18.6)
144
357
252
610
(332)
277
(22.2)
(28.3)
0.0
227
(68.6)
(17.7)
141
Growth (%)
Net fund-based Income Gth
Net Profit Gth
2.5
(7.8)
(0.1)
35.1
Balance Sheet (RMm)
FY Dec
2014A
2015A
2016F
2017F
2018F
Cash/Bank Balance
Government Securities
Inter Bank Assets
Total Net Financing & Advs.
Investment
Associates
Fixed Assets
Goodwill
Other Assets
Total Assets
3,898
1,335
721
29,525
15,529
0.0
458
0.0
753
53,030
3,304
1,591
977
34,295
15,110
0.0
461
56.2
718
57,364
4,467
1,464
783
38,444
15,899
0.0
484
0.0
754
63,189
4,735
1,620
877
43,099
16,731
0.0
509
0.0
792
69,300
5,019
1,793
982
48,281
17,608
0.0
534
0.0
831
76,034
Customer Deposits
Inter Bank Deposits
Debts/Borrowings
Others
Minorities
Shareholders' Funds
Total Liab& S/H’s Funds
40,678
300
1,133
1,406
240
2,949
53,030
43,795
0.0
1,883
1,402
282
3,414
57,364
44,671
4,118
1,883
1,433
353
3,813
63,189
47,351
6,643
1,883
1,465
432
4,263
69,300
50,192
9,570
1,883
1,497
517
4,748
76,034
2.4
(16.4)
4.9
6.3
(1.0)
(2.2)
Bottomline driven by strong
financing growth of 15% yo-y
Source: Company, AllianceDBS
ASIAN INSIGHTS
Page 32
VICKERS SECURITIES
Company Guide
BIMB Holdings
Financial Stability Measures (%)
FY Dec
2014A
2015A
2016F
2017F
2018F
72.6
55.7
29.3
96.6
0.7
78.3
59.8
26.3
95.9
0.0
86.1
60.8
25.2
88.2
8.1
91.0
62.2
24.1
84.7
11.9
96.2
63.5
23.2
81.4
15.5
1.1
0.6
1.1
0.7
1.1
0.7
1.1
0.7
1.1
0.7
170.4
174.6
173.0
164.0
162.0
0.2
0.2
0.3
0.3
0.4
13.4
12.2
15.3
12.1
15.0
12.0
14.8
11.7
14.5
11.3
Balance Sheet Structure
Financing-to-Deposit Ratio
Net Financing / Total Assets
Investment / Total Assets
Cust . Dep./Int. Bear. Liab.
Interbank Dep / Int. Bear.
Asset Quality
NPF / Total Gross Financing
NPF / Total Assets
Financing Loss Reserve
Coverage
Provision Charge-Off Rate
Capital Strength
Total CAR
Tier-1 CAR
Healthy asset-quality
indicators with low
impaired financing
ratio and high
coverage ratio
Source: Company, AllianceDBS
Target Price & Ratings History
RM
4.49
14
16
18
4.29
4.09
3.89
6
4
7
8 10
9
11
12
15
17
13
5
3.69
3.49
2
3
1
3.29
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Not e : Share price and Target price are adjusted for corporate actions.
S. No.
Dat e of
Report
Closing
Pric e
12- mt h
T arget Rat ing
Pric e
1:
25 F eb 16
3.54
3.85
HOLD
2:
29 F eb 16
3.60
3.85
HOLD
3:
03 Mar 16
3.61
3.85
HOLD
4:
24 Mar 16
3.80
3.85
HOLD
5:
03 May 16
3.92
3.85
HOLD
6:
12 May 16
3.86
3.85
HOLD
7:
02 J un 16
4.06
3.85
HOLD
8:
12 J ul 16
4.00
3.85
HOLD
9:
14 J ul 16
4.09
3.85
HOLD
10:
28 J ul 16
4.00
3.85
HOLD
11:
12:
13:
14:
15:
16:
17:
18:
01 Aug 16
29 Aug 16
05 Sep 16
31 Oct 16
07 Dec 16
22 Dec 16
10 Jan 17
07 Feb 17
3.99
4.00
4.02
4.40
4.18
4.32
4.20
4.32
3.85
4.15
4.15
4.15
4.15
4.80
4.80
4.80
HOLD
HOLD
HOLD
HOLD
HOLD
BUY
BUY
BUY
Source: AllianceDBS
Analyst: Lynette CHENG
Sue Lin LIM
ASIAN INSIGHTS
VICKERS SECURITIES
Page 33
Malaysia Company Guide
Bursa Malaysia
Refer to important disclosures at the end of this report
Version 7 | Bloomberg: BURSA MK | Reuters: BMYS.KL
DBS Group Research . Equity
20 Feb 2017
BUY
Indirect proxy to Islamic banking
growth
Last Traded Price ( 17 Feb 2017)
KLCI : 1,707.68)
2017): RM8.81 (KLCI
Price Target 1212-mth : RM10.00 (14% upside)
Potential Catalyst: Structural changes such as streamlining of
surveillance role, revision in listing fees and revamp in fee structure
Where we differ:
differ: Our TP is higher than consensus as we are pegging it
to a higher valuation, given the upside potential to earnings
Analyst
Lynette CHENG +60 32604 3907 [email protected]
Sue Lin LIM +65 8332 6843 [email protected]
What’s New
•
•
•
•
Indirect proxy to Islamic financing growth via
commodity trading platform, Bursa Suq al-Sila
(BSAS)
Average daily value traded on BSAS expected to
grow on continued growth in Islamic financing
Diversified revenue base positive in times of
subdued equity market
Maintain BUY with RM10.00 TP
Price Relative
RM
Relative Index
9.9
208
9.4
188
8.9
8.4
168
7.9
148
7.4
128
6.9
108
6.4
5.9
Feb-13
Feb-14
Feb-15
Bursa Malaysia (LHS)
Forecasts and Valuation
FY Dec (RM m)
Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (sen)
EPS Pre Ex. (sen)
EPS Gth Pre Ex (%)
Diluted EPS (sen)
Net DPS (sen)
BV Per Share (sen)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
88
Feb-17
Feb-16
Relative KLCI (RHS)
2016A
2016A
473
295
271
194
194
(2.5)
36.1
36.1
(3)
36.1
34.0
162
24.4
24.4
23.4
9.8
3.9
5.4
CASH
23.2
Earnings Rev (%):
Consensus EPS (sen
sen):
sen :
Other Broker Recs:
2017F
2017F
490
318
293
210
210
8.5
39.2
39.2
9
39.2
36.9
164
22.5
22.5
7.9
7.9
4.2
5.4
CASH
24.0
2018F
2018F
511
342
318
228
228
8.6
42.5
42.5
9
42.5
40.1
167
20.7
20.7
6.7
6.0
4.5
5.3
CASH
25.7
2019F
2019F
533
368
345
248
248
8.5
46.2
46.2
9
46.2
43.5
169
19.1
19.1
5.6
4.0
4.9
5.2
CASH
27.5
0
39.9
B: 4
0
42.1
S: 2
0
N/A
H: 9
Source of all data on this page: Company, AllianceDBS, Bloomberg
Finance L.P.
ASIAN INSIGHTS
ed: CK / sa:WMT, PY
Moving beyond equities; BUY. Albeit indirect, Bursa is also a
proxy to growth in Islamic banking as transactions on its
commodity trading platform, Bursa Suq al-Sila (BSAS) is
expected to increase in conjunction with Islamic financing
growth. Furthermore, BSAS’ global accreditation implies a
potential to grow alongside global growth in Islamic financing
rather than just domestically. We expect BSAS contribution to
remain small, but view the diversification in revenue base a
boon to its earnings profile. Separately, we continue to like
Bursa for its strong cashflow generation as an exchange
operator, which will continue to support its high dividend
payouts.
Diversifying income base. With the increasing prevalence of
Islamic banking, more transactions are expected be performed
under BSAS, increasing the average daily value traded on BSAS.
Assuming an average blended rate of RM4.50 per contract,
every RM225bn worth of transaction would add RM1m to BSAS
revenue. As of end-FY16, ADV stood at RM16bn, growing by
more than 3-fold in the last three years. Strong traction from
BSAS also aids in diversifying Bursa’s reliance on equity-related
income. This is particularly crucial currently, as the equity market
is expected to remain subdued in the foreseeable future.
Higher average daily value traded on BSAS contributes positively
to revenue. Bursa earns trading fee for transactions performed
on BSAS. A charge of RM3 is imposed per contract worth
RM1m if it is settled within four days. A charge of RM10 and
RM15 is imposed if it takes 5-21 days and more than 22 days,
respectively. Hence, BSAS revenue typically moves in tandem
with the average daily value traded on BSAS. However, the
quantum may differ slightly, according to the average blended
trading fee charged.
Valuation:
Our TP is based on the Dividend Discount Model and assumes
94% dividend payout and 4% long-term growth. Potential
upside from higher liquidity and velocity as well as structural
changes, will help re-rate Bursa's share price, in our view.
Key Risks to Our View:
Weaker market sentiment. Our sensitivity analysis shows that
every 1% decrease in average daily trading value assumption
would lower FY17 net profit by 0.4%.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (RMm/US$m)
Major Shareholders (%)
Kumpulan Wang Persaraan Diperbadankan (%)
Capital Market Development Fund (%)
EPF (%)
Free Float (%)
3m Avg. Daily Val (US$m)
ICB Industry : Financials / General Financial
536
4,725 / 1,061
19.8
18.7
7.2
54.3
1.7
VICKERS SECURITIES
Company Guide
Bursa Malaysia
WHAT’S NEW
Indirect proxy to Islamic banking
Bursa Suq alal-Sila (BSAS) serves as the trading platform for
Islamic financial institutions to trade commodities. Islamic
financial institutions use BSAS to facilitate liquidity
management, risk management in Islamic financial market
and Islamic financial product offerings. The Shariah contract
pertinent to the transactions performed in BSAS is the
murabahah contract, where commodities (in this case) are
sold at cost plus profit, on deferred payment basis. Islamic
financial institutions locally as well as globally can participate
in BSAS.
Higher average daily value traded on BSAS contributes
positively to revenue. Bursa earns trading fee for transactions
performed on BSAS. A charge of RM3 is imposed per contract
worth RM1m if it is settled within four days. A charge of
RM10 and RM15 is imposed if it takes 5-21 days and more
than 22 days, respectively. Hence, BSAS revenue typically
moves in tandem with the average daily value traded on BSAS
(see Chart 1). However, the quantum may differ slightly,
according to the average blended trading fee charged.
How does Bursa benefit from the growth in Islamic banking?
With the increasing prevalence of Islamic banking, more
transactions are expected be performed under BSAS,
increasing the average daily value traded on BSAS. Assuming
an average blended rate of RM4.50 per contract, every
RM225bn worth of transaction would add RM1m to BSAS
revenue. Evidently, BSAS have grown over the years, as ADV
continues to grow from strength to strength sequentially (see
Chart 2). As of end-FY16, ADV stood at RM16bn, growing by
more than 3-fold in the last three years. This was largely
driven domestically, particularly in 2015 when the Islamic
Financial Services Act was enacted, which resulted in higher
conversion of deposits to murabahah. Foreign ADV has also
grown gradually, albeit at a slow pace. The number of
participants has also grown by 59% to 124 participants as of
end-FY16 (from 78 participants in 1Q14)
ASIAN INSIGHTS
BSAS contribution
contribution expected to improve but remain small. As
a result of the strong growth in ADV, revenue from BSAS
improved concurrently. In FY13, BSAS contributed 1.3% to
Bursa’s total revenue. In FY16, this has grown to 3.4% (see
Chart 3). With Islamic financing expected to continue
outpacing conventional financing, we believe this momentum
will persist but remain a small contributor to Bursa’s overall
earnings given the low charges imposed on BSAS
transactions. That said, we view the diversification in revenue
base positively, as it reduces the concentration risk with
regard to equity-related income. This is particularly crucial
currently, as the equity market is expected to remain subdued
in the foreseeable future (see Chart 4).
Maintain BUY and TP of RM10.00. Despite the bright
prospects for BSAS, contribution to bottomline remains
minute for Bursa. A significant pick-up in transaction value is
required before BSAS revenue begins to contribute
significantly. Thus, we keep our earnings and
recommendation unchanged. Our TP is based on the
Dividend Discount Model and assumes 94% dividend payout
(excluding special dividends) and 4% long-term growth,
implying 25x FY17 EPS.
Potential upside to dividend yield. The stock currently
provides a decent 4-5% yield, with room for further upside
given its sizeable cash hoard. Bursa’s dividend payout was
higher y-o-y in FY16 and the company has declared special
dividends in 2013 and 2014. However, management
indicated a preference to keep its cash buffer in preparation
for possible regulatory changes – the International
Organization of Securities Commissions (IOSCO) has yet to
finalise the guideline for capital requirements. Meanwhile,
potential structural changes (revision in listing fees, revamp in
fee structure and streamlining of its surveillance role) could
unlock its earnings potential.
VICKERS SECURITIES
Page 35
Company Guide
Bursa Malaysia
40
20
2.0
Foreign ADV (LHS)
No of trading participants (RHS)
ADV (RHS)
4Q16
3Q16
2Q16
1Q16
4Q15
3Q15
2Q15
1Q14
0
1Q15
0.0
4Q16
3Q16
2Q16
1Q16
4Q15
3Q15
2Q15
1Q15
4Q14
3Q14
2Q14
BSAS revenue (LHS)
80
4.0
-
1Q14
-
Domestic ADV (LHS)
BSAS revenue moves in tandem with the average daily value traded
Growing number of trading participants and foreign participants
Chart 3: BSAS performance
Chart 4: Equity - average daily volume and value trends
%
3.4
3.3
3.3
3.8
3.5
4.0
3.5
3.0
2.5
1.7
1.5
4.0
1.0
2.0
0.5
BSAS revenue (LHS)
4Q16
3Q16
2Q16
1Q16
4Q15
3Q15
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
FY16
FY15
-
FY15
-
FY14
2,000
1,500
2.0
6.0
FY13
2,500
BSAS % to rev (RHS)
BSAS remains a small contributor to Bursa’s revenue, but
diversification in revenue base positive to the company
1,000
500
0
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
2.1
1.6
8.0
1.3
10.0
3,000
4.5
2.2
12.0
3.1
14.0
3.1
3.0
3.5
16.0
3.4
3.4
4.0
RM m
18.0
100
60
4Q14
2.0
6.0
3Q14
4.0
1.0
8.0
2Q14
6.0
3.2
10.0
120
3.0
10.0
140
17.0
12.0
15.2
14.0
12.0
13.8
14.0
12.8
16.0
11.9
16.0
6.9
18.0
5.8
18.0
5.1
20.0
5.1
15.8
RM bn
20.0
8.0
5.2
5.1
7.3
3.0
2.0
15.2
9.9
4.0
15.4
16.0
13.6
11.9
5.0
%
18.7
RM m
6.0
18.7
Chart 2: BSAS statistics
19.0
Chart 1:BSAS revenue vs ADV
Ave Daily Volume (m)
Ave Daily Value (RMm)
Subdued average daily volume and value trends in the equity market
since 2014.
Source: Company, DBS Bank, AllianceDBS, Bloomberg Finance L.P.
ASIAN INSIGHTS
Page 36
VICKERS SECURITIES
Company Guide
Bursa Malaysia
Average Daily Volume (m)
CRITICAL DATA POINTS TO WATCH
1975
1994.5
Earnings Drivers:
Revision in clearing fee. Close to 50% of Bursa’s operating
revenue consists of revenue from securities trading, the bulk of
which comprises clearing fees. Bursa currently imposes a
maximum cap of RM1,000 on its clearing fees which typically
benefits institutional investors, due to their larger contract
values. In our view, Bursa could lower clearing fees to promote
retail participation while raising the RM1,000 cap to enhance
revenue from institutional investors. A balancing act is required
as higher transaction costs could reduce market participation
(specifically from retail investors).
1709.6
1716
1768
1821
1666
2016A
2017F
2018F
2019F
1424.6
1139.7
854.8
569.9
284.9
0.0
2015A
Average Daily Value (RMm)
1999
2039.0
1812
1854
1892
1930
2016A
2017F
2018F
2019F
1631.2
Higher listing fee will boost Bursa’s earnings.
earnings Revenue from
derivatives trading comprises sub-20% of Bursa’s operating
revenue, with CPO Futures making up 80% of the total
derivative volume traded in the bourse. Meanwhile, the
remainder of Bursa’s revenue is derived from other fee income
such as listing fees, depository fees and revenue from
information services. Bursa’s last revision in listing fee was in
2008 and is currently lower vis-à-vis its closest peer, Singapore
Exchange (SGX). Although the timing of such a revision remains
fluid, the exercise will indeed boost Bursa’s earnings.
1223.4
815.6
407.8
0.0
2015A
Average Value/Volume
1.09
1.08
1.07
1.06
2015A
2016A
2017F
2018F
2019F
29.3
29.3
26.1
25.3
24.6
2017F
2018F
2019F
1.11
1.01
0.89
Potential streamlining in regulatory watchdog role.
role This would
be positive for Bursa as it could then redirect its time and
resources to more revenue-generating activities, such as
developing more initiatives to stimulate trading activities and
velocity, promoting capital markets and raising the exchange’s
competitiveness in the ASEAN region. As duplications will be
removed, we expect to see better cost efficiencies for Bursa.
0.67
0.44
0.22
0.00
Velocity (%)
Revamp of tax structure. Currently, on top of the 0.1% stamp
duty (with a cap of RM200) charged, investors are also charged
GST on clearing fees. Replacing stamp duty with GST could
reduce investors' transaction costs. Taxes currently make up a
large proportion (76%) of transaction costs (excluding
brokerage).
29.6
23.7
17.7
11.8
5.9
To further enhance retail participation, Bursa can offer
incentives to encourage companies to voluntarily raise their free
floats. For instance, by offering incentives for share splits and
increasing minimum free float requirements, trading liquidity
can be enhanced and Bursa will benefit from a broader and
deeper securities market.
0.0
2015A
2016A
Revenue breakdown by segment
100%
90%
80%
35%
34%
35%
36%
36%
37%
37%
16%
15%
18%
19%
19%
19%
20%
49%
51%
48%
45%
45%
44%
43%
2015
2016
2017F
2018F
2019F
70%
60%
50%
40%
30%
20%
10%
0%
2013
2014
Equity
Derivatives
Other operating revenue
Source: Company, AllianceDBS
ASIAN INSIGHTS
VICKERS SECURITIES
Page 37
Company Guide
Bursa Malaysia
Balance Sheet:
Net cash position. Bursa’s net cash position is largely supported
by its highly cash-generative business as an exchange operator.
We do not foresee a change in this position as no major capex
requirement is expected.
Leverage & Asset Turnover (x)
0.05
0.3
0.05
0.04
0.3
0.04
0.03
0.03
0.2
0.02
Lucrative dividend payout. Bursa generously pays out more
than 90% of its net profit historically. Special dividends were
paid out in 2013 and 2014. Although there is still room for
another special dividend, management intends to maintain its
cash buffer for the time being.
0.02
0.2
0.01
0.01
0.00
0.1
2015A
2016A
2017F
Gross Debt to Equity (LHS)
2018F
2019F
Asset Turnover (RHS)
Capital Expenditure
RMm
18.0
Share Price Drivers:
Currently trading below 1010-year mean valuation. The market
has not priced in the positives from structural changes. These
changes will boost Bursa’s earnings and act as re-rating catalysts
for the stock, in our view.
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
Strong market volumes and values a boon for Bursa. Bursa is a
good proxy to a recovery in market volume and value.
Nevertheless, we believe this is unlikely to be a catalyst for the
stock in the near term due to the weaker sentiment of late.
0.0
2015A
2016A
2017F
2018F
2019F
Capital Expenditure (-)
ROE (%)
25.0%
Key Risks:
Sustainability of market liquidity. Bursa’s earnings are reliant
on market volumes and capital market activity which are
volatile. A negative macro sentiment could dampen market
volumes and values. Our sensitivity analysis shows that every
1% decrease in average daily trading value assumption would
lower FY17 net profit by 0.4%. Our assumptions for average
daily trading volume and value for 2017 are 1.72bn shares and
RM1.85bn respectively.
20.0%
15.0%
10.0%
5.0%
0.0%
2015A
2016A
2017F
2018F
2019F
Forward PE Band (x)
(x)
Structural changes would take time to implement.
implement The timing
of approval for the aforementioned measures is still fluid and
implementation may take time.
26.7
25.7
24.7
+2sd: 24.2x
23.7
+1sd: 23.2x
22.7
Company Background
Bursa Malaysia is an exchange holding company principally
involved in treasury management and the provision of
management services to its subsidiaries which operate the
securities exchange, derivatives exchange and depository and
clearing house in Malaysia.
Avg: 22.2x
21.7
-1sd: 21.1x
20.7
-2sd: 20.1x
19.7
18.7
17.7
Feb-13
Feb-14
Feb-15
Feb-16
PB Band (x)
(x)
6.6
+2sd: 6.18x
6.1
+1sd: 5.79x
5.6
Avg: 5.39x
5.1
-1sd: 5x
-2sd: 4.6x
4.6
4.1
3.6
Feb-13
Feb-14
Feb-15
Feb-16
Source: Company, AllianceDBS
ASIAN INSIGHTS
Page 38
VICKERS SECURITIES
Company Guide
Bursa Malaysia
Key Assumptions
FY Dec
2015A
2015A
2016A
2016A
2017F
2017F
2018F
2018F
2019F
2019F
1,975
1,999
1.01
29.3
1,667
1,812
1.09
29.3
1,716
1,854
1.08
26.1
1,768
1,892
1.07
25.3
1,821
1,930
1.06
24.6
2015A
2015A
2016A
2016A
2017F
2017F
2018F
2018F
2019F
2019F
Revenues (RMm)
Equity
Derivatives
Stable revenue
Other operating revenue
233
86.2
163
5.85
213
88.7
165
5.75
219
93.7
171
6.04
225
99.0
181
6.34
231
105
191
6.66
Total
488
473
490
511
533
2015A
2015A
2016A
2016A
2017F
2017F
2018F
2018F
2019F
2019F
488
(209)
279
0.0
0.0
0.0
0.0
279
(72.3)
(7.8)
0.0
199
199
303
473
(202)
271
0.0
0.0
0.0
0.0
271
(67.9)
(9.0)
0.0
194
194
295
490
(197)
293
0.0
0.0
0.0
0.0
293
(73.3)
(9.8)
0.0
210
210
318
511
(192)
318
0.0
0.0
0.0
0.0
318
(79.6)
(10.7)
0.0
228
228
342
533
(187)
345
0.0
0.0
0.0
0.0
345
(86.4)
(11.6)
0.0
248
248
368
3.5
1.8
2.6
0.2
(3.1)
(2.5)
(2.9)
(2.5)
3.6
7.8
8.4
8.5
4.3
7.6
8.6
8.6
4.3
7.7
8.5
8.5
57.2
40.7
25.6
10.6
24.9
92.9
NM
57.2
41.0
23.2
8.6
22.9
94.2
NM
59.9
42.9
24.0
8.0
23.7
94.2
NM
62.3
44.7
25.7
7.5
25.1
94.2
NM
64.9
46.5
27.5
6.9
26.5
94.2
NM
Average Daily Volume (m)
Average Daily Value
(RMm)
Average Value/Volume
Velocity (%)
Segmental Breakdown
FY Dec
Income Statement (RMm)
FY Dec
Revenue
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
PrePre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins & Ratio
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Equity revenue makes up
bulk of earnings
Source: Company, AllianceDBS
ASIAN INSIGHTS
VICKERS SECURITIES
Page 39
Company Guide
Bursa Malaysia
Quarterly / Interim Income Statement (RMm)
4Q2015
1Q2016
FY Dec
4Q2015
1Q2016
Revenue
Other Oper. (Exp)/Inc
Operating
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
PrePre-tax Profit
Tax
Minority Interest
Net Profit
Net profit bef Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins
Opg Profit Margins (%)
Net Profit Margins (%)
125
(54.7)
70.6
0.0
0.0
0.0
0.0
70.6
(17.9)
(2.0)
50.6
50.6
70.6
126
(55.5)
70.6
0.0
0.0
0.0
0.0
70.6
(18.0)
(2.7)
49.9
49.9
70.6
2Q2016
2Q2016
3Q2016
3Q2016
4Q2016
4Q2016
122
(52.8)
69.4
0.0
0.0
0.0
0.0
69.4
(17.7)
(2.3)
49.5
49.5
69.4
112
(50.2)
61.6
0.0
0.0
0.0
0.0
61.6
(15.7)
(1.9)
44.0
44.0
61.6
113
(43.6)
69.0
0.0
0.0
0.0
0.0
69.0
(16.6)
(2.2)
50.2
50.2
69.0
4Q16 earnings lifted by lower
staff cost
2.6
(1.9)
(1.9)
(1.7)
0.7
0.1
0.1
(1.3)
(3.1)
(1.6)
(1.6)
(0.9)
(8.6)
(11.3)
(11.3)
(11.0)
0.7
11.9
11.9
13.9
56.4
40.4
56.0
39.6
56.8
40.5
55.1
39.4
61.3
44.6
Balance Sheet (RMm)
FY Dec
2015A
2015A
2016A
2016A
2017F
2017F
2018F
2018F
2019F
2019F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
244
0.0
253
1,514
0.0
48.7
26.4
2,086
230
0.0
288
1,848
0.0
43.5
26.9
2,436
221
0.0
288
2,231
0.0
55.0
26.9
2,821
2,821
212
0.0
288
2,707
0.0
69.5
26.9
3,303
205
0.0
288
3,300
0.0
87.7
26.9
3,907
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
0.0
1,084
150
0.0
33.5
803
16.0
2,086
0.0
1,379
140
0.0
30.3
869
18.3
2,436
0.0
1,741
140
0.0
30.3
881
28.1
2,821
0.0
2,199
140
0.0
30.3
894
38.8
3,303
0.0
2,777
140
0.0
30.3
909
50.3
3,907
(1,158)
1,514
N/A
N/A
N/A
0.3
1.3
1.3
CASH
CASH
N/A
3.3
(1,448)
1,848
N/A
N/A
N/A
0.2
1.3
1.2
CASH
CASH
N/A
2.8
(1,800)
2,231
N/A
N/A
N/A
0.2
1.2
1.2
CASH
CASH
N/A
2.4
(2,243)
2,707
N/A
N/A
N/A
0.2
1.2
1.2
CASH
CASH
N/A
2.0
(2,803)
3,300
N/A
N/A
N/A
0.1
1.2
1.2
CASH
CASH
N/A
1.7
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
Source: Company, AllianceDBS
ASIAN INSIGHTS
Page 40
VICKERS SECURITIES
Company Guide
Bursa Malaysia
Cash Flow Statement (RMm)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (sen)
Free CFPS (sen)
2015A
2015A
2016A
2016A
2017F
2017F
2018F
018F
2019F
2019F
279
23.7
(77.7)
0.0
0.0
(8.8)
216
(15.5)
(31.5)
0.0
0.0
70.3
23.3
(184)
0.0
0.0
(5.8)
(190)
0.52
49.7
40.4
37.5
271
24.2
(73.3)
0.0
0.0
(19.6)
202
(10.9)
(29.6)
0.0
0.0
(17.4)
(57.9)
(187)
0.0
0.0
(6.8)
(194)
0.15
(50.0)
37.7
35.6
293
25.5
(73.3)
0.0
351
0.0
597
(15.0)
0.0
0.0
0.0
0.0
(15.0)
(198)
0.0
0.0
0.0
(198)
(198)
0.0
384
45.8
108
318
24.6
(79.6)
0.0
443
0.0
707
(15.0)
0.0
0.0
0.0
0.0
(15.0)
(215)
0.0
0.0
0.0
(215)
0.0
477
49.1
129
345
23.7
(86.4)
0.0
560
0.0
843
(15.0)
0.0
0.0
0.0
0.0
(15.0)
(233)
0.0
0.0
0.0
(233)
0.0
595
52.7
154
Source: Company, AllianceDBS
Target Price & Ratings History
9.58
RM
Dat e of
Report
Closing
Pric e
1:
26 Apr 16
8.61
10.10
BUY
2:
25 J ul 16
8.89
10.10
BUY
3:
26 J ul 16
8.85
10.20
BUY
4:
11 Oct 16
8.85
10.20
BUY
5:
25 Oct 16
8.70
10.20
BUY
6:
05 J an 17
8.88
10.20
BUY
7:
06 Feb 17
8.75
10.00
BUY
9.38
9.18
2
8.98
8.78
6
4
3
8.58
7
5
1
12- mt h
T arget Rat ing
Pric e
S.No.
8.38
8.18
7.98
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Not e : Share price and Target price are adjusted for corporate actions.
Source: AllianceDBS
Analyst: Lynette CHENG
Sue Lin LIM
ASIAN INSIGHTS
VICKERS SECURITIES
Page 41
SMC Research
Malaysia Equity Explorer
Malaysia Building Society
Berhad
Refer to important disclosures at the end of this report
Bloomberg: MBS MK | Reuters: MBSS.KL
DBS Group Research . Equity
20 Feb 2017
NOT RATED RM1.15
RM1.15 KLCI : 1,707.68
Looking beyond provisions
Closing price as of 17 Feb 2017
Return *: 3
Risk: Moderate
Potential Target 1212-mth*
mth* : 12-month RM 0.90 (22% downside)
•
•
•
Analyst
Lynette CHENG +60 32604 3907
[email protected]
•
Sue Lin LIM +65 8332 6843
[email protected]
The Business
Price Relative
Forecasts and Valuation
FY Dec (RMm
RMm)
Pre-prov. Profit
Net Profit
Net Pft (Pre Ex.)
EPS (sen)
EPS Pre Ex. (sen)
EPS Gth (%)
EPS Gth Pre Ex (%)
Diluted EPS (sen)
PE Pre Ex. (X)
Net DPS (sen)
Div Yield (%)
ROAE Pre Ex. (%)
ROAE (%)
ROA (%)
BV Per Share (sen)
P/Book Value (x)
MBSB is an exempt finance company equipped
with a lucrative personal financing portfolio
Sizeable Islamic banking asset renders MBSB a
compelling conduit in creating another “pure”
Islamic bank, aside from BIMB and Muamalat
Heavy provisions remain a near-term drag but
M&A appeal could resurface in FY18
Fair value of RM0.90, implying 0.8x FY17BV; M&A
a potential catalyst to re-rate the stock to RM1.30
2015A
2015A
1,052
258
258
8.39
8.39
(80)
(80)
8.20
13.7
2.71
2.4
5.4
5.4
0.7
155
0.7
Consensus EPS (sen
sen):
sen :
Other Broker Recs:
2016F
2016F
1,037
199
199
4.64
4.64
(45)
(45)
3.47
24.8
1.04
0.9
3.4
3.4
0.5
117
1.0
2017F
2017F
1,074
262
262
4.57
4.57
(1)
(1)
4.57
25.2
1.37
1.2
3.9
3.9
0.5
120
1.0
2018F
2018F
1,146
548
548
9.55
9.55
109
109
9.55
12.0
2.87
2.5
7.7
7.7
1.0
127
0.9
3.90
B: 0
7.00
S: 1
10.6
H: 4
ICB Industry : Financials
ICB Sector: Financial Services
Principal Business: Consumer Finance
Source of all data on this page: Company, AllianceDBS, Bloomberg
Finance L.P.
Forte in personal financing. MBSB is the only exempt finance
company in Malaysia. What differentiates an exempt finance
company from a bank is mainly from its prohibition in
participating in the interbank market and in accepting demand
deposits. MBSB has carved a strong niche in the segment of
personal financing to civil servants, thanks its access to the direct
deduction code obtained from Angkasa which provides it with
the first cut of a civil servant’s salary at repayment.
Compelling Islamic banking proxy. We believe institutions with
an intention to compete on the global Islamic banking space will
keep an eye on opportunities to take MBSB into its coffers,
given its sizeable Islamic banking asset and lucrative personal
financing business. When stacked against the Islamic banks in
Malaysia, MBSB ranks among the top 10 players based on asset
size (#8) and loan portfolio size (#5). Currently, Islamic banking
makes up c.80% of MBSB’s assets, loans and income.
The Stock
Saddled by hefty provisions. MBSB has delivered weak earnings
traction since FY15 and is expected to remain so up to FY17,
attributable to its impairment programme deployed to narrow
the gap between MBSB and that of the industry. However, we
expect credit cost to decline to 1% in FY18 (from c.2% in FY1617F), which will be the main factor lifting ROE to 8%.
Fair value of RM0.90 based on Gordon Growth model, assuming
8% ROE, 9% cost of equity and 2% long-term growth. Our TP
implies 0.8x FY17 BV, which we believe justly reflects its weak
ROE traction of sub-5%. However, in the event of an M&A
(which in our view, will be increasingly imminent in FY18), we
believe MBSB could fetch a valuation of 1.1x BV, which
translates to a fair value of RM1.30 (based on FY17 BV).
At A Glance
Issued Capital (m shrs)
Mkt. Cap (RMm/US$m)
Major Shareholders (%)
EPF
Tan Sri Dato’ Chua Ma Yu
Free Float (%)
3m Avg. Daily Val (US$m)
5,799
6,669 / 1,497
65.1
5.2
2.4
*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage
universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage
universe and is explained further on the back page of this report.
ed: CK / sa: WMT, PY
Equity Explorer
Malaysia Building Society Berhad
Insured by PIDM
Not applicable
3.5%
Not applicable
Transitional compliance
with Basel 3
Able to participate
Source: Company, DBS Bank, AllianceDBS
60
40
20
-
Islamic financing income (LHS)
Islamic % (RHS)
9M16
Not insured by PIDM
Bank Negara Malaysia
No restrictions
80
2015
Interbank
market
Deposit
insurance
Statutory
reserve
requirement
Capital ratios
Commercial Bank
%
100
Total income (LHS)
Source: Company, DBS Bank, AllianceDBS
MY: Islamic banks ranked by asset size
RM bn
180
156
Regulated by
DepositDeposittaking
restriction
Exempt Finance
Company
Ministry of Finance
Limited to savings and
fixed deposits. Not
allowed to take
demand deposits
Unable to participate
RM m
1,600
1,400
1,200
1,000
800
600
400
200
-
2014
Differences between an exempt finance company and a
commercial bank
MBSB: Proportion of Islamic financing income to total income
2013
The only exempt finance company in Malaysia. Malaysia Building
Society Berhad (MBSB) started out as Federal and Colonial Building
Society Limited in 1950, and was eventually listed on Bursa Malaysia
in 1972. MBSB was granted the status of an exempt finance
company in 1972 by the Ministry of Finance, allowing the company
to undertake financing business without a banking licence. The
main difference between an exempt finance company and a
commercial bank is that an exempt finance company is not allowed
to participate in the interbank market and accept demand deposits.
Apart from that, MBSB is also not subject to statutory reserve
requirements.
Hence, for any bank apart from MAY ISL, adding MBSB to the
coffers could make a difference to its ranking. Nonetheless, we
highlight that MBSB has yet to achieve the status of a full-fledged
Islamic institution as it is still in the midst of converting its
conventional assets to Islamic. The initiative to move towards the
Islamic status started when the financial institution introduced a dual
banking system of conventional and Islamic banking in 2003.
Currently, Islamic operation makes up c.80% of its assets, loans and
income. We understand that what is leftover is a portion of
corporate and mortgage accounts. All accounts under personal
financing are Islamic.
2012
COMPANY BACKGROUND
160
3
7
Al-Rajhi
AFB
10
ALLCE ISL
11
11
SC SAADIQ
KFH
13
HSBC AMAN
Muamalat
HL ISL
AMISL
MBSB
RHB ISL
PUBLIC ISL
BIMB
CIMB ISL
MAY ISL
BANK RAKYAT
0
OCBC AL-…
20
AFFIN ISL
19
15
40
23
38
26
41
46
60
44
57
80
55
92
100
Source: Company, DBS Bank, AllianceDBS
MY: Islamic banks ranked by loan portfolio size
130
RM bn
140
120
100
5
1
7
SC SAADIQ
AFB
7
AL-RAJHI
7
KFH
ALLCE ISL
9
AFFIN ISL
12
0
10
HSBC AMAN
20
OCBC AL-…
15
27
AMISL
MUAMALAT
31
RHB ISL
18
32
HL ISL
32
MBSB
PUBLIC ISL
40
40
34
60
BIMB
63
80
CIMB ISL
On the path towards becoming a fullfull-fledged Islamic bank. When
stacked against the Islamic banks in Malaysia, MBSB ranks among
the top 10 players based on asset size (#8) and loan portfolio (#5).
120
MAY ISL
Closing the gap between itself and the banks. A key initiative under
MBSB’s agenda to “close the gap”, is its impairment programme.
Management has guided that the programme will see a total of
RM2.0bn impairment over FY15-17. To date, MBSB crossed the
halfway mark of this programme, with more than RM1bn of
impairment booked. Apart from that, MBSB completed a rights issue
exercise in July 2016, strengthening its capital adequacy. MBSB has
also been improving its core banking infrastructure and back-office
operations over the last few years.
140
BANK RAKYAT
MBSB is helmed by Chief Executive Officer, Dato’ Ahmad Zaini bin
Othman whom was appointed in Feb 2009. Prior to his stint in
MBSB, Dato’ Ahmad Zaini was the CEO of AmIslamic Bank,
managing all the group’s affairs pertaining to Islamic banking in
commercial and corporate finance and was responsible for setting
up the Islamic business model for the group. He is also a member of
the Chartered Institute of Islamic Finance Professionals (CIIF). In
recognition of his contributions to Islamic banking he was appointed
a faculty member (industry expert) to the International Centre for
Education in Islamic Finance (INCEIF).
Source: Company, DBS Bank, AllianceDBS
Page 43
Equity Explorer
Malaysia Building Society Berhad
Malaysia: BNM tightening measures
Stronghold in personal financing. At 66% of total financing
portfolio, personal financing is MBSB’s key segment. This is followed
by corporate loans (17%) and home financing (16%). MBSB
managed to build a niche in the personal financing segment
through its access to the direct deduction code obtained from
Angkasa (Angkatan Koperasi Kebangsaan Malaysia or National Cooperative Organisation of Malaysia). Angkasa is the central collection
agency that manages the salary deduction of government servants
on behalf of cooperatives and certain non-cooperatives. Financial
institutions with access to this code get the first cut of a civil
servant’s salary, hence reducing the chances of default.
Date
3-Nov-10
Segment
Property Loans
1-Jan-11
Property Loans
15-Mar-11
Credit Cards
Others
1%
Home
financing
16%
Personal
Financing
66%
The credit card limit for cardholders
earning <RM36k p.a. are capped at
double the monthly income of the
holder from each issuing bank.
15-Jun-11
Auto Loans
1-Jan-12
Retail Loans
8-Jul-13
Personal Loans
Lowered maximum tenure for
personal loans to 10 years (from 25
years) and pre-approved personal
financing products are prohibited.
8-Jul-13
Property Loans
Lowered maximum tenure for
property loans to 35 years (from 45
years).
Source: Company, DBS Bank, AllianceDBS
Personal financing growth crimped by macroprudential policies.
MBSB’s personal financing segment recorded stellar growth prior to
2013, with its portfolio more than doubling up from year to year.
However, with concerns relating to the high household debt in
Malaysia, BNM introduced macroprudential policies stating
cautiousness in household loans. In 2013, BNM enforced a
regulation targeted at personal financing, by limiting its tenure to 10
years (from 25 years). Subsequent to that, personal financing
growth has been on a downtrend for MBSB.
MBSB: Personal financing
RM m
%
25,000
250
20,000
200
150
15,000
100
10,000
50
5,000
0
Personal financing (LHS)
Source: Company, DBS Bank, AllianceDBS
Page 44
2015
2014
2013
2012
2011
-50
2010
-
Growth y-o-y (RHS)
Credit card eligibility raised to RM24k
per annum from RM18k per annum.
Cardholders earning <RM36k p.a.
can hold credit cards from only two
issuers.
MBSB: Loan portfolio
Corporate
loans
17%
Measures
70% LTV cap on third and
subsequent property.
Risk weights applied by banks are
raised to 100% from 75%, for
housing loans >90% LTV.
A hire purchase agreement can only
be prepared after the actual car unit
has been allocated to the dealer, as
the car's chassis number has to be
included in the agreement, and the
buyer needs to be present at the
bank to finalise the hire purchase
agreement.
Banks should use net income (after
tax, EPF and other debt obligations)
rather than gross income in assessing
borrowers' affordability.
Source: Company, DBS Bank, AllianceDBS
Equity Explorer
Malaysia Building Society Berhad
INVESTMENT CASE
FINANCIAL REVIEW
BeatenBeaten-down share price due to weak earnings. MBSB’s share price
plummeted by 52% from November 2014 to early Feb 2016.
Valuations have dropped from a high of 2.7x BV to 0.5x FY16 BV
currently. While we believe current valuation justly reflects MBSB’s
weak earnings momentum due to its ongoing impairment
programme, we believe MBSB’s appeal as an M&A target will
resurface in FY18, once the impairment programme is completed.
FY16--18F.
Credit cost assumption of 2.2%/1.9%/1.0% across FY16
Management has guided that the programme will see a total of
RM2.0bn impairment over FY15-17. To date, MBSB crossed the
halfway mark of this programme, with more than RM1bn of
impairment booked. Our credit cost assumption in FY18 remains
conservative as it is higher than the credit cost booked prior to the
impairment programme (sub-1%). We expect impaired financing
ratio to remain high in FY16 and FY17, with a slight improvement in
FY18 to 7% (from 7.5% and 7.4% in FY16 and FY17).
MBSB: Personal financing
RM
3.00
MBSB: Credit cost and impaired financing ratio
%
2.50
Share price
fell by 52%
2.00
1.50
2.5
%
12
2.0
10
8
1.5
1.00
6
1.0
4
Impaired financing ratio (RHS)
Source: Company, DBS Bank, AllianceDBS
2018F
2017F
2016F
0
2015
2
-
2014
0.5
2013
Jan-17
Oct-16
Jul-16
Apr-16
Jan-16
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Jan-14
Apr-14
0.00
2012
0.50
Credit cost (LHS)
Source: Company, DBS Bank, AllianceDBS
Still an attractive M&A target. Despite several failed attempts in
M&A, we believe institutions with an intention to compete on the
global Islamic banking space will continue to keep an eye on
opportunities to take MBSB into its coffers, given its sizeable Islamic
banking asset and lucrative personal financing business. In fact, we
believe MBSB’s M&A appeal will heighten in FY18, after the
completion of its impairment programme and more progress is
made in “narrowing the gap” between them and banks as it lowers
the hurdle to integration.
We imputed 5%/6%/9% loan growth for FY16FY16-18F.
18F Loan growth is
expected to be driven by corporate loans as MBSB continue to place
an emphasis on this segment. Deposit growth was encouraging this
year, driven mainly by fixed deposits. Hence, we pencilled in deposit
growth of 11%/7%/7% for FY16-18F, resulting in the financing to
deposit ratio to come in around 105-107% across the years.
MBSB: Financing and deposit growth
%
%
70
114
60
112
50
110
40
108
30
106
20
Financing growth (LHS)
Financing to deposit ratio (RHS)
2018F
2017F
2016F
102
2015
(10)
2014
104
2013
10
2012
Conduit for the making another “pure” Islamic bank. News of
MBSB in negotiations for a potential merger and acquisition (M&A)
with Asian Finance Bank emerged on 22 Nov. This did not come as a
surprise as M&A speculations involving MBSB has surfaced in the
media several times historically, but all attempts have been futile
thus far. While a merger with Asian Finance Bank does not enlarge
its portfolio in a significant way, MBSB will attain an Islamic banking
licence from the acquisition. Hence, the merger will speed up
MBSB’s aspirations of attaining Islamic as well as a bank status.
Apart from this, the most talked about attempt was one by CIMB
and RHB in 2014 where MBSB was slated to remain listed and to act
as a vehicle for any proposed Islamic bank, in line with the
government’s agenda to create a “Mega Islamic Bank’. However,
negotiations were halted in January 2015 as extraction of synergies
were challenging amid a weakening macroeconomic backdrop then.
In Feb 2016, MBSB was also in talks for a merger with Bank
Muamalat.
100
Deposit growth (LHS)
Source: Company, DBS Bank, AllianceDBS
NIM for FY16 is expected to decline by 18bps as management plans
to reduce higher-yielding retail financing portfolio and increase
lower-yielding corporate loans. We expect this portfolio rebalancing
to continue in the years to come, resulting in a further decline in
NIM of 9bps in FY17F and 7bps in FY18F, respectively.
Page 45
Equity Explorer
Malaysia Building Society Berhad
RISKS
Bottomline improvement post impairment programme. While high
provisions may continue to be a feature in FY16 and FY17, we
expect bottomline to improve significantly in FY18 to close to FY13
levels, on the back of narrowing credit cost. Consequently, ROE is
envisaged to climb towards 8% in FY18.
Further asset quality upsets. While MBSB targets to complete its
impairment programme by 2018, the current weak macroeconomic
backdrop may exert pressure on MBSB’s asset-quality indicators,
hence necessitating more impairments. If this materialises, MBSB’s
weak earnings momentum may not end in FY18 as expected.
%
40
29.6
32.5
RM m
1,400
34.0
MBSB: Net profit
1,200
35
30
1,000
25
800
20
7.7
3.9
400
3.4
5.4
600
15
10
Timing of M&A. The current operating environment for the banks
remains challenging, with revenue growth being limited by the
moderating loan growth, narrowing NIM and weak capital markets.
These challenges are not expected to taper off in the near term.
Hence, while MBSB’s M&A appeal may heighten in 2018, the
operating environment may remain tough for banks to pursue an
M&A agenda.
Net profit (LHS)
2018F
2017F
2016F
2015
Category
2014
MBSB: Risk assessment
0
2013
5
-
2012
200
Pre provision profit (LHS)
ROE (RHS)
Source: Company, DBS Bank, AllianceDBS
Fair value of RM0.90. We value MBSB using the Gordon Growth
Model, assuming 8% ROE, 10% cost of equity and 2% long-term
growth. With that, we arrive at a fair value of RM0.90, which
implies 0.8x FY17 BV. We believe the current valuation is fair for the
stock given its weak ROE traction of sub-5% in the near term (FY16FY17). Nonetheless, in the event of an M&A (which in our view, will
be increasingly imminent in FY18), we believe MBSB can fetch a
higher valuation. While historical M&A transaction implies an
average valuation of 1.3x BV, a discount is necessary as ROEs have
de-rated compared to the past. We find that a valuation of 1.1x BV
for MBSB’s franchise is fair, which translates into a fair value of
RM1.30, based on FY17 BV.
MBSB: 1212-month forward P/
P/BV ratio (x)
(x)
3.2
2.7
+2sd: 2.7x
2.2
+1sd: 2.1x
1.7
Avg: 1.5x
1.2
-1sd: 0.9x
0.7
Feb-07
-2sd: 0.3x
May-08
Aug-09
Nov-10
Feb-12
May-13
Aug-14
Source: Company, DBS Bank, AllianceDBS
Page 46
Wgt
Wgtd Score
40%
20%
40%
1.2
0.6
0.4
2.2
Source: Company, DBS Bank, AllianceDBS
VALUATIONS
0.2
Earnings
Financials
Shareholdings
Overall
Risk Rating
1 (Low) - 3 (High)
3
3
1
Nov-15
Feb-17
Equity Explorer
Malaysia Building Society Berhad
Key Assumptions
FY Dec
Sensitivity Analysis
2013A
2013A
2014A
2014A
2015A
2015A
2016F
2016F
2017F
2017F
2018F
2018F
Gross Loans Growth
18.9
2.4
4.4
5.0
6.4
8.9
Customer Deposits Growth
Yld. On Earnings Assets
31.2
5.9
(2.3)
4.8
3.8
4.7
11.0
4.5
7.0
4.5
7.0
4.4
1.3
0.8
0.8
0.7
0.7
0.8
2013A
2013A
2014A
2014A
2015A
2015A
2016F
2016F
2017F
2017F
2018F
2018F
97.9
244
209
186
210
240
Avg Cost Of Funds
Income Statement (RMm)
FY Dec
Net Interest Income
Non-Interest Income
140
91.8
62.5
57.5
59.3
61.0
Operating Income
1,503
1,364
1,361
1,354
1,398
1,476
Operating Expenses
(295)
(305)
(308)
(318)
(324)
(330)
PrePre-provision Profit
1,208
1,059
1,052
1,037
1,074
1,146
Provisions
(276)
(126)
(697)
(788)
(724)
(415)
Associates
0.0
0.0
0.0
0.0
0.0
0.0
Exceptionals
0.0
0.0
0.0
0.0
0.0
0.0
PrePre-tax Profit
932
933
355
249
350
731
(335)
82.5
(97.4)
(49.8)
(87.4)
(183)
Minority Interests
0.0
0.0
0.0
0.0
0.0
0.0
Preference Dividend
0.0
0.0
0.0
0.0
0.0
0.0
Net Profit
Net Profit bef Except
598
1,015
258
199
262
548
598
1,015
258
199
262
548
(56.1)
149.8
(14.5)
(11.1)
13.2
14.3
33.8
69.9
(74.6)
(22.7)
31.8
108.9
4.6
4.6
3.9
3.9
3.9
3.9
3.8
3.7
3.7
3.6
3.7
3.6
19.6
22.4
22.7
23.4
23.2
22.4
Net Int. Inc / Opg Inc.
6.5
17.9
15.4
13.7
15.0
16.3
Non-Int. Inc / Opg inc.
9.3
6.7
4.6
4.2
4.2
4.1
Fee Inc / Opg Income
0.0
0.0
0.0
0.0
0.0
0.0
Oth Non-Int Inc/Opg Inc
9.3
6.7
4.6
4.2
4.2
4.1
ROAE Pre Ex.
32.5
29.6
5.4
3.4
3.9
7.7
ROAE
32.5
29.6
5.4
3.4
3.9
7.7
1.9
1.9
2.8
0.7
0.5
0.5
1.0
2.6
0.7
0.5
0.5
1.0
Taxation
2017F
2017F
Loan growth +/- 1%
NIM +/- 10bps
Net Profit +/- 0.3%
Net Profit +/- 12%
Impairment programme
to complete in FY17
Margins Trend
Growth (%)
Net Interest Income Gth
Net Profit Gth
Margins, Costs & Efficiency (%)
Spread
Net Interest Margin
Cost-to-Income Ratio
Business Mix (%)
Profitability (%)
ROA Pre Ex.
ROA
Source: Company, AllianceDBS
Page 47
Equity Explorer
Malaysia Building Society Berhad
Quarterly / Interim Income Statement (RMm)
FY Dec
Quarterly Net Profit & Growth
2Q2015
2Q2015
3Q2015
3Q2015
4Q2015
4Q2015
1Q2016
1Q2016
2Q2016
2Q2016
3Q2016
3Q2016
Net Interest Income
58.1
47.3
54.1
50.8
37.4
52.6
Non-Interest Income
12.8
14.3
17.0
14.3
17.4
8.77
Operating Income
339
336
343
331
339
362
(75.2)
(73.2)
(75.8)
(73.3)
(83.9)
(77.9)
Operating Expenses
PrePre-Provision Profit
264
262
267
258
255
284
(134)
(196)
(266)
(219)
(180)
(210)
Associates
0.0
0.0
0.0
0.0
0.0
0.0
Exceptionals
0.0
0.0
0.0
0.0
0.0
0.0
Pretax Profit
129
66.8
1.31
39.1
74.7
73.7
(43.7)
(3.3)
(17.1)
(4.3)
(11.7)
(15.8)
0.0
0.0
0.0
0.0
0.0
0.0
85.6
63.5
(15.8)
34.8
63.0
57.9
17.0
(31.2)
(18.6)
14.4
(6.1)
(26.3)
40.6
(25.7)
nm
nm
80.9
(8.1)
Provisions
Taxation
Minority Interests
Net Profit
High provisions are the key
drag on earnings
Growth (%)
Net Interest Income Gth
Net Profit Gth
Source: Company, AllianceDBS
Gross Loan& Growth
Balance Sheet (RMm)
FY Dec
Cash/Bank Balance
2013A
2013A
2014A
2014A
2015A
2015A
2016F
2016F
2017F
2017F
2018F
2018F
4,584
5,767
6,928
11,942
13,559
14,599
Government Securities
0.0
0.0
0.0
0.0
0.0
0.0
Inter Bank Assets
0.0
0.0
407
0.0
0.0
0.0
30,296
31,032
31,785
33,349
35,512
38,829
0.0
0.0
983
993
1,003
1,013
Total Net Loans & Advs.
Investment
Associates
0.0
0.0
0.0
0.0
0.0
0.0
Fixed Assets
105
144
144
134
123
113
Goodwill
43.0
36.1
28.7
24.6
20.4
16.3
Other Assets
217
687
813
853
909
994
Total Assets
35,246
37,666
41,089
47,296
51,127
55,564
Customer Deposits
28,193
27,531
28,585
31,730
33,951
36,327
Inter Bank Deposits
0.0
0.0
0.0
0.0
0.0
0.0
Debts/Borrowings
2,184
2,717
4,524
5,428
6,514
7,817
Others
2,683
2,736
3,118
3,428
3,768
4,142
0.0
0.0
0.0
0.0
0.0
0.0
2,186
4,682
4,862
6,710
6,894
7,277
35,246
37,666
41,089
47,296
51,127
55,564
Minorities
Shareholders' Funds
Total Liab & S/H’s Funds
Source: Company, AllianceDBS
Page 48
Customer Deposit & Growth
Equity Explorer
Malaysia Building Society Berhad
NPL / Total Gross Loans
Financial Stability Measures (%)
FY Dec
2013A
2013A
2014A
2014A
2015A
2015A
2016F
2016F
2017F
2017F
2018F
2018F
107.5
112.7
111.2
105.1
104.6
106.9
Net Loans / Total Assets
86.0
82.4
77.4
70.5
69.5
69.9
Investment / Total Assets
0.0
0.0
2.4
2.1
2.0
1.8
Cust . Dep./Int. Bear. Liab.
92.8
91.0
86.3
85.4
83.9
82.3
Interbank Dep / Int. Bear.
0.0
0.0
0.0
0.0
0.0
0.0
NPL / Total Gross Loans
5.2
6.6
7.4
7.5
7.4
7.0
NPL / Total Assets
4.7
5.7
6.1
5.7
5.5
5.2
Loan Loss Reserve Coverage
0.0
0.0
0.0
0.0
0.0
0.0
Provision Charge-Off Rate
0.9
0.4
2.0
2.2
1.9
1.0
Balance Sheet Structure
Loan-to-Deposit Ratio
Asset Quality
Capital Strength
Total CAR
Tier-1 CAR
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
High impaired
financing ratio
Source: Company, AllianceDBS
Page 49
Industry Focus
Islamic Banks
2012
2013
2014
2015
1,267
389
26.6
0.5
9.4
1,204
886
128.1
1.0
19.5
1,437
1,049
18.4
0.8
16.3
1,735
1,122
7.0
0.8
15.5
2,008
1,212
8.0
0.8
14.7
1.55
0.84
0.60
0.62
0.67
115
28.2
133
33.1
143
32.4
120
32.0
110
27.8
89
35.3
87
18.4
105
40.1
109
24.9
106
20.8
59.4
20.8
17.0
20.1
6.1
Source: Company, DBS Bank, AllianceDBS
MAY ISL: Proportion to MAY domestic financing
RM m
%
140,000
50.7
120,000
44.5
80,000
29.1
25.6
30
Page 50
131,123
108,540
86,879
61,998
20,000
20
10
2015
2012
2014
0
2013
-
Financing (LHS)
• Among its Malaysian peers, MAY is best positioned to
propagate Islamic banking within ASEAN. With a presence in
all 10 ASEAN countries, we believe MAY has a leg up in
leveraging on the growth opportunities presented within the
region. MAY has started on this, with the implementation of
the Islamic First strategy in Indonesia. This, along with
initiatives such as increasing awareness of Shariah products
and services, a revamp of the Shariah offerings and expansion
of distribution network (through conversion of conventional
only branches to dual branches offering both conventional
and Shariah products), improved Bank Maybank Indonesia
Unit Usaha Shariah industry ranking from 12th in FY13 to 5th
in FY15, in terms of asset size. Over in Singapore, MAY
pioneered several products in the market such as a special
savings account for the Hajj pilgrimage, Islamic Auto Finance,
Malaysia Residential Property Financing and Malaysia
Commercial & Industrial Property Financing in 2013, and
Islamic Business Term Financing and Islamic trade facilities and
foreign currency deposits in 2014. In 2015, MAY ISL
introduced Islamic financing products at Maybank Hong
Kong, marking the beginning of MAY ISL’s reach for
corporate clients in Hong Kong and Greater China.
40
30.8
60,000
40,000
60
50
38.7
100,000
52,369
Making inroads with Islamic First strategy
• Over the years, MAY ISL has gradually increased its financing
share in the group, from 26% in 2010 to just above 50% in
2015. The success is underpinned by MAY’s Islamic First
strategy, where across the group, customers are offered
Islamic products first, before an offer for conventional
products. The strategy was deployed in 2011 and saw
significant uptick in proportion to the group’s domestic
financing from 2012 onwards..
2011
2011
Company background:
• Maybank Islamic (MAY ISL) is among the top 5 Islamic banks
and sukuk arranger globally, while its parent company,
Maybank (MAY) sits among the top 5 biggest banks in ASEAN
by asset size. Domestically, MAY ISL holds the leading market
share in Islamic financing (33%) and deposits (26%), aided by
its extensive branch network of 393 MAY branches (which
concurrently offers Islamic banking services) and 15
standalone Islamic branches.
RM m
Pre-provision profit
Net Profit
Earnings Gth (%)
ROA (%)
ROE (%)
Impaired financing
ratio (%)
Loan loss coverage
(%)
CASA ratio (%)
Financing to
deposit ratio (%)
Loan growth (%)
Deposit growth
(%)
38,710
Maybank Islamic (MAY ISL) is a subsidiary under the listed
Maybank Group, and is among the top 5 global Islamic banks.
MAY ISL holds the leading market share in Islamic financing and
deposits domestically. Its extensive branch network and
widespread regional representation places them in the best
position to expand Islamic financing beyond the Malaysian
borders.
MAY ISL Financial summary
2010
MAYBANK ISLAMIC
% to domestic financing (RHS)
Source: Company, DBS Bank, AllianceDBS
Global: Sukuk League table
Bank
CIMB
Maybank
Standard
Chartered Bank
RHB
HSBC
Dubai Islamic
Bank
AmInvestment
Bank Bhd
JP Morgan
National Bank of
Abu Dhabi
Emirates NBD
PJSC
2015
Market
Amount
share
(USD m)
(%)
2016
Market
Amount
share
(USD m)
(%)
5,234.7
15.0
5,329.5
12.8
2,959.8
8.5
4,602.4
11.0
2,255.0
6.5
3,878.4
9.3
3,300.1
9.5
3,037.5
7.3
4,453.0
12.8
2,905.4
7.0
1,302.6
3.7
2,636.2
6.3
1,914.3
5.5
2,633.9
6.3
1,483.0
4.3
1,464.8
3.5
1,181.9
3.4
1,463.7
3.5
664.8
1.9
1,389.8
3.3
Source: Company, DBS Bank, AllianceDBS
Industry Focus
Islamic Banks
MAY ISL: Financing and deposit growth vs LDR
%
%
70
109
105
60
89
120
106
100
87
50
80
40
60
30
40
20
20.8
6.1
24.9
20.1
40.1
17.0
10
18.4
20.8
35.3
59.4
20
Financing growth (LHS)
Financing to deposit ratio (RHS)
2015
2014
2013
0
2012
0
2011
Watch the next frontier
• MAY ISL’s investment account portfolio stands at RM17.7bn
as of end-Dec 2015, making it the largest in the industry.
Looking ahead, MAY ISL aspires to sustain its pole position.
MAY ISL is also part of the Investment Account Platform (IAP),
enabling MAY ISL to act as a facilitator in channelling funds
from interested investors to finance projects and ventures
listed on the platform. While MAY ISL has yet to list projects
on this platform, we understand that the bank is keen to
improve the traction in the coming year. We are keenly
watching how MAY ISL could use this to its advantage. We
believe positive reception of investment accounts could be a
prelude to more product innovation within the Islamic
banking space.
Deposit growth (LHS)
Source: Company, DBS Bank, AllianceDBS
%
1.8
160
143
1.55
1.6
140
120
1.4
120
133
1.2
115
1.0
0.8
100
110
0.84
0.62
0.60
80
0.67
60
0.6
0
Impaired financing ratio (LHS)
2015
20
0.0
2014
0.2
2013
40
2012
0.4
Financing loss coverage (RHS)
Source: Company, DBS Bank, AllianceDBS
MAY ISL: Profitability measures
RM m
2,500
%
25
19.5
2,000
16.3
15.5
14.7
1,500
2,008
1,212
1,735
1,122
10
1,437
1,049
500
20
15
9.4
1,204
886
1,000
5
Pre-provision profit (LHS)
Net profit (LHS)
Source: Company, DBS Bank, AllianceDBS
Page 51
2015
2014
2013
0
2012
0
2011
Valuation
• Our HOLD rating and RM7.50 TP for Maybank Group is
maintained. Our TP implies 1.1x FY17 BV and is based on
11% ROE, 4% growth and 10.3% cost of equity. While MAY
ISL is a clear winner in the Islamic banking space, as a whole,
asset quality remains a key concern for the Group.
%
2011
• MAY ISL’s impaired financing ratio saw a slight uptick since
2013, and this was accelerated particularly in 2Q16. As of
end-June 2016, its impaired financing ratio stood at 1.2%, as
absolute impaired loans have almost doubled from RM0.87bn
to RM1.62bn. These largely stemmed from working capital
and construction segments. The increase in 2Q16 was led by
deliberate efforts by MAY in extending a hand to its
customers amid a weaker operating environment. To that
end, restructured and rescheduled (R&R) financing were
accelerated for its oil & gas (Singapore and Malaysia) and steel
(Malaysia only) exposures. Consequently, its financing loss
coverage ratio slid from 110% in Dec 2015 to 75% in June
2016.
MAY ISL: Asset quality
1,267
389
Financials
• MAY ISL’s ROEs are higher (sub-15%) than MAY’s (c.110%),
mainly attributable to the lower cost-to-income ratio. This
reflects MAY ISL’s ability to leverage on its parents resources,
in terms of branch network, risk-management systems and
common infrastructure. MAY ISL’s regional operations are
also capable of tapping onto the strong resources built up
locally. For example, MAY ISL set up the Shariah Centre of
Excellence in 2015, which aims to be the global Islamic
Finance industry’s key reference point on matters pertinent to
industry best practices using Shariah as the basis.
ROE (RHS)
Industry Focus
Islamic Banks
BANK RAKYAT
Bank Rakyat (not listed) is the second biggest Islamic bank after
Maybank Islamic, with a forte in personal financing to civil
servants. Due to its heavy skew to personal financing, Bank
Rakyat enjoys high net financing margin while its asset quality
remains sound thanks to its access to the direct salary deduction
code (Angkasa). Listing Bank Rakyat would create an alternate
Islamic bank proxy apart from BIMB. Separately, we highlight
that the acquisition of Bank Rakyat would give an acquirer an
immediate boost in ranking by Islamic asset size.
Company background:
• Bank Kerjasama Rakyat (Bank Rakyat) was formed from a
merger of 11 cooperative union backs back in 1954.
Today, it stands as the largest cooperative bank in Malaysia.
Bank Rakyat is also dubbed a Development Financial
Institution (DFI), a specialised institution established by the
government of Malaysia to support developments of selected
sectors (of strategic importance to the country). Apart from
providing specialised products and services catered to the
identified sector, DFIs also offer consultation and advisory
services to customers. Bank Rakyat is among the six
institutions under the purview of the central bank (Bank
Negara Malaysia; BNM) through the Development Financial
Institutions Act 2002. As part of the cooperative sector, Bank
Rakyat also reports to the Ministry of Domestic Trade,
Cooperatives and Consumerism.
A valuable Islamic addition
• Bank Rakyat’s journey to becoming an Islamic financial
institution began in 1993, by gradually converting its assets
from conventional to Shariah-compliant. The conversion was
completed a decade after. In August 2013, the press reported
that Bank Muamalat was toying with the idea of acquiring a
DFI, with one of the candidates being Bank Rakyat. Although
nothing has materialised since then, we highlight that the
acquisition of Bank Rakyat would significantly boost the size
of the acquirer’s Islamic banking assets given that it is not
only among the top Islamic banks in Malaysia, but also
globally.
Bank Rakyat: Financial summary
2012
2013
2014
2015
2,769
1,752
61.1
(29.0)
363
2.2
16.8
2,894
1,920
64.6
5.6
388
2.3
16.6
2,894
1,976
66.4
2.9
428
2.2
15.5
2,485
1,824
61.1
(8.0)
470
2.0
13.0
2.52
2.22
2.04
1.89
106
5.4
115
5.0
128
5.2
109
5.3
91
11.9
7.1
90
3.6
4.2
91
5.6
4.9
91
3.8
3.6
FYE Dec
Pre-provision profit
(RM m)
Net Profit (RM m)
EPS (sen)
EPS Gth (%)
BV Per Share (sen)
ROA (%)
ROE (%)
Impaired financing
ratio (%)
Loan loss coverage
(%)
CASA ratio (%)
Financing to deposit
ratio (%)
Loan growth (%)
Deposit growth (%)
Source: Company, DBS Bank, AllianceDBS
Bank Rakyat: Financing portfolio (as of end-Jun 2016)
Construction
1%
Financial
services
4%
Others
1%
Home
financing
3%
Consumption
credit
91%
Source: Company, DBS Bank, AllianceDBS
Bank Rakyat: Financing and deposit growth vs LDR
%
%
20
91
18
16
90
91
91
Page 52
89
12
10
8
88
87
87
6
3.8
3.6
5.6
4.9
3.6
4.2
11.9
7.1
2
86
8.8
18.0
4
91
90
14
85
Financing growth (LHS)
Financing to deposit ratio (RHS)
Source: Company, DBS Bank, AllianceDBS
2015
2014
2013
84
2012
0
2011
Forte in personal financing
• At more than 90% of Bank Rakyat’s total loans as of endJune 2016, personal financing makes up the bulk of Bank
Rakyat’s loan portfolio. The bank has carved in niche in
personal financing, particularly to the civil servants. This is
largely achieved through leveraging on its direct deduction
code obtained from Angkasa (Angkatan Koperasi Kebangsaan
Malaysia or National Co-operative Organisation of Malaysia).
Angkasa is the cooperative mandated to make direct
deductions from its borrowers’ salaries.
92
Deposit growth (LHS)
Industry Focus
Islamic Banks
Diversification efforts going forward
• Given the headwinds in growing personal financing, Bank
Rakyat aspires to reduce its exposure to personal financing by
growing its commercial financing segment. While this reduces
its concentration risk, margins will be dragged as commercial
financing typically yields a lower rate as opposed to personal
financing.
Bank Rakyat: Asset quality
Financials
• Financing growth dipped from FY12 onwards, since BNM
introduced regulations to control household debt, which
included measures specific to personal financing, such as a
cap of 10 years on its loan tenure and tighter underwriting
criteria. Although Bank Rakyat is taking the initiative to grow
other segments of its portfolio, loan growth is expected to
remain sluggish given the still heavy skew towards personal
financing.
2.2
130
2.80
125
2.8
2.52
2.6
120
115
115
2.4
2.22
107
2.0
110
2.04
106
109
105
1.89
100
Impaired financing ratio (LHS)
2015
2014
2013
2012
95
2011
1.8
Financing coverage ratio (RHS)
Source: Company, DBS Bank, AllianceDBS
Bank Rakyat: Earnings growth
RM m
3,500
%
60
49.9
50
3,000
40
2,500
30
2,000
20
9.6
(7.7)
0
2,485
1,824
2,894
1,920
2,769
1,752
10
2.9
(13.4)
1,000
2,894
1,976
1,500
500
-10
Pre-provision profit (LHS)
Net profit growth (RHS)
2015
2014
2013
-20
2012
0
2011
• The main culprit behind the contraction in earnings in FY12
and FY15 was lower margins on the back of intense
competition and dilution from growing lower-yielding
commercial financing. Although margin compression is
expected to continue as Bank Rakyat ramps up its commercial
financing, we expect the bank’s net financing margin to
remain higher than the industry average, as higher-yielding
unsecured loans makes up a sizeable portion of its portfolio.
High credit cost was also a drag on earnings across the years.
%
128
2,744
2,024
• Bank Rakyat’s asset quality is sound, with impaired financing
ratio showing a consistent decline y-o-y. Although the nondiscretionary salary deductions by Angkasa reduces the risk of
non-repayment by its personal financing customers to a
certain extent, further deterioration in asset quality remains
plausible against the tepid macroeconomic backdrop. In
2Q16, Bank Rakyat’s impaired financing grew 24% q-o-q,
mainly from the construction segment.
%
3.0
Net profit (LHS)
Source: Company, DBS Bank, AllianceDBS
Bank Rakyat: ROE vs BVPS
sen
500
%
23.5
25
450
400
16.8
350
16.6
20
15.5
13.0
300
15
250
200
10
150
470
428
388
5
363
50
367
100
Book val/sh (LHS)
2015
2014
2013
0
2012
0
2011
Valuation
• Bank Rakyat is not listed on Bursa Malaysia. Nonetheless, we
highlight that listing Bank Rakyat would create an alternate
Islamic bank proxy apart from BIMB. With an ROE of 13%, we
believe a valuation of 1.2x BV is prudent for the bank. At such
valuations, Bank Rakyat could command a market
capitalisation of RM17bn (based on FY16 book value), more
than twice the market capitalisation of BIMB.
ROE (RHS)
Source: Company, DBS Bank, AllianceDBS
Page 53
Industry Focus
Islamic Banks
BANK MUAMALAT
Bank Muamalat is among the top 10 (by asset size) Islamic
banks in Malaysia and is the second full-fledged Islamic bank
established in the country. The bank has been widely touted for
a merger and acquisition deal over the years, as the market has
long anticipated a pare down in shareholding by its largest
shareholder, DRB Hicom. Alternatively, DRB Hicom could take
Bank Muamalat down the listing route, which we expect could
command a market capitalisation of close to RM1bn.
Company background:
• Bank Muamalat is the second full-fledged Islamic bank
established in Malaysia, after Bank Islam. The bank is a
product of combining the assets and liabilities of Islamic
windows of three banks, i.e. Bank Bumiputra Malaysia (Bank
Bumi), Bank of Commerce (M) and BBMB Kewangan. With an
asset size of RM23bn, Bank Muamalat is one of the smallest
banks in the industry.
• Bank Muamalat is jointly owned by DRB-Hicom (70%) and
Khazanah Nasional (30%). DRB-Hicom is a conglomerate
operating in Malaysia. Its subsidiaries include Pos Malaysia
(POS MK Equity) and national carmaker, Proton. DRB-Hicom is
in turn, 56% owned by Etika Strategi Sdn Bhd, a company
controlled by a prominent businessman, Tan Sri Dato’ Seri
Syed Mokhtar. Operationally, Bank Muamalat is led by CEO,
Dato’ Haji Mohd Redza Shah Abdul Wahid.
Bank Muamalat: Financial summary
FYE Mar
Pre-provision profit
(RM m)
Net Profit (RM m)
EPS (sen)
EPS Gth (%)
BV Per Share (sen)
ROA (%)
ROE (%)
Impaired financing
ratio (%)
Loan loss coverage
(%)
CASA ratio (%)
Financing to deposit
ratio (%)
Loan growth (%)
Deposit growth (%)
2013
2014
2015
2016
238
163
159
273
168
16.8
142.5
160
0.8
10.5
2.50
152
12.7
(24.5)
146
0.8
8.7
2.18
89
7.5
(41.1)
155
0.4
4.8
2.48
132
11.0
47.7
167
0.6
6.6
2.21
102
102
83
89
20.6
57
24.4
69
24.3
70
24.3
75
11.9
3.3
14.6
(5.9)
12.5
10.9
8.0
0.5
Source: Company, DBS Bank, AllianceDBS
Bank Muamalat: Financing portfolio
Hire
purchase
6%
Others
9%
Working
capital
24%
• The three biggest segments of Bank Muamalat’s financing
portfolio are residential property, personal financing and
working capital financing. Akin to Bank Rakyat and MBSB,
Bank Muamalat is also granted access to the direct salary
deduction code by Angkasa.
Mortgage
31%
Construction
4%
Personal use
26%
Source: Company, DBS Bank, AllianceDBS
Bank Muamalat: Financing and deposit growth vs FDR
%
25
70
69
75
15
52
57
80
60
50
10
8.0
0.5
12.5
10.9
14.6
11.9
3.3
21.0
11.9
40
5
FY16
FY15
FY14
(5.9)
-5
FY13
0
-10
30
20
10
0
Financing growth (LHS)
Financing to deposit ratio (RHS)
Deposit growth (LHS)
Source: Company, DBS Bank, AllianceDBS
Page 54
%
70
20
FY12
Long-awaited M&A play
• Bank Muamalat has been widely touted as a potential merger
and acquisition candidate. This arose from the understanding
that BNM had requested DRB-Hicom to pare down its stake to
40%. Bank Islam (2011), Affin (2013) and MBSB (2016) had
made an attempt to acquire Muamalat, but no firm
developments have materialised to date. Although Bank
Muamalat is a small player in the industry as a whole,
Muamalat is still within the top 10 (by asset size) among
Islamic banks. Its asset size is bigger than Affin Islamic and if
merged with MBSB, its Islamic asset size would eclipse Bank
Islam’s.
Industry Focus
Islamic Banks
• At 2.21% gross impaired financing ratio, Bank Muamalat’s
asset quality is less robust compared to its peers. The bulk of
its impaired financing comes from the personal financing and
working capital financing segments, which have impaired
financing ratios of 2.4% and 3.0%, respectively.
Bank Muamalat: Asset quality
%
%
5.3
120
102
4.70
4.8
96
4.3
100
83
102
80
89
3.8
60
3.3
2.8
2.50
40
2.48
2.21
2.18
2.3
20
FY15
FY13
Impaired financing ratio (LHS)
FY16
0
FY14
1.8
FY12
Financials
• Bank Muamalat’s financing grew by 8% in FY16, led by home
and personal financing. Going forward, the bank is managing
growth in home financing (due to high competition in the
market) and focusing on loan growth in personal financing.
While its financing-to-deposit ratio is low at 75% (vs the
industry’s 90%), the ratio has crept up y-o-y as deposit
growth has not kept up with financing growth. In FY14,
deposits contracted due to a deliberate reduction of its highcost wholesale deposit to manage net financing margins and
to ensure compliance with the liquidity coverage ratio
requirements (wholesale deposits have a higher run-off rate).
We understand that liquidity coverage ratio treads above the
minimum requirement of 70% but lower than the industry
average of 125%. The bank is focusing on growing its CASA
franchise to improve its deposit profile.
Financing coverage ratio (RHS)
Source: Company, DBS Bank, AllianceDBS
Bank Muamalat: Earnings growth
RM m
%
300
200
142.5
250
150
50
(9.7)
100
-50
132
273
89
159
152
163
168
238
69
179
50
0
(41.1)
(48.2)
Pre-provision profit (LHS)
Net profit (LHS)
FY16
FY15
FY14
FY13
-100
FY12
0
Net profit growth (RHS)
Source: Company, DBS Bank, AllianceDBS
Bank Muamalat: ROE vs BVPS
sen
%
170
12
10.5
165
10
8.7
160
155
150
145
6.6
4.9
140
4
167
155
146
160
135
130
8
6
4.8
2
Book val/sh (LHS)
FY16
FY15
0
FY14
125
FY13
• Given that Bank Muamalat has yet to make significant
progress in closing a merger and acquisition transaction thus
far, the listing of Bank Muamalat is an alternative option for
DRB-Hicom to consider. In April 2016, Bank Muamalat’s CEO
was quoted by the media, saying that listing is an available
option for shareholders. Nonetheless, he added that it is not
an issue being discussed in the immediate term, given the
currently weak market sentiments. We highlight that if this
route is taken, the bank could fetch a valuation that is
comparable to Affin (closest comparable to its ROE profile). At
a conservative valuation of 0.5x BV, Bank Muamalat could be
listed at a market capitalisation of close to RM1bn.
100
47.7
140
Valuation
• Bank Muamalat is under the ambit of listed company DRB
Hicom (DRB MK Equity), which trades at 0.4x FY17 PB. DRB is
a conglomerate with interests in automotive, property,
banking, and services (waste management, national vehicle
inspection, and O&M of power plants).
200
FY12
• Earnings growth was strong in FY16, as cost savings from its
voluntary separation scheme (completed the year before)
started to kick in. Despite commanding high net financing
margins (thanks to a sizeable proportion of higher-yielding
personal financing), the bank’s overall profitability is dragged
by a relatively high cost-to-income ratio (c.56%). When
stacked against its peers, Bank Muamalat’s ROE lies at the
lower end, at sub-7%.
150
ROE (RHS)
Source: Company, DBS Bank, AllianceDBS
Page 55
Industry Focus
Islamic Banks
Appendix
Page 56
Industry Focus
Islamic Banks
OIC members: Selected economic data points (latest available data)
Country
Unit
Afghanistan
Albania
Algeria
Azerbaijan
Bahrain
Bangladesh
Benin
Brunei
Burkina Faso
Cameroon
Chad
Comoros
Cote d'Ivoire
Djibouti
Egypt
Gabon
Gambia
Guinea
Guinea-Bissau
Guyana
Indonesia
Iran
Iraq
Jordan
Kazakhstan
Kuwait
Kyrgyzstan
Lebanon
Libya
Malaysia
Maldives
Mali
Mauritania
Morocco
Mozambique
Niger
Nigeria
Oman
Pakistan
Palestine
Qatar
Saudi Arabia
Senegal
Sierra Leone
Somalia
Sudan
Suriname
Syria
Tajikistan
Togo
Tunisia
Turkey
Turkmenistan
Uganda
United Arab Emirates
Uzbekistan
Yemen
OIC
GDP
USD per
capita
668
4,634
5,484
7,884
24,854
1,088
903
40,979
725
1,407
941
841
1,546
1,814
3,151
10,317
441
536
672
4,040
3,492
5,443
6,475
5,423
12,496
43,600
1,269
10,916
6,602
10,934
8,484
701
1,283
3,243
628
427
3,203
19,310
1,358
2,972
97,519
24,362
1,067
775
131
2,081
9,680
9,680
1,114
643
4,313
10,515
9,032
727
43,963
2,049
1,418
4,012
Banking
penetration
Population
Density
Total
population
%
10.0
38.0
50.5
29.2
81.9
29.1
16.0
N/A
13.4
11.4
7.7
21.7
15.1
N/A
N/A
30.2
N/A
6.2
N/A
N/A
35.9
N/A
11.0
24.6
53.9
72.9
N/A
46.9
N/A
80.7
N/A
13.3
20.4
39.1
N/A
3.5
44.2
73.6
8.7
N/A
65.9
69.4
11.9
14.1
7.9
15.3
N/A
N/A
11.5
17.6
27.3
56.5
1.8
27.8
83.2
40.7
N/A
31.9
per sq km
50
105
17
117
1,940
1,237
98
80
66
49
11
424
71
38
92
7
199
51
66
4
142
49
83
86
7
218
31
572
4
92
1,364
14
4
48
36
16
200
15
245
735
193
15
79
90
17
17
3
101
61
134
72
102
11
198
110
74
51
10,009
mil
32.5
2.9
39.7
9.7
1.4
161.0
10.9
0.4
18.1
23.3
14.0
0.8
22.7
0.9
91.5
1.7
2.0
12.6
1.8
0.8
257.6
79.1
36.4
7.6
17.5
3.9
6.0
5.9
6.3
30.3
0.4
17.6
4.1
34.4
28.0
19.9
182.2
4.5
188.9
4.4
2.2
31.5
15.1
6.5
10.8
40.2
0.5
18.5
8.5
7.3
11.1
78.7
5.4
39.0
9.2
31.3
26.8
1,726.3
Ages 0-14
% of
Total
44.0
18.6
28.5
21.9
21.5
29.5
42.2
23.1
45.6
42.5
47.7
40.3
42.5
32.7
33.2
37.1
46.2
42.5
40.8
28.8
27.7
23.6
41.0
35.5
26.7
22.3
31.4
24.0
29.8
25.0
27.5
47.5
40.0
27.2
45.3
50.5
44.0
20.5
35.0
40.2
15.5
28.6
43.8
42.4
46.7
40.5
26.8
37.1
34.8
42.2
23.4
25.7
28.2
48.1
13.9
28.5
40.3
34.0
Ages 1564
% of Total
53.5
69.1
65.5
72.5
76.1
65.6
55.0
72.5
52.0
54.3
49.8
56.9
54.5
63.1
61.6
57.8
51.5
54.4
56.0
66.2
67.1
71.3
56.0
60.7
66.6
75.7
64.4
67.9
65.6
69.1
67.8
50.0
56.8
66.6
51.4
47.0
53.3
76.9
60.5
56.8
83.3
68.6
53.3
55.0
50.5
56.2
66.3
58.8
62.2
55.0
69.1
66.8
67.6
49.4
84.9
66.8
57.0
61.9
Ages
65+
% of
Total
2.5
12.4
5.9
5.6
2.4
5.0
2.9
4.4
2.4
3.2
2.5
2.8
3.0
4.2
5.2
5.1
2.3
3.1
3.2
5.0
5.2
5.1
3.1
3.8
6.7
2.0
4.2
8.1
4.5
5.9
4.7
2.5
3.2
6.2
3.4
2.6
2.7
2.6
4.5
3.0
1.2
2.9
2.9
2.7
2.8
3.3
6.9
4.1
3.0
2.8
7.6
7.5
4.2
2.5
1.1
4.7
2.8
4.0
Account
at fin inst
% of
Total
10.0
38.0
50.5
29.2
81.9
29.1
16.0
N/A
13.4
11.4
7.7
21.7
N/A
12.3
13.7
30.2
N/A
6.2
N/A
N/A
35.9
92.2
11.0
24.6
53.9
72.9
18.5
46.9
N/A
80.7
N/A
13.3
20.4
39.1
N/A
3.5
44.2
73.6
8.7
N/A
65.9
69.4
11.9
14.1
7.9
15.3
N/A
23.3
11.5
17.6
27.3
56.5
1.8
27.8
83.2
40.7
6.4
31.7
Note: Percentage of adults with account in financial institution is used as a proxy to banking penetration
Source: OIC, Global Findex 2014
Page 57
Borrowed
from fin inst
% of Total
3.6
10.2
2.2
18.9
21.3
9.9
7.6
N/A
5.0
1.9
2.4
7.2
2.3
4.5
6.3
4.3
N/A
2.0
N/A
N/A
13.1
31.6
4.2
13.6
16.5
14.1
13.5
15.6
N/A
19.5
N/A
2.7
7.7
4.3
N/A
1.4
5.3
9.2
1.5
N/A
12.6
12.2
3.5
4.0
2.0
4.2
N/A
13.1
3.8
3.7
8.0
20.0
2.2
15.7
15.4
1.3
0.4
8.4
-5
Page 58
Source: Companies, DBS Bank, AllianceDBS
MBSB
2.5
0.1
(2.2)
1.6
AFB
0
KFH
AL-RAJHI
5
SC SAADIQ
1.5
1.0
0.5
-0.5
0.0
0.0
(0.3)
AFB
KFH
0.2
0.1
0.6
0.5
RHB ISL
ALLCE ISL
AL-RAJHI
AFFIN ISL
0.6
MUAMALAT
KFH
AFB
AL-RAJHI
SC SAADIQ
ALLCE ISL
MUAMALAT
-37.2
0.5
11.8
14.5
52.4
84.8
122.1
131.9
137.6
197.0
233.0
254.9
MBSB
1
5
AFB
AL-RAJHI
7
7
SC SAADIQ
ALLCE ISL
9
7
KFH
AFFIN ISL
12
10
40
31
32
32
34
27
18
15
OCBC AL-…
HSBC AMAN
MUAMALAT
HL ISL
AMISL
RHB ISL
PUBLIC ISL
0
SC SAADIQ
HSBC AMAN
0.6
AMISL
340.4
257.6
BIMB
CIMB ISL
20
OCBC AL-AMIN
0.6
HL ISL
AMISL
RHB ISL
MBSB
PUBLIC ISL
MBSB
CIMB ISL
2.0
0.6
0.7
0.7
PUBLIC ISL
Return on assets (ROA)
HSBC AMAN
0.8
0.8
HL ISL
%
2.5
404.0
500
MAY ISL
-500
547.3
1,000
BIMB
40
CIMB ISL
1,500
0.9
2,000
BANK RAKYAT
7
3
60
0.8
Return on equity (ROE)
MAY ISL
AFB
Al-Rajhi
11
10
63
80
AFFIN ISL
120
1,824.1
KFH
ALLCE ISL
13
11
130
120
OCBC AL-AMIN
140
1,212.5
AFFIN ISL
SC SAADIQ
19
15
160
MAY ISL
RM bn
160
BANK RAKYAT
Total deposits
2.0
9
8
6
2
12
10
OCBC AL-…
HSBC AMAN
26
23
41
38
156
RM bn
140
1.0
AFB
AL-RAJHI
KFH
ALLCE ISL
14
13
HL ISL
Muamalat
46
44
140
RM bn
180
BIMB
AFFIN ISL
SC SAADIQ
23
20
MBSB
AMISL
57
55
92
Total assets
BANK RAKYAT
5.3
5.1
OCBC AL-…
HSBC AMAN
0
AFFIN ISL
6.6
31
30
RHB ISL
PUBLIC ISL
0
6.4
41
40
BIMB
CIMB ISL
20
ALLCE ISL
MUAMALAT
HL ISL
MBSB
AMISL
20
MUAMALAT
8.4
8.8
10
HSBC AMAN
10.9
10.2
RHB ISL
PUBLIC ISL
48
44
MAY ISL
BANK RAKYAT
40
AMISL
RHB ISL
11.5
11.2
BIMB
CIMB ISL
40
HL ISL
CIMB ISL
PUBLIC ISL
15
14.0
60
13.0
145
60
BANK RAKYAT
80
73
80
OCBC AL-AMIN
MAY ISL
100
BANK RAKYAT
100
14.7
16.0
%
20
BIMB
120
MAY ISL
Industry Focus
Islamic Banks
Islamic banking: Industry benchmarking
Gross financing
100
Net profit
RM m
0
0
5
250
200
15
100
50
0
Source: Companies, DBS Bank, AllianceDBS
Page 59
KFH
SC SAADIQ
141
128
HSBC AMAN
AFB
123
111
MAY ISL
MBSB
98
AL-RAJHI
111
97
RHB ISL
AL-RAJHI
97
AMISL
OCBC AL-…
AFB
SC SAADIQ
AMISL
AL-RAJHI
BANK RAKYAT
KFH
MBSB
ALLCE ISL
MUAMALAT
OCBC AL-AMIN
CIMB ISL
(13)
(14)
(23)
(59)
AMISL
BANK RAKYAT
AFB
SC SAADIQ
(6)
(7)
PUBLIC ISL
8
AMISL
SC SAADIQ
HSBC AMAN
AFB
KFH
AL-RAJHI
6
(21)
(14)
(13)
7
6
(10)
(7)
(5)
1
1
2
4
OCBC AL-AMIN
BANK RAKYAT
7
8
16
15
9
14
11
4
0
MBSB
BIMB
MAY ISL
CIMB ISL
ALLCE ISL
RHB ISL
HL ISL
PUBLIC ISL
(15)
(5)
AFFIN ISL
HSBC AMAN
4
4
4
4
(1)
MUAMALAT
(1)
60
MBSB
6
Pre-provision profit growth (y-o-y)
2
CIMB ISL
BIMB
BIMB
HL ISL
HSBC AMAN
-30
9
15
14
HL ISL
ALLCE ISL
92
16
91
19
KFH
MAY ISL
CIMB ISL
150
AFFIN ISL
244
%
300
89
Financing-to-deposit ratio
84
71
RHB ISL
MAY ISL
10
HL ISL
24
21
RHB ISL
-80
OCBC AL-AMIN
31
40
AFFIN ISL
AFFIN ISL
PUBLIC ISL
21
22
24
15
18
20
BANK RAKYAT
192
-60
81
-40
80
-20
MUAMALAT
(96)
(140)
MBSB
AFB
(14)
(75)
HSBC AMAN
KFH
(8)
(13)
ALLCE ISL
(2)
(4)
AMISL
PUBLIC ISL
BANK RAKYAT
3
(2)
BIMB
HL ISL
8
3
MAY ISL
CIMB ISL
20
ALLCE ISL
27
%
80
PUBLIC ISL
CASA ratio
-20
80
0
14
Net profit growth (y-o-y)
-10
74
0
RHB ISL
AFFIN ISL
48
42
145
28
27
%
30
BIMB
16
18
20
21
21
23
24
25
27
28
28
SC SAADIQ
MUAMALAT
95
Financing growth (y-o-y)
MUAMALAT
0
5
MBSB
10
BANK RAKYAT
RHB ISL
20
AFB
KFH
AL-RAJHI
AMISL
25
PUBLIC ISL
MUAMALAT
HL ISL
CIMB ISL
ALLCE ISL
30
28
35
MAY ISL
-200
AFFIN ISL
%
40
32
50
32
100
OCBC AL-…
-150
OCBC AL-AMIN
150
SC SAADIQ
-100
AL-RAJHI
-50
37
%
200
35
%
35
30
25
20
15
10
5
0
-5
-10
-15
-20
BIMB
HSBC AMAN
Industry Focus
Islamic Banks
Islamic banking: Industry benchmarking
Deposit growth (y-o-y)
Page 60
AFB
0
HL ISL
Source: Companies, DBS Bank, AllianceDBS
20
15
Total Capital
12
11
11
10
10
HSBC AMAN
RHB ISL
PUBLIC ISL
HL ISL
AMISL
15
15
KFH
MBSB
2.8
2.2
2.2
1.9
150
204
7.4
7.4
%
8
14
0
OCBC AL-…
MUAMALAT
AMISL
HSBC AMAN
1.9
1.5
1.2
4
13
18
16
15
12
BIMB
BANK RAKYAT
AFFIN ISL
13
15
OCBC AL-AMIN
12
RHB ISL
13
15
MBSB
1.1
1.1
1.0
0.9
0.9
0.7
0.7
0.6
0.5
3
MAY ISL
ALLCE ISL
16
13
14
BIMB
CIMB ISL
AFB
HL ISL
MAY ISL
PUBLIC ISL
AL-RAJHI
ALLCE ISL
Tier 1
13
22
25
Capital ratios
SC SAADIQ
16
14
16
13
14
0
AFFIN ISL
5
14
10
CIMB ISL
MUAMALAT
25
250
15
%
30
AL-RAJHI
50
1
19
Financing loss coverage ratio
SC SAADIQ
2
24
25
0
19
20
KFH
MBSB
126
112
Net credit cost
AL-RAJHI
SC SAADIQ
AFB
KFH
BIMB
MUAMALAT
HSBC AMAN
AMISL
AFFIN ISL
ALLCE ISL
CIMB ISL
HL ISL
OCBC AL-…
PUBLIC ISL
MAY ISL
RHB ISL
BANK RAKYAT
MBSB
1.2
1.2
RHB ISL
1.6
1.6
AFB
AFFIN ISL
AL-RAJHI
1.7
1.7
HL ISL
SC SAADIQ
1.8
1.7
MAY ISL
PUBLIC ISL
2.1
ALLCE ISL
1.9
KFH
CIMB ISL
2.1
2.1
AMISL
56
56
51
48
48
47
44
41
39
37
36
36
29
23
66
63
79
86
%
100
90
80
70
60
50
40
30
20
10
0
KFH
61
53
AFB
OCBC AL-AMIN
73
68
2.4
2.3
MUAMALAT
HSBC AMAN
2.4
BIMB
%
BANK RAKYAT
75
65
HSBC AMAN
BANK RAKYAT
62
57
0.0
3.0
0.5
BANK RAKYAT
3.2
Net financing margin
AFB
89
85
ALLCE ISL
MUAMALAT
23
23
%
250
AFFIN ISL
89
89
CIMB ISL
SC SAADIQ
21
21
200
RHB ISL
AMISL
96
BIMB
PUBLIC ISL
20
18
150
KFH
CIMB ISL
MUAMALAT
100
92
RHB ISL
MAY ISL
9
7
100
HSBC AMAN
109
97
149
AFFIN ISL
AL-RAJHI
1.0
3.0
MBSB
1.5
OCBC AL-AMIN
2.0
MBSB
OCBC AL-…
ALLCE ISL
BANK RAKYAT
150
110
294
(3)
2.5
MAY ISL
200
PUBLIC ISL
300
175
5
HL ISL
3.0
BIMB
%
350
AMISL
-50
331
50
307
3.5
AL-RAJHI
SC SAADIQ
Industry Focus
Islamic Banks
Islamic banking: Industry benchmarking
Cost-to-income ratio
Gross impaired financing ratio
6
7
5
Industry Focus
Islamic Banks
Islamic Banking: Definition of terms
Terms
Al-ijarah thumma al-bai (AITAB)
Bai' bithaman ajil (BBA)
Bai' dayn
Bai' 'inah
Bai' salam
Bai' sarf
Financing
Financing loss coverage
Financing-to-deposit ratio
Fund-based Income
Ibra'
Ijarah
Impaired financing ratio
Istisna
Kafalah
Mudarabah
Muqasah
Murabahah
Musawamah
Musyarakah
Net financing margin (NFM)
Non Fund-based Income (Feebased)
Profit attributable to depositors
Profit rate
Qard
Rahn
Sukuk
Tabarru'
Tawarruq/commodity murabahah
Wadi'ah
Wakaf
Wakalah
Zakat
Definitions or equivalent terms in conventional model
Lease contract followed by ownership of asset through a sale contract
Sale contract based on deferred payment at a certain price
Sale of debt
Sale contract followed by repurchase by the seller at a different price
Sale contract based on order of certain asset with certain specifications. Full payment is made in
cash at the time of conclusion of the contract whereas the delivery of the asset is deferred to a
specific time
Sale of currency
Loans
Loan loss coverage
Loans-to-deposit ratio
Interest income
Rebate/waiver of partial or total claim against certain right or debt
Lease or service contract that involves benefit/usufruct of certain asset or work for an agreed
payment or commission within an agreed period
Impaired loan ratio
Sale contract by way of order for certain product with certain specifications and certain mode of
delivery and payment (either in cash or deferred)
Guarantee
Profit-sharing contract
Offsetting
Sale contract with a disclosure of the asset cost price and profit margin to the buyer
Sale contract without the disclosure of the asset cost price and profit margin to the buyer
Profit and loss sharing
Net interest margin
Non-interest income
Interest expense
Interest rates
Loan contract
Pledge/charge
Bonds
Voluntary donation/contribution
Purchasing an asset with deferred price, either on the basis of musawamah or murabahah, then
selling it to a third party to obtain cash
Safe keeping a contract in which a party entrusted his property to another party for safe keeping
and to be returned upon request
A form of endowment by an owner of a property for public benefit and wellbeing which is allowed
by Shariah
Agency contract
Almsgiving
Source: BNM, AllianceDBS
Page 61
Industry Focus
Islamic Banks
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 18 Feb 2017 16:26:09 (MYT)
Dissemination Date: 20 Feb 2017 08:53:38 (MYT)
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd,
its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated
in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to
change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard
to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of
addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal
or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of
profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This
document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or
persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it
may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no
obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a)
(b)
such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research
department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction
in the past twelve months and does not engage in market-making.
Page 62
Industry Focus
Islamic Banks
ANALYST
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
research reports. As of 20 Feb 2017, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold
interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s)
responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and
procedures are in place to ensure that confidential information held by either the research or investment banking function is handled
appropriately.
COMPANYCOMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary
position in the securities recommended in this report as of 31 Jan 2017.
2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for
for investment banking services:
3.
DBS Bank Ltd, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or intend to seek
compensation for investment banking services from Maybank as of 1 Jan 2017.
4.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
5.
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
RESTRICTIONS ON DISTRIBUTION
General
This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or
located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be
contrary to law or regulation.
Australia
This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”),
both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act
2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary
Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended
only for “wholesale investors” within the meaning of the CA.
This report is being distributed in Hong Kong by or on behalf of, and is attributable to DBS Vickers (Hong Kong) Limited
which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong)
Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. Where this
publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not
the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express
understanding that, whilst the information contained within is believed to be reliable, the information has not been
independently verified by DBS Bank (Hong Kong) Limited. This report is intended for distribution in Hong Kong only to
professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any
rules promulgated thereunder.)
Hong Kong
For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].
Indonesia
Malaysia
This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.
This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from
ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this
report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that
ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and
associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of
them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to
perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have
received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other
services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
Page 63
Industry Focus
Islamic Banks
Singapore
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No.
198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the
Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign
entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial
Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert
Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons
only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from,
or in connection with the report.
Thailand
This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only
intended for institutional clients only and no other person may act upon it.
United Kingdom
This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore.
This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and
regulated by the Financial Conduct Authority in the United Kingdom.
In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and
associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any
form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at
persons having professional experience in matters relating to investments. Any investment activity following from this
communication will only be engaged in with such persons. Persons who do not have professional experience in matters
relating to investments should not rely on this communication.
Dubai
This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch)
having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC),
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research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon
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This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on
this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research
analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company,
public appearances and trading securities held by a research analyst. This report is being distributed in the United States by
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contact DBSVUSA directly and not its affiliate.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified,
professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
DBS Bank Ltd
12 Marina Boulevard, Marina Bay Financial Centre Tower 3
Singapore 018982
Tel. 65-6878 8888
e-mail: [email protected]
Company Regn. No. 196800306E
Page 64