KUALA LUMPUR: A concentration on retail financing and other structural features will help Malaysia's Islamic banks withstand economic disruptions caused by the Covid-19 pandemic, Moody's Investors Service said.
The country's seven largest Islamic banks, five of which are subsidiaries of domestic banking groups with conventional operations, have a heavy concentration on retail financing which is less vulnerable to an economic downturn than business financing.
"Declining economic growth and increasing unemployment will raise the risk of delinquencies in retail
financing, but the impact on losses will be limited as most of it is secured by residential properties,
cars or low-risk unit trusts," said Moody's analyst Tengfu Li.
"In addition, Malaysian banks generally have prudent underwriting practices for retail financing thanks to regulatory guidelines for 'responsible' financing, which adds to their asset quality," Li added.
The local Islamic banks are also well-positioned to defend profitability because they will see limited impairment losses as their asset quality holds up.
In addition, financing growth at the Islamic banks will be supported by financial groups' efforts to expand Islamic banking and increasing acceptance of such products by consumers.
They would also continue to keep their operating expenses low as they leverage on their parents' infrastructure, Moody's said.
The firm expects the Islamic banks to maintain their capitalisation in the next 12-18 months, as a slowdown in capital consumption offsets a deterioration in profitability.
Meanwhile, their funding and liquidity should remain stable, underpinned by retail deposit growth, weak financing demand and support from the government and parent groups.
"Retail current and savings account deposits will drive overall deposit growth as consumers wary of spending save their funds, while financing demand will remain weak," Li said.
"Deposits at Islamic banks in general will continue to grow faster than conventional deposits due to the popularity of Sharia- compliant financial products and the Islamic drive by banking groups. And continued support from the government and parent groups, mainly in the form of deposits, investment accounts and sukuk, will also mitigate funding risks," Li added.