Smaller Malaysian Islamic banks face stiffer deposit competition if MBSB and Asian Finance Bhd merge
Moody's Investors Service says that if the merger between Malaysia Building Society Berhad (MBSB) and Asian Finance Berhad (AFB) is successful, competition for deposits among smaller Islamic banks in Malaysia will intensify.
Such a deal will likely lead to the larger of the two financial institutions, MBSB, emerging as the surviving entity.
"MBSB's credit profile would be enhanced because the acquisition of AFB and its Islamic banking licence would give MBSB access to cheaper funding and broaden its revenue stream," said Simon Chen, a Moody's Vice President and Senior Analyst. "The entry of MBSB into the current and savings account deposit market would further intensify competition for low-cost deposits among institutions that are not part of big integrated banking groups. Nevertheless, while competition among Islamic banks is growing, their profitability remains robust."
Moody's analysis is contained in its just-released report titled Islamic Banking Malaysia: Potential merger is credit positive for MBSB but will raise funding pressure on sector, and is authored by Chen.
Moody's report says that broader sector consolidation is unlikely for now, because the favourable operating environment will allow standalone Islamic institutions to fare well on their own. Moody's explains that the MBSB-AFB proposed merger is driven by unique circumstances that are not
shared by the other Islamic banks in Malaysia.
The growth potential for Islamic banks in Malaysia is strong, given the availability of well-established infrastructure and growing consumer awareness of Shari'ah-compliant products. The stable macroeconomic environment is also supportive of credit demand for all banks in the country.