Bank Islam focuses on consumer financing to propel profits

Bank Islam, which embarked on a transformation programme following steep losses in 2005 and 2006, is set on an aggressive growth path.

With a targeted financing growth of 18% this year, the business will be led by consumer financing, managing director Datuk Seri Zukri Samat tells StarBizWeek.

However, the long term strategy is to balance 70% of its exposure to consumers and the rest to business entities especially among high-end small and medium enterprises (SMEs).

Underscoring this push for lending, the financing to deposits or lending ratio, which is currently at 55% , will be raised to 70% by 2013.

Realistic targets?

Drawing from the industry's projected loans growth of 11%-12% and Bank Islam's financing growth for the first six months at 8.6%, Zukri is positive of reaching the 18% target.

“Financing growth for July and August was encouraging,” he notes.

In terms of asset size, Zukri says deposits for the first six months of this year are allowed to dip in order to bring up the financing to deposit ratio which is below 50%.

“We allowed it to dip on purpose,” he says. “Some of the deposits have negative carry. We price ourselves out to avoid hot money and those depositors that look for high deposit rates and are not loyal to the bank.”

Acknowledging the uncertain operating environment, Zukri notes that many of the bank's forecasts are based on an inhouse growth forecast economic growth of 4% to 5% for 2011.
Zukri: ‘We know the credit behaviour especially in distressed situations. We are well-equipped to deal with such situations.’

Priority on domestic operations

While inorganic growth and expansion into certain markets remain an option, Bank Islam's immediate focus is on strengthening its domestic presence.

“It's a market we know. We are also aware of our strength and weaknesses.

“We know the credit behaviour especially in distressed situations. We are well-equipped to deal with such situations,” says Zukri who formerly helmed Pengurusan Danaharta Bhd, the national asset company set up after the 1997 Asian financial crisis to restructure debt-ridden companies.

Another area being emphasised is non-fund based income for which earnings contributions rose from 5% in 2006 to 12% in June this year. The target over the next three years is for this ratio to hit 20%.

The drivers of this income will be mainly from new consumer products such as TAP mobile banking. Since its launch in October last year, it has attracted 150,000 customers.

Debit cards which were launched six months ago already have 350,000 subscribers.

In wealth management, the bank has started selling unit trusts at its branches, recording sales of RM6mil a month compared with just RM1mil a few years back.

In addition, Bank Islam, which is the only Islamic bank on the Securities Commission's approved advisor status list, intends to leverage on this status to grow its corporate investment banking business.

“We have done a couple of listings such as for a flight training school, APFT, and Focus Lumber,” says Zukri. “We have a few mandates in hand with a submission for listing going in next week for a manufacturing company in Selangor.”

In the sukuk area, the bank has been appointed lead arranger for a RM5bil Islamic bond issued by a government-linked company (GLC). Bank Islam has a few more mandates that are in the pipeline.

Treasury is another area of focus. “The team has doubled and income from foreign exchange transactions has gone up by 50%,” says Zukri.

On lending, emphasis is placed on priority sectors that have high growth potential and are resilient to any downturn.

These are sectors such as oil and gas and palm oil while areas under the Economic Transformation Programme such as healthcare and education are also considered.

Caution in lending, however, is exercised in the personal financing segment where only selected segments of the population are eligible or those working at GLCs and selected established institutions with repayments via salary deductions.

With a current account savings account (CASA) ratio of 44%, Bank Islam is well-positioned to enjoy higher margins.

One strategy to attract these funds is to open branches in new and vibrant townships, taking first mover advantage, in places such as Putra Heights and Saujana. The bank has strong ties with universities, enabling it to open branches in campuses.

Demand for fixed financing

Before floating rate products were introduced, the bank gave out only fixed rate financing, given the nature of Islamic banking which is based on sales contract. It realised that if the overnight policy rate goes up, margins get squeezed.

In the relatively low interest rate environment at present, demand for fixed rate financing tends to decline. “That is good for us,” says Zukri. “We pay less on our cost of funds on floating rates but still benefit from our legacy portfolio which is mainly comprised of fixed rates.”

He thinks interest rates are not expected to move until the middle of next year.

In a stable interest rate environment, it is still good to offer floating rates, he says, adding that there is part of the bank's risk strategy to manage its books.

Ready for Basel III?

The adoption of Basel III will be effective by 2018 and involves the set of liquidity, capital and leverage ratios.

In terms of liquidity, the bank's financing to deposit ratio is still low and its exposure to marketable securities is significantly skewed to government and AAA papers.

The bank's risk weighted capital adequacy ratio is high at 16% as at June 2011. Banks are supposed to hold 6% of Tier I or core capital and 2.5% of a capital conservation buffer.

At Bank Islam, 100% of its capital is Tier I. It can opt to raise Tier II capital for its business expansion and mergers and acquisitions deals. “A bank can leverage up to 33 times of its Tier I capital. Bank Islam's Tier I capital is RM2.26bil which allows us to grow our assets to about RM75bil.” The bank's assets today amounts to only RM28bil.

Rising from the ashes

When Zukri first stepped in five years ago, Bank Islam had incurred a loss of RM1.8bil, its entire shareholders' funds were wiped out and its cost income ratio was high at 65%.

The biggest problem stemmed from the poor credit standards and culture at the Labuan outfit which was exposed to the Middle East, Bosnia, Tanzania, Scotland, Tanzania and South Africa - places where the bank may not have a strong understanding of the business environment.

Decisions were made in Labuan, often without the proper checks and balances.

Following the announcement of a RM500mil loss in financial year (FY) 2005, Bank Islam engaged three independent parties to work out what should be the reasonable provisions for FY2006.

They all came up with almost the same figure to write down which was RM1.7bil. By then, the bank had a deficit in capital of RM200mil.

“I could not sleep,” recalls Zukri. And then former prime minister Tun Abdullah Badawi was quoted in the papers as saying “do it (turn around Bank Islam) quick and fast.”

Under a turnaround plan from June 2006 to 2009, the bank had to recapitalise and restructure the balance sheet, revamp its IT infrastructure, underatke transformation for both business and operations, rationalise costs and develop its human capital.

“We managed to get Lembaga Tabung Haji and Dubai Investment Group (DIG) to come in,” he says. DIG injected RM828.22mil with another RM186.35mil from Lembaga Tabung Haji. Non-performing financing (NPFs) was a major issue. By February 2007, the NPF ratio had peaked to 13.6% based on a six-months classification.

“We explored the possibility of carving out certain NPF assets. After six months, the NPFs were brought under control,” says Zukri. “After a year, the situation had turned around. Given the good recovery rate, we decided not to proceed with the carve-out plan.”