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Moody's: Malaysian banks' record Sukuk issuance in 1H 2014

July 1, 2014

Moody's Investors Service says the record  MYR 3.25 billion ($1 billion) of ringgit-denominated Sukuk issued by  Malaysian Islamic banks in the first half of 2014 is driven by rapid  asset growth, which in turn has led to significant funding and capital  needs.

"We expect Malaysia's strong growth trends to continue, driven by strong demand from the predominantly Muslim population coupled with the government's comprehensive and coherent strategy to increase the proportion of Islamic financing to 40 per cent of total domestic financing by 2020 from 24 per cent at the end of May 2014," says Khalid Howladar, Moody's Global Head for Islamic Finance.

"As a result of rapid asset growth, Islamic Banks are expected to become an increasing contributor to Sukuk volumes" adds Howladar.

"Islamic banking assets in Malaysia totalled MYR 434 billion at the end of May 2014, representing 21 per cent of total banking-system assets versus 16 per cent at end-2009," says Simon Chen, a Moody's Assistant Vice President and Analyst.

"In addition, the 20 per cent compound annual growth in Islamic financings since 2009 has steadily outpaced the 16 per cent growth in Islamic deposits, creating a funding gap," adds Chen.

"And, when combined with the fact that over 95 per cent of the banks' funding mix is composed of short-term deposit funding, the banks are in need of increasing amounts of stable long-term funding - Sukuk issuances can provide such funding."

Moody's analysis is contained in its just-released report titled Malaysian Islamic Banks: Asset Growth, Funding and Basel III Capital Needs Drive Increasing Sukuk Volumes, and is co-authored by Chen and Shaoyong Beh, an Associate Analyst.

Moody's report says Sukuk issuances are expected to rise because if Islamic banks maintain their current risk-adjusted profitability to support their internal capital growth of eight per cent per annum, and risk-weighted assets grow at 11 per cent per annum, Moody's estimates that the banks will need an additional MYR 2.5 billion in new equity or capital-qualifying securities such as Basel III compliant Sukuk by 2016 to maintain capital ratios at current levels.

According to the report, the MYR 2.5 billion amount is estimated to increase to MYR 8.7 billion by 2020.

Moody's report concludes by saying that Moody's expects the Islamic banks will continue to raise new capital -- such as from Sukuk issuance -- ahead of future business growth, balance their capital structure with a mix of equity and capital securities, and at the same time, build loss-absorbing buffers above the regulatory minimum capital requirements.

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Source: CPI Financial

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