Islamic banking which was on a rampant rise has just met modesty as its share grew by a paltry 36 bps during Jan-Sep 09, after accelerating from a mere 0.4 percent to a commendable 5.5 percent in a short span of five years.
What is more worrisome than the industry share is the sharp decline in Islamic banks advance/deposits ratio which slumped by 16 percentage points to 56 percent in the last nine months. Unlike conventional banks, Islamic counterparts could not even park their liquidity to the much safer havens of government papers owing to lack of Shariah compliant instruments.
This left six Islamic banks with surplus liquidity - with most of them being in their nascent stages, had hard times to comply with state banks capital requirement as their equity slowly depleted due to losses. With the exception of Meezan Bank which is meeting the capital requirements, the low ADR and compliance issues call for consolidation in the industry.
The situation has prompted BankIslami to show interest in acquiring Emirates Global by entering into a memorandum of understanding, as per KSE notice issued yesterday. The pricing and other modalities will be finalized after due diligence and regulators consent. BankIslami has to keep at least an eye if not both, to watch out for the sudden growth in non performance in the latter with only a 25 percent coverage ratio.
Lets confine the discussion to synergies obtained by acquirer entity and its impact on Islamic banking industry. BankIslami which grew from 72 to 102 branches in 2008, decided to halt the organic growth this year owing to economic slowdown. Earlier, the bank scrutinized mortgage portfolio and has lately shown interest in its auto loans. Sources reveal that mortgage deal worth assets of Rs1.3 billion is in finalization stage, whereas they deferred the latter (Rs2.3 bn), while Meezan has also shown interest in buying Citis auto portfolio, lately.
BankIslamis ADR is low relative to industry while it manages to mobilize decent size of deposits, hence, acquisition of a relatively clean consumer mortgage portfolio of Citi will increase its ADR by 6 percentage points and resolve its excess liquidity issue to some extent. Furthermore, the acquisition of Emirates Global will increase the same ratio by 5 more percentage points to 43 percent.
The acquisition of Emirates Global (43 branches) if materializes, will not only help the bank to keep its pace in industry after halting organic growth but also facilitate it to meet minimum capital requirement of the central bank. As per September accounts, bank was short of little over a billion rupee, while the merged entity with over Rs8 billion will provide the cushion for next two years. There, however, remains a concern of cannibalization as there are 12 branches of the o-be-acquired bank which happen to be located at similar locations of the possible acquirer.
The merger will make BankIslami to comfortably sit at second place in the industry in terms of assets size at around Rs50 billion mark - 8 percent increase in market share to 21 percent -, as per September accounts, but would still be less than half of the industry leader Meezan (Rs 108 bn, 47 percent share). Nonetheless, this merger will foster some healthy competition in Islamic banking which, has a long way to go in Pakistan.
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