Moody's sees stiffer deposit competition from MBSB, AFB merger

Malaysia Building Society Bhd proposed a cash call to raise up to RM2bil.

KUALA LUMPUR: The merger of Malaysia Building Society Bhd (MBSB) and Asian Finance Bhd (AFB) will lead to stiffer competition among smaller Islamic banks to secure deposits, says Moody's Investors Service.

It said on Tuesday such a deal would 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 license would give MBSB access to cheaper funding and broaden its revenue stream," says a Moody's vice president and senior analyst Simon Chen.

He said MBSB's entry 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," he said.

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" which is authored by Chen.

The Moody's report points out 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 ratings agency said the growth potential for Islamic banks in Malaysia is strong, given the availability of well-established infrastructure and growing consumer awareness of Shariah-compliant products. 

The stable macroeconomic environment is also supportive of credit demand for all banks in the country.