In August 2019 my page "Two banks, one Islamic and one conventional, which are directly comparable" reviewed the results of the Malaysian conventional bank CIMB Bank Berhad with its smaller Islamic subsidiary CIMB Islamic Bank Berhad.
I was surprised to find that the smaller Islamic bank was the more profitable of the pair. A few months later, someone suggested to me that the situation was different with Maybank. (Malayan Banking Berhad, commonly known as Maybank, is the largest financial services group in Malaysia.)
I didn't check at the time, but went back to the subject for my July 2020 column in the magazine "Islamic Finance News." As I assumed that my correspondent would be right, I was surprised by what I found. You can read my article below.
In my 7 August 2019 column, I compared the 2018 results of CIMB Bank and CIMB Islamic Bank. My expectation was “Given common ownership, both should have the same management culture, and achieve similar financial results apart from differences due to size.” As CIMB Islamic was much smaller, I expected it to be less profitable, due to lacking economies of scale.
To my surprise, I found that CIMB Islamic was noticeably more profitable. Its return on equity (profit post tax and zakat divided by shareholders’ funds), (“ROE”), was 15.1%.
That compared with CIMB Bank’s ROE of 10.4%, after adjusting out the equity financing its ownership of the Islamic subsidiary. (Before the adjustment, CIMB Bank’s ROE was only 8.4%).
The key explanation was that CIMB Islamic was operating with much higher leverage ratio (total assets, not weighted for risk, divided by shareholders’ funds). It was 19.57, which struck me as very high in today’s regulatory environment. By comparison, CIMB Bank was operating with a much lower leverage ratio of 11.7.
A few months ago, I was asked about Maybank, where my interlocutor expected a different outcome from the calculations. I have now computed the figures, using the calendar 2018 results to maintain comparability with CIMB.
Malayan Banking Berhad (“MBB”) describes itself as the largest financial services group in Malaysia, and is the parent company of the Maybank group whose consolidated assets of RMB 807 billion are significantly larger than CIMB Group’s consolidated assets of RMB 534 billion.
As well as owning many subsidiaries, MBB carries on a conventional banking business, and its financial statements disclose both the group results and the conventional bank results.
Maybank group’s Islamic banking activities are carried out through Maybank Islamic Berhad (“MIB”) (in Malaysia) and PT Bank Maybank Syariah Indonesia. By comparing the total Islamic banking income shown in MBB’s consolidated results with MIB’s figures, one sees that most of the MBB group’s Islamic banking business is within MIB.
MIB’s ROE was 18.9%. (Profit for the year RMB 1.975 billion, and shareholder’s equity of RMB 10.477 billion.) That is almost 4 percentage points higher than CIMB Islamic’s ROE for the same period, which is a commendable achievement.
However, MBB’s ROE (after adjusting for equity used to finance investments in subsidiaries) was only 14.4%. This was computed by reducing the RMB 7.3 billion published MBB Bank post tax and zakat profit by eliminating the RMB 2.4 billion dividends from subsidiaries, and similarly eliminating from the RMB 65.6 billion equity a figure of RMB 31.4 billion representing equity financing the investment in subsidiaries.
Again, MBB’s conventional banking ROE was significantly higher than CMB Bank’s ROE of 10.4%, but well behind the ROE of MIB.
As with CIMB Islamic, a key part of the explanation for MIB being more profitable than its conventional parent can be found in the balance sheet.
MIB has total assets of RMB 225 billion, giving an unweighted leverage ratio of 21.5. (Even if one excludes assets financed by the customers’ investment accounts of RMB 23.5 billion, the unweighted leverage ratio would still be 19.2.) In comparison, the MBB leverage ratio is only 12.4 computed after excluding investments in subsidiaries from the assets with a matching reduction in the shareholders’ equity.
Accordingly, while the Maybank group is more profitable than the CIMB group, both in conventional banking and in Islamic banking, we see the same pattern as with CIMB.
Contrary to what one would expect, the Islamic banking subsidiary is much more profitable than its conventional banking parent company.