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Friday September 23, 2011

Bank Islam still open to M&As despite 2 failed attempts

KUALA LUMPUR: Bank Islam, which is expected to hit another year of record profit, is still open to the idea of growing through mergers and acquisitions (M&A) despite two unsuccessful attempts earlier.

“To grow the bank domestically, I am all for it, but it's a matter of getting the right candidates,” managing director Datuk Seri Zukri Samat told StarBiz.

“Shareholders are open to the idea, but we must ensure that candidates are suitable on all fronts. In terms of synergies, it shouldn't be a case of just one plus one.”

Zukri: ‘Expansion outside Malaysia is on our agenda.’

He pointed out that in the case of the Hong Leong Bank-EON Bank merger, the auto loans business was one of the key drivers and the CIMB Bank-Southern Bank merger saw the emergence of a strong cards business.

“It must be something that has a strategic fit,” he said.

It was speculated some time back that Bank Islam was eyeing a merger with Maybank Islamic Bank (MIB), which has a strong niche in Islamic banking, but the talks fizzled out.

Lately, Bank Islam was again in the news with a potential tie-up with Bank Muamalat, but that did not take off due to lack of synergies between the two banks.

“Expansion outside Malaysia is on our agenda,” said Zukri. “We are still monitoring the global situation which looks fragile and fluid. We are still keen on Indonesia ... it's a market one can't miss despite the fact that Islamic banking is growing at 38% every year, the market penetration is at 3%.

“But the Indonesian market has its challenges. Almost every bank is eyeing Indonesia. Valuations have gone up. It is hard to get two times book value, but probably four to five times,” he said.

At the same time, Bank Islam is also observing the potential change in the regulatory framework with regard to foreign ownership of Indonesian banks.

“We would want to work with a strong local party and learn our way through,” said Zukri, indicating a similar set-up that Bank Islam has in Sri Lanka.

Besides a 20% stake in Amana Bank of Sri Lanka, Bank Islam earns management fees under a technical support agreement. “Later, if we like the place, we can always support the business growth,” he said. “We can't afford to lose money on these ventures. Our balance sheet is not that big.”

Domestically, the branch network will be expanded by three more to 122 by year-end. The target is to have 150 branches by 2015. The customer base of 1.7 million in 2006 has doubled to 3.5 million.

Bank Islam's financing-to-deposit ratio, at 55%, is considered very low. Deposits are growing faster than financing while some businesses, such as hire-purchase, were halted temporarily when Zukri first stepped in as MD five years ago. “I had to put the house, processes and systems in order. The HP business was restarted in September 2007.”

Going forward, the plan is to move the financing to deposit ratio to 70% over the next three years. “We have to set a realistic target with emphasis on credit quality,” he said.

Bank Islam achieved a return to equity (ROE) at 18% in the last financial year. “Internally, we want to maintain ROE at a minimum of 15% for the next three years,” said Zukri. “It will be a real challenge to maintain this in the current uncertain and competitive environment.”

Bank Islam is 51% controlled by BIMB, which in turn is controlled by Tabung Haji with 18.5% and 30.5% by Dubai Investment Group (DIG).

Despite earlier reports of a potential change in the ownership of the DIG stake, it was currently status quo, said Zukri. “We have started paying dividends which came up to 4.75% last year. This year, we paid an interim dividend of 2.63%.”

The bank achieved a profit before zakat and tax of RM503.4mil for the 18 months ended Dec 31, 2010, and RM240.9mil for the six months ended June 30, 2011.

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