When people compare Islamic banks with traditional ones, they often run the risk of "comparing apples and oranges". (Note: The comparison of apples and oranges occurs when two projects or project groups are compared that cannot actually be compared. This idiom, comparing apples and oranges, refers to a distinct difference between objects that are generally considered incomparable or incomparable, such as apples and oranges. The idiom can also be used when a false analogy is drawn between two items, as in the case of an apple being accused of not being a good orange.

The reason is that banks can be different in many ways, apart from whether they are Islamic or traditional banks. Such as:

Do they operate in the same country?

What is their management culture like?

How do they compare in size?

Do they have fundamentally different operating models or business goals?

I often stress that Islamic banks are banks. Comply with the requirements of its Sharia Law Supervisory Board to make the bank an Islamic bank.

I compared two Malaysian banks owned by CIMB Group Holdings Berhad (" CIMB Group "). Given co-ownership, both should have the same management culture and deliver similar financial results in addition to their size. The following figures are from the accounts for the year ended 31 December 2018.

CIMB Bank Berhad (" CIMB Bank ") is a traditional Bank. The combined assets of CIMB Bank amounted to 451.9 billion yuan, accounting for 85% of the consolidated assets of CIMB Group of 534.1 billion yuan.

This traditional bank, CIMB Bank, also owns an Islamic bank, CIMB Islamic Bank Limited (" CIMB Islamic Bank "). CIMB Islam is much smaller, about a quarter the size of its traditional parent, with combined assets of just 103.7 billion yuan.

Apart from owning CIMB Islamic Bank, CIMB also carries out some of its own Islamic banking business. These Islamic businesses are small, with revenues of just Rmb149m that year on CIMB's Rmb8.1bn net income before administrative fees.

I expect CIMB Bank to be more profitable than CIMB Islamic Bank due to economies of scale. The raw numbers I calculated surprised me.

CIMB's net profit after tax was Rmb2.8bn in 2018. As of December 31, 2018, the equity of common shareholders was 33.4 billion yuan, with an apparent ending ROE of only 8.38%.

However, this ignores the fact that CNY6.5 billion of CIMB's equity is financing CIMB Islamic Bank's equity investment. Reducing the equity to RMB 33.4-6.5 = 26.9 billion yuan (equity to finance the banking business) would significantly increase the ending ROE by 10.4%.

CIMB's net profit after tax in 2018 was 800 million yuan. Its common Stockholders' equity at December 31, 2018 was RMB5.3 billion and its return on equity was 15.1%.

This surprised me. I thought it would be less profitable than CIMB Bank. The reason is its balance sheet.

CIMB's own balance sheet (non-consolidated balance sheet) shows total assets at Rmb321.9bn. Logically, we should cancel our $6.5 billion investment in CIMB shares, leaving $315.4 billion in bank assets. Comparing them with the 26.9 billion yuan of reduced bank equity calculated above yields an underlying (non-risk-weighted) leverage ratio of 315.4/26.9 = 11.7.

In contrast, CIMB's Islamic balance sheet has total assets of 103.7 billion yuan. The equity of common shareholders was 5.3 billion yuan, and the basic leverage ratio was 19.57. In today's regulatory environment, that number is surprisingly high.

I haven't yet investigated how it was allowed to operate with so much leverage, but its parent company may have hinted at a commitment to support it and no inter-company fees.

To obtain the same basic leverage ratio as CIMB calculated at 11.7, CIMB would need an additional $3.6 billion of equity since 103.7 / (5.3+3.6) = 11.7.

With this additional equity, Cimb Islam's return on equity will fall to 0.8 / (5.3+3.6) = 9.0%. Given the size difference between the two banks, this looks more reasonable compared to CIMB's adjusted figure of 10.4%.

Given that even 11 years after the global financial crisis, the business environment for banks remains challenging and interest rates are relatively low by historical standards, both sets of results look credible.