Despite its smaller size, Maybank's Islamic banking subsidiary was more profitable than Maybank's traditional bank.
In my column of August 7, 2019, I compared the performance of CIMB Bank and CIMB Islamic Bank in 2018. My expectation is that "given co-ownership, both should have the same management culture and achieve similar financial results in addition to being of different size." Since Cimb Islam is much smaller, I would expect its margins to be lower due to the lack of economies of scale.
To my surprise, I found that Cimb Islam was significantly more profitable. Its return on equity (after-tax profit and Zakat divided by shareholders' funds) (" ROE ") is 15.1%.
In contrast, CIMB's ROE was 10.4% after adjusting for its equity financing for the ownership of its Islamic subsidiary. (Before the adjustment, CIMB's ROE was just 8.4%.)
The key explanation is that CIMB has a much higher leverage ratio (total assets, unweighted risk, divided by shareholder funds). That's 19.57, which in today's regulatory environment strikes me as very high. CIMB, by contrast, has a much lower leverage ratio of 11.7.
A few months ago, I was asked about Malayan Bank, and my interlocutor expected a different calculation. I have now calculated these numbers, using the 2018 calendar results to keep them comparable to CIMB.
Malayan Bank (" MBB "), which claims to be Malaysia's largest financial services group, is the parent company of Malayan Banking Group, with consolidated assets of RMB 807 billion much higher than CIMB Group's consolidated assets of RMB 534 billion.
In addition to owning a number of subsidiaries, MBB is also engaged in traditional banking, and its financial statements disclose both group and traditional banking results.
The Islamic banking business of the Maybank Group is conducted through Maybank Islamic Bhd. (" MIB ") (in Malaysia) and PT Bank Maybank Syariah Indonesia. By comparing the total Islamic banking revenue shown in the MBB consolidated results with the MIB data, it can be seen that the majority of the MBB group's Islamic banking business is within the MIB.
The ROE for the MIB is 18.9%. (annual profit of 1.975 billion yuan, shareholders' equity of 10.477 billion yuan) is nearly 4 percentage points higher than CIMB's ROE in the same period, commendable.
However, MBB's ROE (after adjusting for equity used to fund subsidiary investments) was only 14.4 per cent. This is calculated by reducing MBB Bank's reported after-tax and after-tax profit of RMB7.3 billion by deducting RMB2.4 billion in dividends from the subsidiary, and also deducting RMB31.4 billion from the RMB65.6 billion in equity, representing equity financing for investment in the subsidiary.
Thirdly, the ROE of MBB's regular bank is significantly higher than that of CMB's 10.4%, but it is far behind that of MIB.
As with Cimb Islam, a key part of MIB's ability to be more profitable than its traditional parent can be found on the balance sheet.
With total assets of 225 billion yuan, the MIB has an unweighted leverage ratio of 21.5. (Even stripping out 23.5 billion yuan in client investment accounts, the unweighted leverage ratio is 19.2.) By contrast, the MBB leverage ratio, excluding investments in subsidiaries from the matched assets, is only 12.4, reducing shareholders' equity.
So while Malaybanking Group is more profitable than CIMB in both traditional and Islamic banking, we see the same pattern as CIMB.
Contrary to expectations, the Islamic banking unit was much more profitable than its traditional banking parent.
