Asiamoney Islamic Finance Awards, 2015

Asiamoney, April 2015 

Best Bank in Asia: CIMB

CIMB remains the bank that has made the most successful attempt to take a strong Malaysian template for Islamic finance and to turn it into a regional, even global, business.

One gets a clearest sense of this from a look at the bank’s deal flow. Yes, the standout number is that CIMB was on 28.2% of all Malaysian ringgit sukuk between February 2014 and 2015, but perhaps the more significant number is that it was also on 14.7% of all global sukuk, worth US$6.5 billion. Where it handled 100 Malaysian sukuk issues, it was on 110 global ones.

So, when we look at the outstanding CIMB-led deals of the last 12 months, alongside the local landmarks for Malaysian Airports or Meximbank or Khazanah we see CIMB central to some truly significant global deals. When the government of Hong Kong launched the first sovereign sukuk not only from Hong Kong but from East Asia – the first, also, from a AAA sovereign, and at the tightest spread of any sovereign issue from Asia Pacific – CIMB was the only Asian name among the bookrunners. When Indonesia launched a US$1.5 billion sukuk, in a deal which not only attracted more than US$10 billion of demand from 390 investors worldwide but did so using a whole new structure for an Asian sovereign sukuk, the wakala method, CIMB was once again the only Asian name. Likewise the UK’s landmark £200 million sukuk, Turkey’s launch of US$1 billion of 10-year lease certificates, and the Islamic syndicated facilities around the Battersea property financing in the UK, a complex multi-jurisdiction deal that plays to the strengths of those businesses with regional rather than local expertise.

CIMB Islamic has followed the parent bank’s lead in seeking to become an Asean, rather than just a Malaysian, universal bank. Progress towards that objective is mixed – naturally so, since demand for Islamic services obviously varies between Asean markets – but it offers across-the-board Islamic services in any local market that requires them, taking advantage of the foundation formed by CIMB Group’s 40,000 staff across 18 countries.

Most obviously, the target outside Malaysia has been Indonesia, a place of potentially very easy gains for a bank with Malaysia-honed Islamic expertise wanting to target a far bigger, and underdeveloped, market. CIMB Niaga has its challenges, but its Islamic arm, CIMB Niaga Syariah, is already the sixth largest Islamic bank in the country and the 8^th by financing and profitability. It offers the usual banking products and services, investment banking, corporate finance advisory, research and asset management under Shariah-compliant methods in Indonesia, and has gone beyond Jakarta into Surabaya and Bandung. Among other things it has one of the most sophisticated digital offerings in Islamic finance in Indonesia.

CIMB Islamic offers treasury products and services, debt capital markets, commercial, corporate and consumer banking in Singapore, and has become instrumental to Singapore’s fledgling sukuk market, on one occasion boasting an almost 80% share of that market in 2013. Again, it has brought digital nouse to regional Islamic banking here, and was the first in Singapore to offer Zakat payments through internet banking. Elsewhere, CIMB is waiting to take advantage of the platforms being put in place to broaden the Islamic finance industry in Brunei, and supports Muslim clients in Thailand through its significant CIMB Thai business. CIMB can claim to have been involved in advising governments on the formation of Islamic finance frameworks for their domestic capital markets in Indonesia, Thailand, Singapore, South Korea, Hong Kong and the UK.

But perhaps CIMB stands out more among its Malaysian peers in having been early to see opportunity in the Middle East, and to consider that part of a regional strategy. Unlike many who have ventured to the Gulf through Dubai, CIMB opted for Bahrain when it set up back in 2006, which has long been a hub for Islamic finance, hosting the standard-setting body AAOIFI, for example. CIMB’s presence there has helped on distribution and advisory business ever since.

There’s no reason to think CIMB’s regional progress won’t grow faster than its Malaysia business now, partly because of the sense that Malaysia is fully banked, but particularly because CIMB has the right foundations to benefit from two key trends: the further use of Islamic finance in underdeveloped jurisdictions like Indonesia, and the increasingly cross-border nature of Islamic transactions.

Best bank in Malaysia: CIMB

Deciding on the best Malaysian business is tougher than deciding on the best regional one, because many Malaysian banks have built extremely strong businesses in this area, with particular specialisms. Maybank won last year, in recognition of the considerable progress that bank had made across the board; Public Bank is still a leader on the asset management side; and AmIslamic is increasingly capable with a diversified business.

But if our starting point is the capital markets, it becomes difficult to go past CIMB for this award. Its dominance of Malaysia’s sukuk market – the most developed, sophisticated and liquid in the world – has always been, and remains, remarkable: 28.2% of all deals during our review period, worth RM15.6 billion, across 100 different issues.

But with CIMB it’s always been about more than the numbers. Under CIMB Islamic CEO Badlisyah Abdul Ghabi, the bank has always been at the forefront of innovation, not just in terms of its own product development but in assisting in the development of state institutions, exchanges, education and best practice. One might think there’s not much more that can be done in Malaysia that’s new, but still the landmarks keep arriving.

In Malaysia over the last 12 months, for example, a classic example would be Malaysia Airports Holdings’ inaugural sukuk, raising RM1 billion in the world’s first ever rated perpetual sukuk, and Malaysia’s largest ever corporate perpetual sukuk.  Another would be Khazanah’s US$500 million exchangeable into Tenaga Nastional (TNB), the electric utility company; Khazanah’s sixth exchangeable, this was as eye-catching and successful as the others, pricing at a negative yield and showing structural innovation. A third would be the US$1 billion-equivalent multi-currency sukuk from Export-Import Bank of Malaysia (Mexim), the first dollar sukuk issuce from an EXIM bank, and only the second sukuk from an Eximbank globally. It sold to 185 Islamic accounts worldwide.

Or we could look at the distinctive sukuk from the KLCC REIT, or the commercial paper and Islamic MTN programme from Suria KLCC, or the inaugural perpetual subordinated sukuk from DRB-Hicom, or the first sukuk for the Malaysian arm of Bank of Tokyo-Mitsubishi UFJ, the first sukuk from a Japanese commercial bank issued out of Malaysia, or plenty else besides: CIMB was on all of them, bringing innovation and advisory expertise alongside the usual bookrunner heft.

Still, where it was once true to say that CIMB was an investment bank with some other bits bolted on, that hasn’t been the case for some time now. Even though the mega-merger failed – and part of its rationale had been to build a powerful Islamic bank – CIMB Islamic is still a considerable force, across consumer banking, asset management, takaful and private banking. CIMB Islamic serves over eight million customers in Malaysia, a considerable level of penetration in a country of around 30 million people of whom perhaps 18 million are Muslim.

We have argued before that its structured products group perhaps pushes the innovation envelope a little further than is necessary for retail investors. It has launched over 1,400 products with a notional of around RM20 billion, holding 27.7% of the structured product market for 70,000 retail and 70 corporate and institutional clients, all of which is very impressive, but when we read of the Five-Year Funding Arbitrage Callable Flippable Islamic Power Range Accrual INI (“with added features”), we do wonder just how many people understand it. Nevertheless, it’s a market CIMB has cornered with sustained popularity.

Closer to the mainstream, CIMB has a wide range of well-used offers from current and savings accounts to term deposits, credit cards, property financing, enterprise banking and remittance products. Merger or no merger, it’s still a leader.

Indonesia

Bank Syariah Mandiri

If the planned three-way merger between the Islamic units of Bank Mandiri, Bank Rakyat Indonesia and Bank Negara Indonesia goes ahead, then this award is going to be a predictable process for the next decade at least. It would combine the asset base and relative sophistication of Mandiri with the microlending capacity of Rakyat – likely to be one of the key engines of growth in Islamic finance in Indonesia. But, for the moment, the constituents must be considered separately.

Rakyat’s microlending strength is well worth a look: at the end of 2014, micro loans made up 31.3% of the bank’s loan book, and it is expected that the capacity to lend small amounts to consumers and start-up small businesses will be one of the most productive roles Islamic finance can play in Indonesia, the most populous of all Muslim countries. But Mandiri leads the field on most metrics and retains the title of best Islamic bank in Indonesia.

Mandiri’s Shariah arm was launched as a distinct legal entity in 1999, and from a low base has never looked back. Its assets have grown by an average compound annual growth rate of 39.92% ever since up to the end of 2014, with financing growing by 43.41% per year over the same period. In a market with a lot of players – 12 Islamic banks plus 22 further Islamic banking units – Mandiri has a surprisingly high market share, 24.58% in asset terms and 24.65% in financing.

Still, it tells you something about the modest level of Islamic banking penetration in Indonesia that such a large Islamic bank still only ranks 18^th in the country in terms of banking assets overall. It will climb that ranking, for sure, since clearly nobody in the conventional world is consistently growing at 40% per year, but Islamic finance remains a story of potential rather than realised gains.

While the priority for Islamic banking in Indonesia has to be greater awareness and penetration of basic services among the community, Mandiri has also sought to be innovative, and one sees this most clearly in its use of IT. In 2014 BSM launched a mobile banking multiplatform to run on smart phones, and an e-money card that links an Islamic account with toll roads, Busway tickets, parking and shopping. It has also built specialist new products, such as Tabungan Mabrur Junior, a hajj saving account for children under the age of 17 who do not hold ID like a driving licence. Apart from bringing banking services to a younger generation, the idea of the account is also to encourage young people to understand the costs of hajj and the requirement for long-term financial planning.

Like its parent, Bank Syariah Mandiri has bookrunner and syndication capability, and one would expect this to be an increasing source of growth in future as Indonesia’s domestic sukuk markets follow the sovereign’s lead and begin to develop.

Pakistan

Meezan Bank

Meezan Bank was already the clear leader in Islamic finance in Pakistan even before it acquired the local operations of HSBC last year. In November, Meezan’s CEO, Irfan Siddiqui, said Meezan gained accounts with 75 multinational customers through the purchase, and was in the process of switching them to financial products that comply with Shariah law.

The HSBC purchase fits in with a pattern of rapid expansion that has been achieved without putting pressure on the bank’s indicators. On September 30 2014 the bank had 373 branches; by the end of 2014 it had 428; it’s aiming for 550 by the end of this year. Yet even with that capital expenditure, the bank’s financials are growing too. Net profit in 2014 was up 15% year on year, and earnings per share the same; bank deposits were up 31%, to Rp380 billion, with the financing portfolio growing 38% to Rs176 billion. Alongside the expansion it logged a total of 27.5% cash dividends for the year.

Where it can’t grow organically, it is looking to partnership. Earlier this year it announced a tie-up with Pak Kuwait Takaful Co, one of the biggest Islamic insurance institutions in Pakistan, to join forces on household financing. For branchless banking, it has partnered with ufone, and for mobile financial services, with Inov8, which will build smart phone services and social media integration.

Brunei:

Brunei Islam Brunei Darussalam (BIBD)

There is, for the moment, no significant domestic competitor to BIBD as an Islamic bank in Brunei. It is the country’s flagship Islamic bank, formed a decade ago by a merger of the two previous leaders, and part owned by the Ministry of Finance and the Sultan Haji Hassanal Bolkiah Foundation.

One doesn’t need to be huge to lead Brunei Darussalam’s Islamic finance industry, nor particularly quick – the latest published full-year data are for year-end 2013. At that point, total group assets were over B$6 billion, net profit was B$114 million, and the bank has comprehensive coverage of its constituency by virtue of having just 15 branches and 700 staff. It’s healthy – total capital adequacy stands at 24.3% – and underwent a branding and service overhaul in 2013.

There are occasional promises to build an Islamic financial centre in Brunei, and whether or not that comes to anything, BIBD has been able to involve itself at the co-lead level in some of the world’s Islamic capital markets issues. It was on Al Hilal’s benchmark US$500 million sukuk, for example, and was a joint lead on a Singapore deal, an S$150 million Islamic Trust Certificate issue from Swiber Capital. It is, it notes, the only Bruneian bank to have won international mandates.

DEALS

A look at the deals that took place in Asia over the last year reveals that innovation is alive and well in Islamic finance, even in an industry that appears increasingly commoditized. Transactions in Asia showed new structures, new currencies and new underlying assets.

The headlines went to sovereign sukuks, most obviously Hong Kong. On September 18, the government of Hong Kong SAR launched a US$1 billion 144a/Reg S five-year sukuk. Keenly awaited, the sukuk followed the legislative changes made in Hong Kong in July 2013 which created a level taxation framework between conventional bonds and sukuk, seen as a vital starting point for any Islamic capital market.  The deal, the first ever by a AAA government and the first from East Asia, was not really about the money – Hong Kong has plenty of ways it can raise sovereign debt – but, just like the UK’s debut issue, to make a point. It sent a message that Hong Kong is serious about becoming a marketplace for Islamic finance, and it created a benchmark for others to price against. And quite a benchmark: at 23 basis points over five-year Treasuries says it was the tightest spread ever achieved on a benchmark dollar bond from an Asian ex-Japan government. Notably, less than half the deal went to Asia, as global demand created a US$4.5 billion order book.

While Pakistan was not a debut issuer when it launched its US$1 billion sukuk in November, it was the first sukuk from the country since 2005, and a difficult sell given its economic and political challenges. After attracting US$2.3 billion in demand, the deal was doubled in size from a planned US$500 million, and priced 50 basis points inside its conventional curve. Again, it’s interesting to see where a bond like this goes: not to Asia, which took just 6% of the paper, but mainly the Middle East (53%) and the UK (24%). Even US investors, whose relationship with Pakistan can be fractious, bought 12% of the deal.

Indonesia’s US$1.5 billion 10-year global sovereign sukuk, launched a week before Hong Kong’s, was not the first from Indonesia, but it did have significance. For a start, it created the largest order book ever from an Asian sukuk, at US$10.2 billion; it was also the first single-tranche 10-year sukuk from an Asian sovereign. But its lasting impact is likely to be a more subtle point: the fact that it used a new structure for a sovereign sukuk, wakala, rather than the usual methods of ijara assets and murabaha receivables. This allowed Indonesia to underpin the sukuk with government-owned properties leased to the Republic, and project assets, including assets under development.

As always, Malaysia was the home of the greatest innovation, in the sukuk markets and elsewhere. Khazanah, the state asset holding company, has been a regular fixture with exchangeable sukuks into its various underlying holdings, and in September (September was quite a month in the Asian sukuk market) it launched its latest one, a seven-year put four US$500 million exchangeable into Tenaga Nasional. Again, there was structural ingenuity here; this was the first such structure to be based on Mudarabah and Murabahah, and was also the first such instrument to price at a negative yield. Only 20% of it sold into Asia, with 80% going to European investors, giving a further example of how the marketing of Islamic transactions has evolved over time.

The inaugural sukuk from Export-Import Bank of Malaysia (MEXIM), a US$1 billion multi-currency programme, was a landmark of sorts, only the second Eximbank sukuk globally and the first in dollars. Like the Indonesia deal, this one used the wakala model, underpinned by leasable assets, shariah-compliant shares and a murabahah receivables component based on commodities; the proceeds will fund MEXIM’s Islamic banking business. Perhaps more significant still was Malaysia Airports Holdings’ RM1 billion perpetual sukuk due 2024, a 10-year perpetual non-call deal launched in December. It was the first rated deal of its type anywhere in the world, a rating that came about by structuring the deal to achieve a 50% equity credit from the rating agencies. “The transaction is a testimony to the increasing depth and maturity of the Malaysian fixed income markets, where investors are beginning to be more receptive towards structured finance transactions,” says CIMB, noting the appeal of yield pickup and credit protection.

A couple of weeks after Malaysian Airports came a similar deal, a perpetual subordinated sukuk Musharakah from DRB-Hicom, rated single A. “Particularly interesting was investors’ positive response to single-A rated subordinated perpetual papers, a rating category where many investors have investment restrictions even in senior papers, let alone in subordinated perpetual securities,” notes CIMB. This one raised RM715 million through two perpetual tranches, one a non-call five, one non-call seven.

Bank capital always spurs innovation, and a RM3 billion subordinated sukuk murabahah programme for AmIslamic Bank in February 2014 brought Malaysia’s first Basel III-compliant subordinated sukuk. It proved to be an influential deal: in the following months Maybank Islamic Bank, RHB Islamic Bank, Public Islamic Bank, Hong Leong Islamic Bank and Bank Islam all followed with similar deals.

One of Malaysia’s singular achievements is making itself a hub not only for sukuk in ringgit but for other currencies too, and this was clearly illustrated in yet another September deal, a US$500 million multi-currency sukuk wakalah programme from Bank of Tokyo-Mitsubishi UFJ (Malaysia), which included a yen tranche, the first ever yen-denominated sukuk in the global market. Another significant deal was a RM3 billion IMTN and ICP programme for a REIT, KLCC; and the Sabah Credit Corporation brought a distinctive musharakah structure when it launched a RM750 million ICP and RM1.5 billion IMTN programme.