GIH: Asset quality erosion to take its toll on SIB

The main challenge facing Sharjah Islamic Bank (SIB) is the arising from asset quality erosion, which is forecast to take its toll on its bottomline for the years 2009 and 2010, says a Middle Eest equity research outfit.
Provisions from non-performing loans (NPLs) and from impairments in equity and property investments will remain on the heavier side in 2009, according to a research note from Global Investment House (GIH).
"Attributable purely to the magnitude of provisions, we forecast a further drop in the profitability of the bank in 2009. Significant peaks in bottomline growth may be visible in 2010 and 2011 on account of a healthy trajectory of the top-line coupled with noteworthy reduction in the size of the impairments," it said.
Entitled Value despite the odds, the report noted that SIB is operating in the United Arab Emirates (UAE) where operating conditions have seen a major shake-up.
"Severe liquidity crunch, plummeting equity markets, eroding property valuations, rising non-performing loans (NPLs) and that too amidst low oil prices coupled with production cuts are problems that will brutally undermine the asset growth trajectory of the banks in the UAE," it said.
On its profitability, SIB posted a net profit of AED231.6 million (RM226.53 million) in 2008, exhibiting a drop of 23% y-o-y in the bank’s bottom-line, adding that the bank’s profitability growth dipped for the first time in the last six years after a stupendous 40% profitability CAGR for the 2002–2007 period.
"Despite a robust growth in the top-line, the net profit was bogged down due to severe provisioning against non-performing loans and impairments in investments. We believe that further decline in profitability may be witnessed in 2009 owing to persistence of high provisioning eroding and completely offsetting a robust increase in net commission income.
"However, earnings growth is expected to rebound strongly in the years following as a consequence of strong top-line improvement, supplemented by a modest rise in other sources of income and relatively lower provisioning requirements," it said.
SIB also faced impairments in investments to the tune of AED79 million during 2008, on account of its property and AFS (most probably equity) investments.
As an outcome of the fall in the stock markets in the last quarter of 2008, the bank’s AFS portfolio deteriorated significantly leading to the revaluation reserve falling AED36 million and an additional AED67 million being charged off the income accounts in impairments (prolonged and significant, as per our understanding).
The total value shrinkage amounted to approximately 17% of the value the investments as of December 2008. The bank, however, seems to have escaped the fall in the property prices in 2008, and charged only AED12 million in impairments during the year.
GIH believes that the bank is yet to face the full brunt of the decline in loans quality, and the plummeting property and equity markets.
It feels it is prudent to provide heavy provisioning throughout the forecast period with the most painful pinch coming in 2009 with both the NPLs ratio and the coverage ratio increasing dramatically.

(This story appeared in The Malaysian Reserve on Apr 13, 2009, in the ISLAMIC COUNTERS, a column that looks at the performance and activities of Islamic financial institutions abroad. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)