Fitch revises outlook on Indonesia’s Bank Shahriah Muamalat

Fitch Ratings recently revised the outlook on PT Bank Shariah Muamalat's (Muamalat) national long term rating to negative from stable and affirmed the rating at 'A (idn)'. At the same time, Fitch has affirmed the rating of the bank's subordinated mudaraba bond at 'A (idn)'.
The outlook revision reflects the increase within the bank's non-performing financing (NPF) in the first quarter of the 2009 financial year (1Q09) and Fitch expects the challenging economic climate may also continue to affect the bank's asset quality and modest capital base.
The bank's NPF stood at 6.4% in 1Q09, up considerably from 4.3% in 2008 and 3% in 2007; this is higher than the 5.1% industry average for Islamic banks. According to the bank, the increase of its NPF was driven mainly by the deterioration in one large account.
Following a restructuring of the financing of that account, the bank expects the loan to be upgraded soon, provided the account continues to perform based on the restructured terms. Given the bank's relatively concentrated financing — its top 20 debtors account for 29% of loans and three times of equity — NPFs could increase significantly should some of these accounts turn non-performing.
However, Fitch understands that the bank has taken preventive measures, such as stepping up debtor monitoring and initiating early restructuring efforts.
The agency is also concerned about the decline within the bank's provision cover to 24% of NPF in 1Q09 from 34% and 88% in 2008 and 2007 respectively; these levels are much lower than the industry average of 104%.
While there is mitigation from its focus on secured lending, a higher provision buffer is preferred given the weak legal climate in Indonesia. The bank intends to increase its provision reserves to 300 billion Rupiah (RM101,915.30) in 2009.
Muamalat's capital ratios are at the lower end of the banking system average with a Tier 1 CAR of an 8.8% in 1Q09, although the total CAR increased to 12.1% underpinned by the issuance of 314 billion Rupiah subordinated mudaraba bonds in 2008. It is likely that the total CAR — which is expected to be 10% at end-2009 — will come under further pressure should the current economic uncertainties affect the bank's asset quality severely. Fitch also understands the bank is considering an equity issuance by early 2010 to strengthen its CAR.
Muamalat was established in 1991 as Indonesia's first Islamic bank. The bank is currently the secondlargest provider of Islamic finance in Indonesia with about 28% market share. Muamalat's largest shareholder is Saudi Arabia based Islamic Development Bank with 28.01% ownership at end-2008. — Source: Fitch Ratings

(This story appeared in The Malaysian Reserve on June 22, 2009. 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)