November 28, 2023 (MLN): Meezan Bank Limited (PSX: MEBL) holds immense potential to mitigate the negative impact of the imposition of a Minimum Deposit Rate (MDR) on Islamic banks, thereby limiting the long-term return on equity (ROE) impact from the worst-case scenario.
As per a research report by Brokerage House JS Global Capital Limited, two key moving parts in this setup: the Shariah-conscious market segment that MEBL currently caters to, as evident from its expanding mix of zero-cost deposits in the pie over the years.
Additionally, the growth potential of MEBL's deposits would unlock when offering similar deposit returns as peers, attracting the other side of the market segment with a 5-year CAGR in savings deposits of 20% despite offering lower rates.
This would likely boost the volumetric growth of the bank’s deposit base from our base case assumption of 15% growth per annum, compared to 26% CAGR in the last five years, it added.
To note, Islamic banks, which were reaping substantial gains due to their exemption from a Minimum Deposit Rate (MDR) on savings accounts, have now come under the limelight following the recent remarks by the finance minister.
Finance Minister Dr. Shamshad Akhtar, in a conversation with a TV host, suggested that the State Bank of Pakistan (SBP) should reevaluate the issue of MDR on Islamic banks.
Under SBP regulation, MDR is mandatory on conventional banks at 150bps below the Policy Rate.
This means that it currently stands at 20.5% given the current policy rate of 22%.
As per JS Global's report, Islamic banks are currently offering savings rates at 7-9.5% lower than conventional banks’ MDR.
Moreover, the recent sharp rise in interest rates has widened the said spread, which used to range between 300bp – 500bp previously, it highlighted.
This means any regulation of a similar MDR on the Islamic Banking industry on a standalone basis could have a significant negative impact on their prospective ROE.
In light of renewed discussions regarding the potential imposition of MDR on Islamic Banks, brokerage house Arif Habib Limited conducted a sensitivity analysis to assess the prospective impact of an increase in the cost of savings deposits (in case of imposition of MDR) on the bottom-line of Islamic Banks.
The report covered Meezan Bank Limited (PSX: MEBL), Faysal Bank Limited (PSX: FABL), and BankIslami Pakistan Limited (PSX: BIPL).
The results derived from the report indicate that a 1% change in the cost of savings deposits corresponds to a per-share impact of Rs2.27 for MEBL, Rs1.35 for FABL, and Rs0.53 for BIPL.
| Sensitivity of Increase in Cost of Savings Deposit on EPS | |||||
|---|---|---|---|---|---|
| Banks | CY24E EPS Base Case | Revised EPS in case of increase in CoD (Savings) by | |||
| 1% | 2% | 3% | 4% | ||
| MEBL | 48.1 | 45.8 | 43.5 | 41.3 | 39 |
| FABL | 12.5 | 11.2 | 9.8 | 8.5 | 7.2 |
Source: AHL Research
To note, the proportion of savings to total deposits stands at 40% for MEBL, 42% for FABL, and 25% for BIPL, as at September 2023, it added.
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Posted on: 2023-11-28T11:19:58+05:00
