As a foreign bank in Malaysia, Deutsche Bank is in the coveted position of owning an Islamic window license and an international Islamic banking license in one of the world’s largest Islamic financial markets.
However, just over a year since the launch of Deutsche Bank International Islamic Bank (DBIIB), the banking group’s Islamic operations appear to be floundering, with few deals completed.
With the departure of key personnel, a lack of Islamic finance expertise and limited dealflow, how much value has the Islamic business been able to add to the German banking group’s bottom line and is it an opportunity still worthwhile pursuing?
Lack of direction
Launched in March last year, DBIIB’s license allows it to provide foreign currency-denominated Islamic commercial and investment banking services to institutional clients, while the business of Deutsche Bank’s Islamic window, operated via Deutsche Bank (Malaysia), is centered around deposit-taking.
With Jamzidi Khalid, the CEO and head of Islamic structuring for Asia ex-Japan, leaving for BNP along with other colleagues also departing the bank, DBIIB has been left somewhat under manned.
It is also understood that Deutsche Bank’s Islamic structuring desk in Dubai suffered a similar fate, with a number of the team there having left for UBS.
According to an industry observer, the slow take-off of Deutsche Bank’s Islamic business is mainly due to a lack of awareness on Islamic finance from the bank’s top brass in Germany.
“There were no clear objectives set out to be carried out by the Islamic team,” said the source, who added that the departure of Deutsche Bank’s Islamic bankers has left the bank with little or no Islamic finance expertise to work with.
The lack of direction of the Islamic banking operations has resulted in the slow growth of the business, with total assets amounting to just RM45.03 million (US$14.76 million) as at the 30th June 2011 from RM54.5 million (US$17.86 million) at the end of December last year. In comparison, Deutsche Bank (Malaysia)’s total assets stood at RM13.69 billion (US$18.72 billion) in the second quarter of this year.
Even more unfortunate for the bank is that it has no financing assets on its books, with its asset base mainly made up of cash and short-term funds.
Limited value-add
In terms of profitability, Deutsche Bank’s Islamic banking operations have added little value to the German banking giant’s overall bottom line.
In the second quarter ended the 30th June 2011, income from Deutsche Bank (Malaysia)’s Islamic banking operations amounted to RM308,000 (US$100,920), compared to the Deutsche Bank group’s net income of EUR1.2 billion (US$1.64 billion),
Additionally, although Deutsche Bank’s Islamic operations are supposed to be centered in Malaysia, its Malaysian business has failed to capture any notable deals, while the work of other Deutsche Bank subsidiaries has propelled the banking group to the position of eighth-top manager of Sukuk in the last 12 months up to September, according to Dealogic data.
However, the data also shows that Deutsche Bank has only managed two Sukuk deals during the period, amounting to US$427 million, and lead arranged one Islamic loan worth US$150 million.
Deutsche Bank’s performance in Dealogic’s league tables also trails the likes of its competitors, Citigroup and Standard Chartered, which have managed six transactions worth US$1.31 billion and seven deals amounting to US$1.2 billion, respectively.
Of the global Sukuk managed by Deutsche Bank in the past 12 months, one comprised a US$1.25 billion Euro market public issue by the Islamic Development Bank (IDB), which it managed with Standard Chartered, HSBC, CIMB Group, Citigroup and BNP Paribas, while the other consisted of Saudi International Petrochemical’s (Sipchem) US$480 million issuance, which Deutsche Bank managed with Riyad Bank.
A further source suggested that Deutsche Bank’s capabilities in the IDB and Sipchem deals were likely provided by its conventional side, as co-managed deals do not require much Islamic finance expertise from the individual banks.
With the strength of its conventional business allowing the bank to undertake sizeable Islamic deals and with little headway made at DBIIB in Malaysia, is it only a matter of time before its Islamic arm is reconsidered?
Headed for the red?
With DBIIB completing few deals since its inception, it is speculated that the bank runs the risk of being red-carded by BNM.
“Clearly, there is an awareness that if DBIIB does not step up its business, the central bank could retract its license,” said a source.
Furthermore, its core capital ratio stood at 1,216.92% in the second quarter of this year. Against a capital base of RM26.11 million (US$8.56 million), this would suggest that the bank has not deployed its capital efficiently.
With Deutsche Bank’s Islamic banking operations lacking Islamic finance expertise and the division losing out on deals to its conventional counterpart, can the bank continue to justify operating a separate Shariah compliant division or is the business in danger of running aground?