* HSBC announces reduction in some Islamic operations
* But pull-back is minor, does not include wholesale
* Bank's own priorities, not industry weakness responsible
* Gulf institutions still planning for expansion
* Some HSBC clients may move to conventional side
By Bernardo Vizcaino
SYDNEY, Oct 18 Four days after HSBC Holdings
said it would shrink its global Islamic banking operations,
National Bank of Abu Dhabi revealed very different plans: it
aims to triple the contribution of its sharia-compliant
operations over the next eight years.
The contrast suggests that rather than being a sign of
weakness in the Islamic finance sector, HSBC's decision
reflected its own business priorities - and to the extent that
the British bank pulls back from the industry, local banks will
gain an opportunity to expand.
HSBC announced early this month that except for
wholesale banking operations, it would no longer offer Islamic
products in Britain, the United Arab Emirates, Bahrain,
Bangladesh, Singapore and Mauritius.
It said it would focus its Islamic finance business on
customers in Malaysia and Saudi Arabia, while keeping a limited
presence in Indonesia.
Through its HSBC Amanah arm, headquartered in the UAE, HSBC
was a pioneer in the industry and it operated the largest
Islamic business of any Western bank, so the news sent ripples
through the sector.
Some analysts speculated the decision reflected doubts about
the long-term profitability of Islamic banking - perhaps
dissatisfaction with costs that can be higher than conventional
banking in some areas. Frequent asset transfers can attract
repeated taxation, while buying the expertise to structure
complex sharia-compliant transactions is expensive.
The details of HSBC's announcement, however, suggest the
bank will not come close to pulling out of Islamic finance, and
may even continue growing in some parts of the industry. The
bank estimated it would keep about 83 percent of its Islamic
business revenue after the move.
HSBC also stressed it would keep its wholesale Islamic
banking operations, which are believed to be more profitable
than retail and include its business of arranging issues in the
Gulf's booming sukuk market, where it is a leader.
"The impact on the competitive landscape and the Islamic
banking market as a whole will be minimal, as the closures
affect only relatively small Islamic banking markets or
countries where HSBC's retail banking presence is limited," said
Alexander von Pock, principal at consultancy A.T. Kearney.
Faced with financial pressures in struggling European and
U.S. markets, and increased regulatory demands as Basel III
global banking standards start to take effect, HSBC and other
Western banks are being forced to prune their operations in both
Islamic and conventional finance.
An HSBC spokesman said the decision on HSBC Amanah followed
a global strategic review, announced in May last year, which
judged businesses on their compatibility with global strategy
and the need to allocate capital efficiently.
"In conventional banks, an Islamic window is non-core
business, and hence banks may be exiting to refocus on core
business," said John Chang, head of retail banking at
Dubai-based Noor Islamic Bank.
In fact, HSBC moved to scale back its Islamic business more
slowly than it pruned its conventional operations; it has
already divested assets in over 26 countries, including the
United States, South Korea and Pakistan.
In the case of the Islamic operations, the decision was
protracted, said a former HSBC Amanah director, who declined to
be named because he was not authorised to speak to media.
Internally, the unit was able to argue that it was
profitable but its weakness was that it lacked scale compared to
HSBC's huge conventional operations, the director said. "The
retail business is profitable, but it is a very tiny business."
HSBC's pull-out from Islamic retail banking operations in
the UAE, the Arab world's second biggest economy, is expected to
put the biggest dent in its growth. But bankers and analysts
said it made sense given regulation and funding trends faced by
"The retreat is more in retail banking, where especially in
the UAE, international banks are only allowed to operate eight
branches, which gives them no competitive edge with domestic
banks who on average operate 40-50 plus branches," Moinuddin
Malim, chief executive of Dubai institution Mashreq Al Islami
, told Reuters.
Before the global financial crisis erupted in 2008, Western
banks could expect to enjoy two advantages when competing with
local banks in the Gulf: cheaper costs of funding, and better
access to overseas financial markets.
Both these advantages have now faded, said Sohail Shafiq,
vice president at Bank Sarasin-Alpen in Dubai. "The costs of the
foreign banks have risen due to downgrades, and the returns on
foreign assets have lost their glitter."
Days after HSBC's announcement, Michael Tomalin, chief
executive of National Bank of Abu Dhabi, the
second-largest bank in the UAE by assets, said his bank would
boost its Islamic operations partly by introducing
sharia-compliant services in Egypt, Oman and Malaysia.
NBAD aims to derive up to 10 percent of its operating income
from Islamic banking by 2020, up from 3 percent currently, he
said at the launch of the bank's Malaysian subsidiary.
Other Gulf institutions also plan to grow in the sector.
Dubai-based investment bank Shuaa Capital is seeking
to increase its share of sharia-compliant business through the
Islamic window of its credit division, a company spokesman said.
Chang said it would be premature to expect any trend for
Western banks to pull back in Islamic finance.
"It is too early to make any snap judgments. HSBC, RBS, BNP
and Deutsche Bank have created separate desks to cater to
Islamic structuring, and this speaks for itself," he said.
But to the extent that the Western institutions do scale
back, Gulf banks will eager to take their place, said Shafiq.
"There is a very good chance that if they provide the
sophistication and the suite of products currently put together
by foreign banks, they could gain a major chunk of the
HSBC did not detail how it would handle clients in the six
countries where it will cut Islamic business, or give a monetary
value for the size of the business.
"We will ensure that we maintain account services for
existing customers, with appropriate sharia oversight, as they
transition to alternative arrangements," the bank said.
The experience of Qatar suggests some of HSBC Amanah's
customers in affected countries may not leave HSBC but instead
move to the conventional side of the bank, limiting the windfall
for other banks.
After Qatar last year banned conventional banks from
offering Islamic services, the flow of deposits to Islamic banks
was smaller than expected; many depositors stayed loyal to their
institutions. By some estimates, 60-70 percent of bank customers
base their choice of bank primarily on pricing and service
quality rather than religious permissibility.