Morgan Stanley initiates coverage on Islamic banking stocks

INTERNATIONAL. Morgan Stanley has initiated coverage on Dubai Islamic Bank (DIB) and Kuwait Finance House (KFH) in a report that forecasts that Islamic assets in the GCC will grow to 18% of system assets by 2012 from its current 13%.

In the firm’s report ''MENA Islamic Banks – Structural Growth Story', Marwa A Elsheikh, an analyst at Morgan Stanley, estimates that the GCC’s 22 Islamic banks have in excess of US$300 billion of Sharia-compliant assets. The report predicts continued strong growth would be driven by a robust outlook for the region and an increasing share of system assets.

The firm has initiated coverage of DIB with an ‘overweight’ rating with a target price of AED 14.1, representing potential upside of 28%. Elsheikh recommends investors remain underweight in KFH, with a KWD 3.10 price target.

“There are a number of reasons why the sector is growing, and will continue to grow, strongly. A buoyant macro economic backdrop and increased infrastructure spending, and continued diversification from oil economies are driving the banking sector generally,” said Elsheikh.

“In terms of factors behind the growth in Islamic finance, a greater focus on Islamic identity, Government backing for the development and promotion of Islamic banking, low penetration, Competition among conventional banks makes Islamic banking more attractive and more favourable industry dynamics are all likely to fuel the growth.”

The report suggests that, while the outlook for the sector remains strong, there are a number of potential hurdles to growth. Most Islamic banks lack scale, products are complex, there is no single regulatory body, there are operational limitations, such as not being allowed to hedge, and there is often less transparency and financial disclosure than conventional banks.

“However, despite these potential setbacks, the underlying growth drivers will more than offset these structural impediments,” said Elsheikh.

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