Morgan Stanley initiates on regional Islamic banking stocks

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%.

The firm has initiated coverage of DIB with an 'overweight' rating with a target price of Dhs14.1, representing potential upside of 28%. Ms Elsheikh recommends investors remain underweight in KFH, with a KD3.10 price target.

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 $300bn 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.

'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 Ms 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 Ms Elsheikh.

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.

For further information about Morgan Stanley visit www.morganstanley.com

Morgan Stanley to offer Islamic bond

NEW YORK - Morgan Stanley plans to bring to market what it believes will be the first sale of an Islamic bond by a multinational corporation, a spokesman for the firm said Wednesday.

The bond sale is being coordinated by Morgan Stanley 's Dubai office. Hugh Fraser, a spokesman for Morgan Stanley in London, declined to identify the corporation.

The offering could take place this quarter and comes as multinational corporations are experiencing difficulties in U.S. corporate debt markets due to the ripple effects of the subprime crisis.

This has left corporate borrowers eager to find fresh sources of funds, particularly in the wealthy Persian Gulf states.

Islamic bonds are known as 'sukuk' and generally are structured as profit-sharing plans so that the bondholder's income resembles a rent payment. Islamic Sharia law forbids the use and payment of interest, and investment in businesses linked to alcohol and gambling.

The Islamic bond market was born just five years ago in Malaysia. It has thrived since then, spreading throughout Asia, the Middle East and Europe.

Encore, a Swiss asset management company, has estimated the size of the sukuk market at $50 billion in 2007. A somewhat parallel market for Islamic mortgages has sprung up in the U.K. and elsewhere in Europe.

HSBC Holdings PLC has been among the most active underwriters of sukuk. The bank's HSBC Amanan Islamic finance division has brought bonds to market on behalf of the governments of Pakistan, Malaysia and Qatar.

The newness and rapid expansion of the market has raised some concerns as its institutions and structures are largely untested, however. To date there have been few publicized defaults and it is not known how the Islamic bond market would cope if a large number of issuers failed to make their payments.