What Can Islamic Bank Do to Boost Its Profitability?

What Can Islamic Bank Do to Boost Its Profitability_

To drive the stock price of Islamic banks, the bank needs to boost its profitability. This is because the stock price of a company often reflects its performance. It is pretty challenging to view the actual value of the stock of Islamic banks. This is because the financial transaction is always moving forward. Frequently, investors’ expectation plays a significant role in driving the stock price. If they view a particular Islamic bank’s future value as promising, the stock price can be overvalued.

Given this fact, observation based on data will be the proper variable to value the actual price of Islamic banks. Below, we discuss critical indicators for profitability in Islamic banks and what can they do to increase the stock price.

1) Decrease Cost to Income Ratio as possible

The ratio indicates the bank’s efficiency in managing its operating expenses to generate the operating revenue. In nature, the lower the bank can pressure the ratio, the more efficient the bank expenses and hence the more net income after subtracting operational cost the bank can generate.

This indicator also includes how much an Islamic bank utilizes the current account and saving account (CASA). CASA reflects a cheap source of funds that the Bank can obtain since it pays lower interest or, even free compared to term or time deposit funds; hence the profitability of the bank increases. The higher the CASA ratio is held, the higher the profitability of the Bank can increase. This is because the Bank pays less interest or margin (in Islamic banks) to their depositors as its sources of funds.

2) Obtain higher ROE and ROA as possible

Return on equity (ROE) indicates how far the company could achieve its profitability over the owned equity capital along with its establishment. The good ROE for the banking sector stands around 10% to 15%. Meanwhile, return on assets (ROA) has become a primary indicator of bank profitability since it accurately reflects the size of the Bank in terms of asset holdings. The ROA demonstrates the profit gained by each dollar invested in an asset. Additionally, it gives bank shareholders greater visibility into the efficiency of the asset allocation to generate profit. The good number of ROA for banks is around 2% to 5%.


For investors and shareholders, It also determines the real indicator for the stock value of the bank. If these key indicators are not in line with the stock price of Islamic banks, it indicates that price is driven solely by investors’ expectations rather than the bank’s performance. For example, we examine the ROE and ROA of 3 Islamic banks in Indonesia relative to their year-on-year price movement in 2021. They are PT. Bank BTPN Syariah, Tbk. (IDX: BTPS), PT. Bank Syariah Indonesia, Tbk. (IDX: BRIS), and PT. Bank Aladin Syariah, Tbk. (IDX: BANK). You can also refer to our article discussing PBV and PER of these banks in other articles here.

BTPS’s price moved around Rp3,450 in 12 months. It has a ROA of 8.21% and an ROE of 20.89%. Even though its book value is only Rp917.28, investors are willing to purchase the stock at a premium due to its high performance. Meanwhile, BRIS’s price has declined in 12 months from Rp2,290 to Rp1,495. In the beginning, investors expected that this Islamic bank could grow consistently within one year, but the truth tells the opposite. Its ROA did not exceed even 1.5%, and ROE was only 12.1% maximum. As a result, the stock price begins to drop approaching its book value at Rp606.

On the other hand, BANK has a very low ROA, around 0.10% and even -8% and its ROE about 0.60% to -72%. However, the stock price is still at a premium because investors expect this Islamic bank can grow further by its nature as a digital bank.

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