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This article first appeared in The Edge Financial Daily, on November 17, 2015.

 

MBS_Table_fd_17nov15_theedgemarketsMalaysia Building Society Bhd
(Nov 16, RM1.61)
Upgrade to market perform with a higher target price (TP) of RM2.08:
The RM273.4 million net profit came in below expectations, accounting for 63%/56% of our/consensus estimates, dragged by further impairment losses. No dividend was declared, as expected.

Malaysia Building Society Bhd’s (MBSB) nine-month net profit ended Sept 30, 2015 (9MFY15) fell by 56%, dragged by higher allowances for impairment losses of RM431 million (9MFY14: RM26 million).  Overall 9MFY15 was dragged by a 18% fall in net interest income and a 30% decline in other operating income. Net interest margin (NIM) compressed by another 50 basis points while the cost-to-income ratio went up almost three percentage points to 23%. Loan and deposit growth was even at 3.7% and 3.5% respectively, resulting in a flattish loan-to-deposit ratio (LDR) at 114%.

Corporate loans/financing composed of 14% of total loans/financing (9MFY14: 11%) while personal financing fell by three percentage points to 69%. Credit costs went up by 170 basis points but the gross impaired loan ratio was up by only 10 basis points to 7%. Loan loss coverage was up by 18 percentage points to 88%. Annualised return on equity fell to 7.5% (9MFY14: 20%).

Quarter-on-quarter, third-quarter net profit ended Sept 30, 2015 (3QFY15) declined by 26%, dragged by allowances for impairment losses at RM196 million (2QFY15: RM134 million). NIMs fell by another 20 basis points. The LDR improved by two percentage points to 114% with loan loss coverage up by seven percentage points to 88%. Asset quality continued to deteriorate with credit costs up by 70 basis points and the gross impaired loan ratio up by 10 basis points.

Management is maintaining a positive outlook with the ongoing merger negotiations (with Bank Muamalat) and expects a positive outcome by year end. The merger, if materialised, will make the MBSB-Bank Muamalat entity bigger than BIMB Holdings Bhd with combined assets of RM62 billion versus BIMB’s RM56 billion (as of June 30, 2015).

FY15 to FY16E (estimate) earnings are slashed by between 26% and 28% to accommodate the group’s impairment programme, which we understand will see another two quarters of elevated credit costs and lower loan growth.  As the merger talk is still ongoing, we did not factor in earnings from the potential merger with Bank Muamalat.

Given the positive impact from the potential merger with Bank Muamalat, which will create the biggest Islamic banking entity, its upside potential is apparent. For now, the TP is raised to RM2.08, from RM1.76, based on blended FY16E 1.3 times/6.5 times price-book (P/B)/price-earnings ratio (PER). This is based on blended 1.4 times FY16 P/B and 10.4 times FY16 PER (implying +1.5 standard deviation above the five-year average PER). The higher P/B and PER are to reflect the expected higher earnings for FY16E due to the potential merger. — Kenanga Research, Nov 16

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