This article first appeared in The Edge Malaysia Weekly on December 14, 2020 - December 20, 2020

It has been a tough few years for banks, so it is to Malaysia Building Society Bhd (MBSB)’s credit that it has managed to register solid earnings growth over the last three years.

It was only a few years ago that MBSB, previously a non-bank lender, became a full-fledged bank. It obtained an Islamic banking licence through its acquisition of Asian Finance Bank (AFB) in February 2018. It then began operating on a single banking platform in April 2019.

The country’s second-largest standalone Islamic bank’s net profit rose to a five-year high of RM716.9 million in the year ended Dec 31, 2019 (FY2019), compared with RM642.4 million in FY2018, RM417.1 million in FY2017 and RM201.4 million in FY2016.

This translates into a three-year compound annual growth rate of 30%, which bags MBSB The Edge BRC award for the highest growth in profit after tax among financial services companies in the below-RM10 billion market capitalisation category.

MBSB’s FY2019 net profit, which was an 11.6% increase over that in FY2018, was aided by an impairment writeback of RM211.67 million in the final quarter that came about mainly from having refined its expected credit loss (ECL) model for loans, financing and advances.

Its FY2019 revenue grew marginally to RM3.01 billion from RM2.86 billion in the previous year, driven by treasury income from financial investments. Its net return on equity improved slightly to 8.76% from 8.62%.

But headwinds arising from the Covid-19 pandemic this year have weighed on the lender and MBSB found itself in a position of net loss in the first two quarters, before returning to profitability in the third. 

In the first quarter ended March 31, MBSB reported a net loss of RM73.25 million due to higher impairment charges on loans, financing and advances. This was despite revenue rising 2% year on year to RM741.31 million.

And, in the second quarter, it turned in a net loss of RM121.51 million due to a hefty, one-off modification loss of RM512.61 million which arose because of the loan moratorium granted to customers. This was despite a 17% improvement in revenue to RM757.36 million. Had it not been for the modification loss, the group would have been profitable.

“[The modification loss] is a significant amount due to the sizeable portfolio contracted at fixed rate financing. However, we hope to start seeing the unwinding of these modification losses sometime next year,” group president and CEO Datuk Seri Ahmad Zaini Othman says.

The bulk of the modification loss came from its fixed-rate personal financing business. Although it has made a concerted effort over the years to reduce its focus on personal financing, the segment still accounts for a large portion of its total financing. As at end-June, it accounted for 55.4% of its total gross financing.

Last month, MBSB reported a strong 51.8% y-o-y rise in third quarter net profit to RM258.24 million, helped by lower impairment charges on financing and a drop in funding cost.

Given that headwinds from the coronavirus pandemic still persist, the situation for banks, including MBSB, remains challenging as they are faced with a low interest rate environment, which affects profitability, while provisions for bad loans are expected to remain elevated. Bank Negara Malaysia has cut the overnight policy rate four times this year by a total of 125 basis points to a record low of 1.75%.

Nevertheless, Kenanga Research is keeping an “outperform” call on MBSB’s shares.

“The stickiness of its fixed assets portfolio saw net profit margin improving significantly [in 3QFY2020] which is likely to stay elevated going into FY2021. We see 4Q2020 to be a challenging quarter on front loading of credit charge and modification losses, albeit moderate compared to 2Q2020. But these should pave the way for a better FY2021,” it says in a report on MBSB on December 1. 

In an interview with The Edge in March this year, Ahmad Zaini said MBSB wants to carve a niche for itself in Islamic trade financing while making sizeable investments in technology, including an e-wallet that it has since launched.

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