Malaysia Building Society Bhd
(Nov 21, 87.5 sen)
Maintain neutral with an unchanged target price (TP) of 93 sen: Malaysia Building Society Bhd (MBSB) posted a 31.3% year-on-year (y-o-y) decline in net profit for the cumulative nine months of financial year 2019 (9MFY19). However, its performance rebounded in the third quarter of financial year 2019 (3QFY19) whereby earnings expanded 39.5% y-o-y on account of lower operating expenditure and expected credit losses (ECL). As a result, the 9MFY19 earnings were within our expectations at 73.2% of our full-year estimate. However, it missed the consensus full-year estimate at 68.5%.
The 9MFY19 ECL was RM326.1 million, compared with RM62.6 million for 9MFY18. The higher ECL was triggered by certain variables and timing issues. There were recoveries to the tune of RM10.5 million. Moving forward, the management indicated that it will be enhancing its ECL model to better reflect its asset quality and smooth out the variability.
Total income was flat at -0.3% y-o-y. However, this was to be expected as it converts to an Islamic bank, running down its net interest income. Consequently, Islamic banking income grew by 2.2% y-o-y due to financing growth. Fully taking advantage of its banking licence, non-interest income rose 80.6% y-o-y. Treasury income (included in its Islamic banking income) grew by 41.7% y-o-y to RM326 million.
Besides treasury income, we opine that MBSB also took advantage of its banking licence to reorganise its deposits. Customer deposits fell 14.3% y-o-y to RM27.2 billion due to a contraction in more expensive time deposits, which fell 14.6% y-o-y to RM26.9 billion. This was substituted by interbank deposits which grew to RM10.4 billion from RM1.8 billion as at 3QFY18. Current accounts/savings accounts also saw good growth of 20.1% y-o-y to RM317.7 million. As the results were within expectations, we maintain our earnings forecasts.
As we have previously mentioned, we believe that MSBS is still building its base having only converted to a banking entity in 2QFY18. Nevertheless, we opine that MBSB is starting to reap some of the benefits of being a bank. Our concern for now is about its asset quality as its gross impaired financing ratio remained stubbornly high at 5.71% (group level) as at 3QFY19 and the high ECL. In addition, an uncertain external environment may put further pressure on its ECL, affecting earnings. In our view, this will moderate gains in operational performance. Therefore, we maintain our “neutral” call. We also maintain our TP of 93 sen, pegging its forecast FY20 book value per share at a price-to-book value multiple of 0.65 times. — MIDF Research, Nov 21