AN aborted merger behind it, non-bank lender Malaysia Building Society Bhd (MBSB) is now fully focused on carrying out its five-year business plan that charts its next phase of growth amid a tougher operating environment.

The 2015-2019 business plan, which MBSB’s (fundamental: 1.2; valuation: 2.4) board approved two weeks ago, includes moves to trim possibly a tenth of its 1,300-odd workforce as it looks to keep a tighter lid on costs. The plan is to keep its cost-to-income ratio (CIR) — already one of the lowest in the industry at 22.36% last year — consistently below 23% over the five-year period.

It also includes plans for MBSB to embark on a merger and acquisition (M&A) exercise in “about a year or so” as the group looks to migrate towards a banking platform as part of its aspiration to become an Islamic financial institution (FI), CEO Datuk Ahmad Zaini Othman says.

“For MBSB, moving forward, we want to place ourselves in a situation to conform to all the best practices and standards of an FI. And for us to do that, to accelerate that, we do need to look at a potential corporate exercise, but this is ultimately subject to our shareholders’ endorsement. We call it ‘corporate exercise’ because we don’t know who’s going to take over who.

“A potential corporate exercise is something that we must seriously look at, at least within the next year or so, for us to continue to carry MBSB into the next phase of our business plan,” Ahmad Zaini tells The Edge in his first one-on-one media interview since the proposed merger with CIMB Group Holdings Bhd and RHB Capital Bhd fell through last month.

The merger, had it gone through, would have seen MBSB being acquired by CIMB-RHB’s Islamic banking operations to become a “mega” Islamic bank.

Ahmad Zaini says MBSB, which is 64.14% owned by the Employees Provident Fund (EPF), had little choice but to agree to being swallowed in that planned exercise because it was dealing with much bigger entities — CIMB and RHB. Any future M&A exercises, however, could see MBSB taking the lead, he says.

“This time around, of course with the blessing of the major shareholder, we should take the lead, really. I think we should,” he remarks.

He declines to name potential acquisition targets but says they need not necessarily be smaller in size.

Analysts and industry observers speculate that Bank Islam Malaysia Bhd, Bank Simpanan Nasional Bhd and Bank Muamalat Malaysia Bhd are likely to be on MBSB’s radar.

MBSB is slightly smaller than the Lembaga Tabung Haji-controlled Bank Islam in terms of asset size, but is far more profitable and has better control of costs.

Analysts say Bank Muamalat, controlled by tycoon Tan Sri Syed Mokhtar Albukhary’s DRB-Hicom Bhd, could make a good merger partner but it could be tough to strike a deal as the latter would want to be in the driver’s seat of the merged entity. DRB-Hicom owns 70% of Bank Muamalat and has been given multiple extensions by the central bank to pare down its stake to 40%.

Ahmad Zaini says another option MBSB could explore to expand, apart from an M&A with a local entity, is a business collaboration with a partner in Indonesia. He says that it was something MBSB had been exploring in earnest before the CIMB-RHB merger was proposed last July.

“These are the kinds of things we’ll look at again — 80% of our assets are already Islamic, so it’s a natural progression for us to aspire to become an Islamic FI, either as a standalone [entity] or through some form of corporate exercise.”

He says the aborted merger was a “costly” exercise for the group as it had invested much time and effort in it. However, there were lessons to be learnt from it and the group can go into its next M&A exercise wiser, he claims.

“We spent about six to seven months on this exercise [and] we stopped a lot of the things we wanted to do. We could not recruit people — they didn’t want to join us because of the uncertainty the merger brought about — and we lost a few people along the way. Business opportunities were also lost, in a sense. So from that point of view, it was costly.

“What’s positive, however, is that we’ve learnt a lot — I’ve learnt a lot — so next time around, we know what to do, what not to do and what to expect. So in that sense, we’ve gained. From the monetary sense, yes, we’ve lost quite a bit because advisers and legal fees need to be paid, regardless. I call these ‘heavy tuition fees’,” he laughs.

Ahmad Zaini joined the group in 2009 and went on to spearhead MBSB’s first five-year transformation plan that led to the group posting a record net profit every year to 2014, helped by a focus on the once-profitable personal financing (PF) business for government servants.

Just last week, MBSB announced a net profit of RM1.02 billion for the year ended Dec 31, 2014 (FY2014), compared with just RM57.2 million back in FY2009. Its FY2014 profit was 70% higher than that a year ago despite having adopted more stringent loan provisioning standards last year in its bid to become more like a bank. The profit was boosted by the recognition of RM366.06 million in deferred tax assets.

The group’s net non-performing loan (NPL) ratio improved to 4.1% from 5.4% a year ago. Beginning January 2014, MBSB had moved towards the industry’s NPL classification of three months in arrears, from the previous six months in arrears.

But the banking environment has since become more turbulent and the next five years are not expected to be easy for FIs.

“The most significant thing about the next five years is that it is a totally new ball game. It’s a new economic environment, new challenges, new regulatory expectations and the stakeholders’ expectations are different. So, we can’t carry on business as usual like we did five years ago.

“Before, we could be a bit more aggressive in certain things, but now, we just have to align ourselves back to the banking environment. And this is the big challenge for us for the next five years,” he says.

MBSB’s loan growth target for that period is a more sober 7% to 8% annually. This compares with a gross loan growth of 51.4% in FY2012 and 18.4% in FY2013. Last year, because of the more difficult environment and having reduced its dependency on the PF businesses after the central bank introduced more stringent rules, growth was just 2.4%.

According to Ahmad Zaini, PF is something the group will continue to focus on, but it also plans to develop more products that leverage its Angkasa BPA code and the AG (Accountant General) code, which allow MBSB to directly deduct from the salaries of civil servants in the servicing of loans.

Under the new five-year plan, MBSB aims to increase the contribution of its fee-based activities, which currently constitute just 4% of its total income, in a bid to diversify. “We’re trying to push it up to 7% to 10% over the next two years or so,” he says.

MBSB also plans to accelerate its credit collection. Ahmad Zaini himself heads the task force created to accelerate and manage bad debt collection.

“This is mostly on the retail side. The corporate side is good … we’ve only got one legacy loan under corporate and the rest are small ones. That’s a big achievement for us. The ones in the PF portfolio … these are actually what I call ‘performing’ NPLs — the borrowers are paying but they are paying us late because they’ve already left the government service and are hence no longer under the automatic salary deductions. So, what we need to do is work out some restructuring exercise with them,” he explains.

On the planned job cuts, Ahmad Zaini says: “What we want to do first is look at all our contract staff and those under agency roles. We’ll maybe trim down those first. I look at this right sizing exercise as achieving two key objectives — one is, of course, the cost aspect as you’re going to get some savings there. But a more important thing is that we’re also delivering a message to the rest of the staff that they do need to increase their competency.”

He says the right sizing exercise will involve cutting “maybe 10%” of MBSB’s workforce, some of which will be done this year.

“If I can maintain our CIR at under 23% and see out this period of turbulence, I think we’re going to come out well in terms of the numbers. Right now, our CIR is 22.36% … we’ll have to give and take some of this because of the prudential costs that we’re going to incur. This right sizing exercise is important because if we were to go into any form of corporate exercise, at least we will be a bit more lean for our eventual partners, so we do need to do this well,” he says.

On hindsight, MBSB’s aborted merger with CIMB and RHB could well be a “blessing in disguise”, he says. All parties had decided to cease talks due to “bad timing” as economic conditions had turned unfavourable.

Still, the EPF also owns a 41.49% stake in RHB, and it has long been speculated that any M&A that involves either RHB or MBSB would also involve the other.

All eyes will be on Ahmad Zaini to see how well he handles the group’s next growth phase and whether it will remain a standalone entity.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on February 23 - 29, 2015.

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