This article first appeared in The Edge Malaysia Weekly on March 9, 2020 - March 15, 2020

THE next three years will be interesting for Malaysia Building Society Bhd (MBSB) as it looks to carve a niche for itself in Islamic trade financing while making sizeable investments in technology, including an e-wallet that will be launched in a few months.

These are among the key thrusts of the Islamic banking group’s new business plan that runs from 2020 to 2022, president and CEO Datuk Seri Ahmad Zaini Othman says.

The plan is aimed at ensuring that MBSB, which is 64.5% owned by the Employees Provident Fund, not just catches up in some areas but also sets itself apart from rivals in the highly competitive industry. Apart from 26 commercial banks, there are 16 Islamic-only lenders in the country.

“For a small bank like us, if we don’t differentiate ourselves, then we’re just going to drown under the wave of the big players. So, business and operational differentiation, which includes process improvement, is key for us,” Ahmad Zaini tells The Edge in an interview.

By the end of 2022, the group aims, amid  increasing industry headwinds, to achieve a net return on equity of 9.17% compared with 8.76% last year.

For perspective, MBSB’s asset size, at RM50.71 billion as at end-2019, makes it the second largest standalone Islamic bank after Bank Islam Malaysia Bhd.

Recall that MBSB obtained its Islamic banking licence only two years ago through its acquisition of Asian Finance Bank (AFB) in February 2018. It is now coming up to a year since it started operating on a single banking platform in April last year.

Pushing trade financing

MBSB has identified trade financing as a key driver of its growth over the next three years. According to Ahmad Zaini, within the bank’s business banking segment, 70% of new business in that period is expected to come from trade financing, with another 10% each to come from renewable energy, equipment, and small and medium enterprise (SME) financing.

It aims to increase its trade financing turnover to RM7.5 billion by end-2022 from RM1.5 billion last year.

“It’s an area where we can generate good income. Also, we are looking at becoming a regional player in terms of trade finance transactions. Right now we do just domestic transactions. We’ve lined up a few opportunities already in the MENA (Middle East and North Africa) region and GCC (Gulf Cooperation Council) countries,” he says.

He adds that the bank is confident of its ability to compete in the regional space.

“The way we approach that business is different … it is very personalised. That is one of the ways we can differentiate ourselves from the other banks. We’re looking at end-to-end round-the-clock processing, collection of documents at the customer’s doorstep, providing advisory services and using technology to communicate with our processing side. So, when a customer gives a document at, say, midnight, by 9am the next day, if everything goes well, we can disburse the [trade financing] line already,” he explains.

Trade financing is Ahmad Zaini’s “baby”, so to speak.

“If you recall, when we took over AFB, they barely did any trade financing, so collections were negligible. Last year, we did RM5.8 billion in transaction volume and the income generated from that was nothing less than RM30 million, which is a major achievement. That tells us that we were right to emphasise it and that the business model we’ve put in place for trade finance is working quite well, as are the resources we’ve put into it,” he says.

Indeed, the focus on trade financing represents a new source of revenue for MBSB.

The group, which used to have a strong reliance on personal financing (PF), has intentionally slowed PF growth in recent years to reduce concentration risk.

As at end-2019, personal financing accounted for 55.1% of MBSB’s total gross financing of RM35.86 billion. The PF business fell 2.8% year on year to RM20 billion.

“It [trade finance] helps diversify their income base, and since they are starting from a low base, they can still reap the benefits of it,” says Kelvin Ong, a banking analyst at AmInvestment Bank Research.

E-wallet

Ahmad Zaini says the group will invest RM250 million over the next three years on technology to support new businesses.

“We are serious about banking on technology. We understand that it will be an expensive affair [for us] but we need to do this because if we don’t, other banks will do it and then it is a matter of having to catch up [with them]. So our strategy is such that we push technology to the forefront. We think we should be a leader in certain aspects of technology,” he says.

As a start, MBSB will launch its own e-wallet, having already secured approval for it from Bank Negara Malaysia. It joins the ranks of bigger banks like Malayan Banking Bhd and CIMB Group, which already have their own e-wallets.

“We launched our e-wallet [last] week for staff, and will launch it for the public in a matter of months,” Ahmad Zaini says, declining to say more about it.

Last year, it launched online banking for both retail and corporate customers and plans on coming up with a mobile app soon. The group has no plan to apply for a separate digital banking licence.

MBSB recently reported a three-fold increase in 4Q2019 net profit to RM356.69 million on the back of higher income and a net writeback on impairments amounting to RM211.67 million. In the previous quarter, it had made provision of RM53.3 million.

The writeback came about as the group had refined its expected-credit-loss (ECL)model for financing to incorporate more macroeconomic forecast factors. There could be more writebacks this year, says Ahmad Zaini.

Net profit for the full year grew a decent 11.6% to RM716.9 million, while revenue rose 5.2% to RM3.01 billion.

Notably, the group’s cost-to-income ratio, an indicator of cost efficiency, improved to 28.37% from 29.53%, making it the best in the industry. This may, however, start inching up as the group makes further investments in technology.

Its corporate-to-retail financing ratio stood at 25:75, and the group is sticking to its plan of moving toward 30:70 by 2022.

Last December, the bank issued RM1.3 billion Tier-2 sukuk wakalah to boost its capital base.

“Now that we are a full-fledged bank, our compliance culture has been enhanced tremendously and I’m happy to say there have been no regulatory breaches whatsoever. It is  a big feat as it is not easy to get 1,800 staff to be in sync with what is expected of the banking business and regulatory environment,” Ahmad Zaini says.

Tougher times ahead

Ahmad Zaini acknowledges that it will be a bumpy road ahead for the industry this year as the Covid-19 outbreak and political uncertainties weigh on economic growth. Its net ROE target of 8.3% for this year is lower than the 8.6% it achieved last year, even as expenditure goes up.

“So far, we’ve not had any retail borrower asking for their financing to be restructured and rescheduled although we are open to it. As for the corporates, we don’t have exposure to the travel industry, but we do have some fairly big exposure to the solar energy side as the panels come from China. But the customer is very strong and so far there has been no request for a restructuring of the financing,” he says.

As it stands, the gross impaired financing (GIF) ratio of MBSB Bank — the banking unit of MBSB — improved to 2.41% as at end-2019, from 2.99% three months earlier. This is higher than the industry average of 1.98%.

At MBSB level, the GIF ratio came down to 5.19% from 5.71%. The ratio is at an elevated level as it includes the RM1 billion of conventional non-performing assets that were parked at the holding company following the merger with AFB, Ahmad Zaini says.

“We were given three years (until April 2021) by Bank Negara to address these. Those assets that can be converted into Islamic and are performing will be brought down to MBSB Bank, but those that can’t will be sold off,” he says.

It is targeting a GIF ratio of about 2.03% at end-2020 for MBSB Bank, and 3.16% for MBSB. Analysts expect most banks, including MBSB, to see an uptick in the GIF ratio this year due to economic and political headwinds.

“Our concern for now is on its asset quality. In addition, an uncertain external environment may put further pressure to its ECL. Nevertheless, we believe that MSBS is still building its base, having only converted to a banking entity in 2QFY2018 and asset quality has improved on a sequential quarter basis,” says MIDF Research in a report following MBSB’s financial results.

Ahamd Zaini says the two 25-basis-point (bps) cuts in the overnight policy rate this year will put pressure on the bank’s net profit margin (NPM), albeit not as badly as for others, given that more than half of its financing are at fixed rates.

It is projecting NPM of  about 2.8% for this year. NPM last year fell slightly to 2.89% from 3.06% in the previous year after Bank Negara cut the OPR by 25 bps last May.

Meanwhile, Ahmad Zaini’s contract comes up for renewal at the end of October. He has been CEO since 2009.

Just this month, MBSB reorganised its management structure to allow for succession planning. There are now two deputy CEOs, one of whom will take over from Ahmad Zaini, subject to Bank Negara’s approval. “The deputies will be evaluated on a quarterly basis over two years, so it is likely that my contract could be renewed for another two years, but it really depends on the board and Bank Negara.”

Meanwhile, MBSB will be moving its headquarters to a 29-storey tower in PJ Sentral this June or July. It paid RM277 million in cash for the building, as per its accounts last year. “Most of the bank’s staff will be moving there, although some will remain in our current building [in Jalan Dungun, Bukit Damansara],” he says.

Bloomberg data shows that of three research houses that track MBSB’s stock, two have a “buy” call while the other has a “hold”, with the average 12-month target price at 94 sen. This suggests further upside from its closing price of 75.5 sen last Friday, which gave it a market capitalisation of RM5.07 billion. The stock has shed 9% this year.

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