This article first appeared in The Edge Malaysia Weekly on October 19, 2020 - October 25, 2020

AFTER two consecutive quarters of losses, Malaysia Building Society Bhd (MBSB) anticipates returning to the black in the third quarter of this year.

President and CEO Datuk Seri Ahmad Zaini Othman says MBSB expects to post a profit in the third quarter of the year ending Dec 31, 2020 (3QFY2020), for two main reasons — one, there will not be any modification loss in that quarter and, two, he expects the bank’s net operating income to be sustained as per the level of the second quarter.

“We also expect that gains from the sale of financial instruments will continue to contribute to the group’s total income,” he says in response to questions from The Edge.

The banking group, which is 65.4%-owned by the Employees Provident Fund (EPF), saw net profit rise to a five-year high of RM716.9 million in FY2019 before its fortunes turned this year, mainly because of the Covid-19 pandemic.

In 1QFY2020, the lender posted a net loss of RM73.25 million compared with a net profit of RM83.83 million in the same period a year earlier, due to higher impairment charges on loans, financing and advances. This was despite revenue rising 1.9% year on year to RM741.41 million.

Its net allowance for impairment charges almost doubled to RM291.78 million from RM153.02 million. This stemmed mainly from “property and construction financing, on the corporate side”, according to Ahmad Zaini.

And, in 2QFY2020, it made a net loss of RM121.51 million due to a hefty, one-off modification loss of RM512.61 million that arose because of the blanket loan repayment moratorium granted to customers. This was despite a 17% improvement in revenue to RM886.35 million.

Had it not been for the modification loss, the group would have been in a position of profit. The modification loss was hefty — by far the largest among the listed banking groups — due to its sizeable financing portfolio contracted at fixed-rate financing. In fact, 92% of the loss came from its fixed-rate personal financing business, which is its largest financing segment.

Going forward, Ahmad Zaini does not expect a marked rise in non-performing loans (NPLs) or provisions in 3QFY2020 as customers continued to come under the blanket moratorium until end-September, hence the status of the loans remained as “performing”.

These are not expected to rise significantly in 4QFY2020 either, he says. “We don’t think so, as our personal financing [repayments] are via a salary-deduction scheme. Maybe [some] in home loans, but that would be small.”

As at end-September, the take-up rate among customers for targeted assistance on financing is “not significant”, he says, without providing numbers.

In late August, MBSB had guided analysts that there would potentially be an additional RM30 million to RM50 million modification loss given that the moratorium would be extended beyond September for selected accounts that needed further assistance. Ahmad Zaini now says this will likely come in much lower as applications for such assistance has been lower than expected.

Asked if the worst is behind the group, Ahmad Zaini says it all depends on how long the current third wave of the coronavirus pandemic and the ensuing partial lockdowns last.

“If at all, [the stress] is going to be on the corporate property financing side. We need to see how property sales are, moving forward. If the developers have trouble selling their properties, that could be a problem for us. [The impact of] that will probably be reflected in our second quarter of next year … because banks can still continue to provide R&R (restructuring and rescheduling of loan repayments) to troubled SMEs (small and medium enterprises) and corporates, without having to categorise them as non-performing, until June next year,” he says.

As at end-June, MBSB’s gross impaired loan (GIL) ratio stood at 6.08%, while that of its banking unit MBSB Bank stood at 3.28%. “We expect GIL to improve by year-end, with our collection efforts,” Ahmad Zaini says.

According to sources, these are expected to be Ahmad Zaini’s final months as MBSB president and CEO, as he will be leaving once his current two-year contract comes to an end in February next year.  He, however, declines to comment when asked about it.

Sources say that MBSB’s long-time chairman, Tan Sri Abdul Halim Ali, 77, will also be leaving upon the end of his term in February next year. Abdul Halim has been chairman since June 2001.

Ahmad Zaini, 63, has been in the lender’s driving seat for over 11 years. He was appointed to the role on Feb 26, 2009.

In early 2018, MBSB created deputy CEO roles for the purpose of succession planning. It appointed Datuk Nor Azam M Taib as deputy CEO of business and Risham Akashah Kamaruzaman as deputy CEO of operations.

It remains to be seen if one of them will eventually take on the CEO role as the EPF, the bank’s controlling shareholder, could also consider an external appointment.

MBSB, previously a non-bank lender, became a full-fledged bank after it acquired Asian Finance Bank in February 2018. It began operating on a single banking platform only in April 2019.

It is still in the process of building up and diversifying its revenue base, and the economic slump as a result of the Covid-19 pandemic is not helping. Although it has made a concerted effort over the years to reduce its focus on personal financing and move more into corporate financing, the segment still accounts for a large portion of its total financing. As at end-June, personal financing accounted for 55.4% of its total gross financing.

However, its large exposure to fixed-rate financing has been a silver lining for the group as it helps cushion the impact of sizeable benchmark-interest-rate cuts this year. Bank Negara Malaysia has cut the overnight policy rate (OPR) four times by a total 125 basis points so far this year to a record low of 1.75%, and another rate cut could be in the offing on Nov 3 at the central bank’s final monetary policy meeting this year.

“With the consecutive OPR cuts, MBSB has an advantage compared with its peers with its 52.3% financing in fixed rate. This has also helped to widen its net profit margin (NPM) in a declining interest rate environment. Management is now guiding for a profit margin of 3% versus 2.5% to 2.6% previously,” AmInvestment Bank Research said in a report after the bank’s 2QFY2020 results. It has a “buy” call and fair value of 78 sen on the stock.

MBSB’s NPM expanded 27 basis points y-o-y to 3.11% as at end-June, given the reduction in its cost of funds.

Nevertheless, a wildcard when it comes to MBSB is provisions, say analysts.

“The thing we worry about is their [loan loss] provisioning. If you look at the last few years, their provisioning has been very volatile, especially in the first half of the year … there’s always that worry that something could turn up,” Ahmad Ramzani Ramli, a banking analyst at Kenanga Research, tells The Edge.

He cut his FY2020 earnings forecast for MBSB by 59% to RM128 million after the higher-than-expected modification loss in the second quarter. Nevertheless, he is maintaining his “buy” call and target price of 70 sen on the bank’s stock.

“While the huge modification loss [was] a dampener, we expect earnings ahead to be supported by elevated NPM, lower credit charge plus potential revaluation gains from its equity reserves, which should boost its book value — mitigating the impact of its modification losses. Furthermore, its fixed-rate portfolio should cushion the impact of further OPR cuts,” he said in an earlier report.

MBSB’s stock, which has shed 38.6% year to date, closed at 51 sen last Thursday, giving it a market capitalisation of RM3.5 billion.

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