This article first appeared in The Edge Financial Daily, on March 4, 2016.

Malaysia Building Society Bhd
(March 3, RM1.40 )
Maintain market perform with a reduced target price (TP) of RM1.40: After an analysts’ briefing with the management last Friday, we reduced our TP to RM1.40 (previously RM1.53) for Malaysia Building Society Bhd (MBSB), but maintained our “market perform” call. At the briefing, while reviewing its financial year 2015 (FY15) results, the management gave guidance on its loan-loss provisions for the next two financial years and reiterated its aspiration to become an Islamic bank.

To recap, MBSB reported a net profit of RM258 million in FY15, a fall of 75%, dragged down by higher impairment allowances amounting to RM697 million. Higher impairment allowances have been the bane of MBSB’s earnings since it embarked on a collective assessment programme in late 2014. The programme is part of its efforts to adopt banking industry standards, as it strives to become a full-fledged banking entity. Recall that the proposed CIMB Group Holdings Bhd-RHB Capital Bhd-MBSB merger was called off last year, which we believed was partly due to the differences in MBSB’s provisioning standards. The collective assessment programme was expected to last until the first half of 2016, but the management reiterated that it will instead continue until 2017. This is due to the adoption of a new methodology coinciding with the FRS 9 Bank Negara Malaysia (BNM) guidelines. Thus the management guided that credit cost, which was at 2.1% for FY15, will remain around 2% for FY16/FY17. We understand that the management expects loan growth of between 5% and 6% for FY16 (FY15: 4.4%) as it strives for higher composition of corporate loans and financing, which currently stands at 15% of total loans and financing. The management also guided that net interest margin (NIM) will be under 3% (FY15 NIM: 3.4%) as it strives to boost its liquidity funding.

Despite the failure of two merger talks, the management reiterated that it’s still aspiring to become an Islamic bank, and is still open to corporate exercises that will achieve or accelerate its aspiration and transformation plans. Hence, it’s possible that we may see the group in another merger and acquisition scenario, although we believe this could be unlikely to happen in the short term. The management believes that the rapid adherence of the BNM guidelines will support its claims in future pre-merger talks.

With this new guidance, we revised our assumptions for FY16/FY17; our new assumptions for FY16/FY17 are loan growth at 5%/5% (previously at 3%/3%), deposits growth at 6%/6% (previously at 4.5%/4.4%), NIMs at 3%/3% (previously at 3.2%/3.1) and credit charge at 2% for FY16/FY17 (previously 1.3%). Our FY16/FY17 earnings are slashed downward by 63%/57% to RM152 million/RM166 million.

We maintain our “market perform” rating with the TP reduced to RM1.40. Nonetheless, we believe any new merger talk will see renewed interest in the stock. — Kenanga Research, March 1