Investment Highlights

• We maintain our BUY call on Malaysia Building Society (MBSB) with an unchanged fair value of RM1.27/share as valuation remains compelling with the stock now trading at 0.8x to our FY19 BV/share. Our fair value is based on an ROE of 9.8% leading to a P/BV of 1.1x. We expect stronger earnings and ROE for FY18 and FY19 due to lower impairment allowances after the completion of its 3-year impairment programme in FY17. We tweak our FY18/19/20 earnings estimate by +4.0%/-1.3%/-0.7% as we lower our assumptions for credit cost and loan growth.

• The group reported a higher 3QFY18 net profit of RM122mil (+42.3%QoQ) largely due to lower provisions for loan impairments. Provisions fell by RM65.4mil QoQ attributed to a more favourable forward looking macroeconomic variable (CPI) forecasted by external agency which was subsequently applied to its retail financing portfolio. We understand this has led to a writeback in provisions of RM71mil for personal financing.

• Cumulatively for 9MFY18, earnings improved to RM524mil (+78.9%YoY) contributed by significantly lower impairment allowances for loans and financing of RM29mil. Recall in 1QFY18, the group also reported writebacks in allowances after lowering its PD and LGD estimates which resulted in a decline in provisions required for corporate financing. 1QFY18 saw the settlement of certain corporate loans and cancellation of undrawn portion credit facilities.
  9MFY18 earnings were slightly ahead of expectation, accounting for 81.0% of our estimate. The variance to our expectation was due to a further write-back in provisions in 3QFY18. Meanwhile, it was above street numbers, making up 84.6% of consensus estimate.

• Total income declined by 5.1%YoY for 9MFY18 due to lower net interest income from the gradual termination of conventional business coupled with a drop in Islamic banking income.

• 3QFY18 saw a credit cost of 0.7% vs. 1.4% in 2QFY18. For 9MFY18, credit cost was 0.11% vs. 1.8% in 9MFY17.

• Gross impaired loan ratio remained stable at 5.5% similar to the preceding quarter. The group’s loan loss cover improved slightly to 129.2% in 3QFY18 vs. 128.3% in 2QFY18.

• Gross loans growth moderated to 0.7%QoQ with the contraction in personal, mortgage and auto financing. Meanwhile, corporate financing grew 3.7%QoQ supported by disbursements of RM2.4bil in 3QFY18 which represented 49.4% of the quarter’s total drawdowns of RM4.9bil.

Source: AmInvest Research - 14 Nov 2018