Investment Highlights

• We maintain our BUY call on Malaysia Building Society (MBSB) with a lower fair value (FV) of RM1.15/share from RM1.24/share. Valuation remains undemanding with the stock trading at 0.7x to our BV/share estimate. We are rolling over our valuation period to FY20. Our revised FV is based on an ROE of 8.7%. This leads to a P/BV of 0.9x (previously: 1.0x) after factoring in a high risk premium which raised the beta in our Gordon growth model slightly. We trimmed our FY19 earnings estimate by 3.7% after raising our credit cost assumption to 0.5% from 0.4%.

• The group reported a softer 1QFY19 net profit of RM84mil (-28.9% QoQ; -73.5% YoY). This was contributed largely by an increase in provisions from higher expected credit losses (ECL) under the MFRS 9 compared to a net writeback in provisions in 1QFY18 from an improvement in staging (from stage 2 to 1) of loans.

• On a QoQ basis, provisions were higher in 1QFY19 due to: i) an adjustment to its forward-looking macroeconomic estimates which raised the ECL for its retail loans under stage 2 impairment, coupled with ii) higher ECLs for impairments from its retail portfolio, mainly personal financing (PF-i) as well as corporate financing caused by past due payments. We understand that factor (i) accounted for 30.0% while the remaining 70.0% of the increase in provisions in 1QFY19 was attributed to overdue payments from borrowers.

• 1QFY19 earnings were below expectations, accounting for 13.0% of our estimate and 12.7% of consensus projection. The deviation from expected numbers was mainly caused by the higher provisions. Management hinted that the bulk of the provisions that was due to past due payments of PFi and corporate financing is likely to reverse in subsequent quarters of FY19 after the borrowers’ settlement.

• The group’s total income grew 5.0% YoY in 1QFY19 supported by stronger non-interest and Islamic banking income.

• 1QFY19 saw a credit cost of 1.7% vs. -1.8% in 1QFY18. The group continues to guide for a credit cost of 0.5% (50bps) in FY19. Credit charge-off is expected to improve in the quarters ahead from the reversal of provisions booked in 1QFY19.

• Asset quality ratios remained stable with gross impaired loan and net impaired loan ratio of 5.3% and 2.1% respectively. The group’s loan loss cover strengthened to 114.5% as impaired loans declined by 2.3%QoQ.

Source: AmInvest Research - 16 May 2019