Investment Highlights

• We maintain our BUY call on Malaysia Building Society (MBSB) with a lower fair value (FV) of RM0.93/share from RM0.95/share. Valuation remains inexpensive with the stock trading at 0.6x to our FY20BV/share estimate. Our revised FV is based on an ROE of 8.4% for FY20, pegging the stock to a lower P/BV of 0.7x as we increased the beta in our Gordon growth model. We revise our FY20/21 earnings estimate by 21.1/%8.5% to RM730mil/RM772mil after adjusting our credit cost lower following the group’s refinement of its ECL model. Our estimates have imputed another rate cut of 25bps in 1H20 in addition to the already announced OPR reduction of 25bps on 22 Jan 2020. Every 25bps cut in OPR will impact the group’s NIM by 3 to 5bps.

• The group reported a stronger 4Q19 net profit of RM357mil. Earnings rose by 110.0% QoQ underpinned by higher Islamic banking income and a write-back in provisions for loan losses. The lower provisions were due to the refinement of its ECL model with more macroeconomic variables which lowered the expected credit losses (ECL) for stages 1, 2 and 3 loans. At group level, ECL declined by 17.3%QoQ to RM1.91bil.

• 12M19 earnings of RM717mil (11.6% YoY) were above expectations, accounting for 140.9% of our estimate and 140.7% of consensus projection. The deviation from our expected numbers was mainly attributable to the writeback in provisions in 4Q19 from the ECL model refinement resulting in a credit cost of 0.30% for FY19 (FY18: 0.30%) vs. our estimate of 0.60%.

• The group’s total income posted a modest growth of 2.7% YoY in 12M19. Higher non-interest income (NOII), supported by wealth management income and a rise in Islamic banking income, was offset by lower net interest income as the group continued to actively convert its conventional assets to Islamic assets. An outstanding balance of RM1.87bil of conventional loans have yet to be converted. This comprised largely mortgages and other term financing.

• Management is now guiding a credit cost of 0.30–0.50% for FY20. The enhancement of the ECL model with more macroeconomic variables is expected to result in less variability on its provisioning for loan losses ahead.

• With a lower amount of loans classified as impairments, coupled with write-offs which included the retail loans, the group’s gross impaired loan ratio (GIL) improved to 5.2% in 4Q19 vs. 5.7% in 3Q19. The reduction in impaired loans was mainly due to the lower impairment of household sector loans. The group’s loan loss cover was 102.6% in 4Q19.

Source: AmInvest Research - 2 Mar 2020