Investment Highlights

• We downgrade our call on Malaysia Building Society (MBSB) from BUY to HOLD with a lower fair value (FV) of RM0.67/share from RM0.83/share. Our revised FV is based on a lower ROE of 6.0% for FY21, pegging the stock to a P/BV of 0.5x (previously: 0.7x). We revise our FY20/21/22 earnings estimate lower by 36.6%/29.8%/12.8% to reflect higher credit cost and CI ratio assumptions.

• The group reported a net loss after tax of RM73mil in 1Q20 (-187.4% YoY) compared to a net profit of RM84mil in 1Q19. The decline in earnings was contributed by higher opex and rise in provisions. 1Q20 earnings were below expectation largely due to higher allowances for loan losses.

• Compared to the preceding quarter, 1Q20 saw a deterioration in staging of loans to stages 2 and 3 which resulted in higher expected credit losses (ECL). At group level, ECL rose by 14.6% QoQ to RM2.19bil.

• The group’s total income registered a modest decline of 0.7% YoY in 1Q20. Lower net interest income was offset by higher income from Islamic operations and non-interest income (NOII). The rise in NOII was supported by gains in from the disposal of FVTPL and FVTOCI securities.

• Total financial investments surged by more than 100% YoY in 1Q20 to RM12.2bil. This was in line with the group’s strategy to grow its treasury portfolio. The increase was largely on FVTOCI securities, and as at 1Q20, MBSB’s FVTOCI reserves stood at RM95.3mil. The group plans to gradually divest its investments in the treasury portfolio to realize gains.

• An outstanding balance of RM1.84bil of conventional loans has yet to be converted. This comprised largely of mortgages, other term and bridging financing.

• Management is now guiding a higher credit cost of 1.25– 1.50% for FY20 (previously: 0.3%-0.5%). Revisions to reflect macroeconomic variables in modelling is expected ahead which will increase the ECL. Prior to the end of the moratorium, we expect the group to build up its provisioning buffers for the impact of Covid-19.

• 1Q20 saw the group’s gross impaired loan ratio (GIL) rising to 5.5% in 1Q20 vs. 5.2% in 4Q19. The increase was contributed by a rise in impairments of personal loan as result of delayed payments prior the commencement of the loan moratorium on 1 April 2020.

Source: AmInvest Research - 26 Jun 2020