Investment Highlights

• We maintain our BUY call on Malaysia Building Society (MBSB) a revised fair value (FV) of RM0.78/share from RM0.62/share. Our revised FV is based on a higher ROE of 7.2% for FY21, pegging the stock to a P/BV of 0.6x (previously: 0.5x). We raise our FY20/21/22 earnings by 22.6%/23.1%/9.4% to reflect lower funding cost and higher non-interest income (NOII). The stock is trading at a cheap valuation of 0.4x P/BV with the potential for the group to further monetize gains on its financial investments due to the decline in MGS yields.

• The group reported an underlying net profit of RM500mil (>100% QoQ) in 2Q20 after stripping out the modification loss of RM513mil which was due to the loan moratorium. RM471.4mil or 91.9% of the total modification loss was contributed by the waiver of interest payments on fixed rate personal financing for the 6-month moratorium (AprSept 2020). Moving into 4Q20, modification loss will be significantly smaller than in 2Q20 circa RM25–50mil. This is in view of the moratorium extension for another 3 months (Oct–Dec 2020) that is only be for the unemployed.

• 2Q20 core earnings improved on the back of lower funding cost with a decline in total deposits due to withdrawals, shortened tenure of deposits and the lower outstanding balances on sukuk murabahah.

• 6MFY20 net profit margin (NPM) expanded by 27bps YoY to 3.11% with the reduction in cost of funds. 2Q20 saw its funding cost falling by 70bps to 3.06%. With the consecutive OPR cuts, MBSB has advantage compared to its peers with its 52.3% financing in fixed rate. This has also helped to widen its profit margin in a declining interest rate environment. Management is now guiding for a profit margin of 3.0% vs. 2.5–2.6% previously.

• In 2Q20, the group recorded higher gains from sale of FVOCI securities of RM107.5mil, coupled with a net writeback in allowances for loan losses of RM54mil.

• For 6MFY20, the group delivered core earnings of RM427mil (124.6% YoY), underpinned by higher total income. Total income grew 27.2% YoY to RM892mil attributed to higher Islamic banking and NOII.

• Normalized earnings for 6MFY20 were above expectation, making up 102.0% and 100.0% of our and consensus FY20 net profit estimates respectively.

Source: AmInvest Research - 27 Aug 2020