Investment Highlights

• We maintain our BUY call on Malaysia Building Society (MBSB) with a lower fair value (FV) of RM0.78/share from RM0.93/share. Our FV is based on a lower FY23F ROE of 7.3% (previously: 8.5%) after reducing our earnings estimates leading to a P/BV of 0.6x. No change to our neutral 3-star ESG rating. .

• MBSB’s 6MFY22 earnings were below expectations, making up only 30% of our FY22F net profit and 36% of the consensus estimate. The variance to our estimate was mainly due to higher-than-expected allowances for potential credit losses. Also, 2QFY22 saw the improvement in staging of certain loans from stage 2 offset by the rise in loans classified as stage 3.

• Hence, we trim our FY22F/23F/24F net profit by 18%/16%/4% after raising our credit cost assumptions.

• The group reported an improved underlying net profit of RM157mil (>100% QoQ) in 2QFY22 on the back of lower operating expenses (opex), absence of mod loss and lower provisions. Fee-based income rose to RM12mil in 2QFY22 (>100% QoQ).

• The group’s 6MFY22 core earnings fell by 56% YoY (after stripping out mod loss and impact of Cukai Makmur of RM224mil). The decline was attributed to higher provisions for loan losses as well as lower fee-based income which was weighed down by losses from the sale of FVOCI and FVTPL securities.

• Also, the drop in earnings was contributed by higher opex from the increase in establishment cost, recognition of depreciation expenses of the group’s new headquarters and higher IT maintenance cost.

• 6MFY22 net profit margin (NPM) slipped 22bps YoY to 3.2% (6MFY21: 3.42%). This was in line with management’s NPM guidance of 3.15%–3.20% for FY22F. Further initiatives on corporate/commercial businesses, which generated lower yields, and the increase in longer term funding from sukuks, Cagamas and investment accounts contributed to the pressure on NPM.

• Nevertheless, YTD OPR hike totalling 50bps coupled with the potential of a further increase in the benchmark interest rate of up to 50bps for the remainder of FY22 are expected to provide some upside to the group’s guided NPM.

• Outstanding balance of conventional loans, which have yet to be converted, continued to decline to RM808mil from RM846mill in 1QFY22.

• In 2QFY22, total customer deposits shrank by 27% YoY to RM26bil.

• Loans growth remained modest with a slight pick-up in pace to 2.8% YoY. It was slower than the industry’s 5.6% YoY growth. Growth in mortgage loans and the marginal increase in personal loans was dampened by a contraction in corporate and auto financing. Its corporate financing/retail loan composition remained stable at 25%/75%.

• The group’s 2QFY22 gross impaired loan ratio (GIL) further increased to 6.9% from 5.9% in 1QFY22, contributed largely by higher impairments of loans to the household sector (personal loans and mortgages) coupled with loans extended to construction and manufacturing sectors. 6MFY22 credit cost remained elevated at 110bps, higher than management’s guidance of 45bps for FY22.

• The stock’s valuation remains undemanding, trading at 0.5x FY23 P/BV.

Source: AmInvest Research - 26 Aug 2022