Investment Highlights

• We maintain our BUY call on Malaysia Building Society (MBSB) with a lower fair value (FV) of RM0.73/share from RM0.78/share post-2Q22 results briefing. Our FV is now based on FY23F ROE of 7.1% leading to a P/BV of 0.6x. No change to our neutral 3-star ESG rating.

• We fine-tune our net profit estimate for FY22F/23F/24F by - 6%/-2%/-8% after lowering our net profit margin estimates and adjusting our credit cost assumptions.

• Management provided a briefing update last Friday following the group’s 2QFY22 results.

• Borrowers in the construction sector faced challenges from higher building material costs, labour shortages and lockdowns during the Covid-19 pandemic. As result of its intention to provide a longer term repayment relief rather than a temporary one, the group has restructured and rescheduled (R&R) some of its loans under the construction sector.

• These loans were then classified as impaired and contributed to the group’s increase in GIL ratio to 6.9% in 2QFY22 from 5.9% in 1QFY22. The group’s GIL ratio is likely to hover around 7% for FY22. On a comforting note, these loans in the construction sector were well collateralised, hence do not require provisions to be made.

• In addition to construction loans, the impairment of non-auto salary deducted personal financing and the R&R of certain manufacturing sector loans have also led to the surge in group GIL ratio.

• The higher impaired loans have contributed to a decrease in loan loss coverage (LLC) to 73.8% (group level) and 81.6% (bank level), lower than the industry’s 108.5%. We understand that there is no intention to increase provisions as pre-emptive measures for heightened macro headwinds to raise its LLC. Instead, the group will be monitoring closely the repayments of R&R loans.

• Upon prompt repayments for 6 months, these loans will be reclassified and taken out from the impaired status and lower its GIL ratio. Consequently, it will also improve the group’s LLC from present levels.

• In 2QFY22, total financial investments shrank by RM900mil from 1QFY22 to RM12.5bil due to disposals of treasury securities.

• Loan growth remained modest with a slight pick-up in pace to 2.8% YoY in 2QFY22. It was slower than the industry’s 5.6% YoY growth. Moving forward, the group will be focusing on trade financing business to realign its financing portfolio in shifting away from the traditional construction sector to manufacturing and higher impact sectors. The group is still targeting an FY22F loans growth of 6–7%, supported by stocks of house financing to be disbursed in 3QFY22 and 4QFY22.

• CASA ratio stood at 6.2% as at end-2QFY22 with the group targeting a CASA ratio of 6–6.5% for FY22. MBSB has rolled out campaigns and offered the bundling of FDs and CASA to attract deposits. In addition, to grow its CASA, the group is focusing on increasing salary-crediting accounts and leveraging its digital capabilities.

• 6MFY22 credit cost remains elevated at 110bps, higher than management’s guidance of 45bps for FY22. Management has now revised the credit cost for FY22 to 60bps and alluded that loan growth as well as some write-back in provisions, though not be significantly large, will lower its credit cost in 2HFY22.

• YTD, MBSB’s net profit margin (NPM) stood at 3.2% compared to 3.27% in 1QFY22. NPM was impacted by higher funding cost as well as the OPR hike due its higher mix in fixed-rate financing compared to peers at 46.7%. Management hinted of a further drop of 5–7bps in NPM for the remainder of FY22 and intends to maintain its margin at above 3% for the financial year.

• The group reported lower operating expenses of RM136.5mil (-9% QoQ) in 2QFY22 due to the reversal of provision on expenses that were no longer required.

• The stock’s valuation remains undemanding, trading at 0.4x FY23F P/BV vs. its 5-year mean of 0.6x.

Source: AmInvest Research - 29 Aug 2022