Investment Highlights

• We maintain our HOLD rating on Malaysia Building Society Bhd (MBSB) with a higher fair value of RM1.15/share (previously RM1.10/share) after revising our net profit estimates to account for a lower credit cost. Our fair value is based on a slightly higher ROE of 7.9% for FY18, leading to an unchanged P/BV of 0.9x.

• MBSB reported a 1QFY17 net profit of RM101.3mil (+190.9%YoY). The improved earnings were contributed by higher total income of 10.9%YoY from an increase in income from Islamic banking and net interest income. Also, contributing to the improvement was a lower OPEX of 1.3%YoY and provisions for loan losses by 23.2%YoY.

• 1QFY17 net profit exceeded expectations, making up 37.2% and 36.3%% of our and consensus forecast for FY17 earnings respectively. However, FY17 earnings will continue to remain unexciting. This is in view of further provisions for loan losses under its loan impairment programme which will be made for the remaining period of FY17.

• To recap, the group embarked on a loan impairment programme to raise its provisions to close the gap towards banking practices and standards. The target for total provisions to be made under the impairment programme was RM1.7bil. 1QFY17 saw the group recognising a provision of RM167.9mil. From the analyst briefing, we gather that there will another RM495mil provisions to be made over the subsequent quarters of FY17 to complete its impairment programme.

• Credit cost continued to remain elevated at 1.9% in 1QFY17 similar to the preceding quarter. We continue to expect an improvement in credit cost after the completion of the impairment programme.

• Net impaired loan ratio improved marginally to 2.8% in 1QFY17 from 2.9% in 4QFY16 while the group's loan loss cover continued to rise to 113.3% with the increase in conservative provisioning.

• Growth in gross loans accelerated to 4.1%YoY in 1QFY17 compared to 3.4%YoY in 4QFY16. The improvement in loan growth was driven by the stronger expansion in corporate loans and marginally better growth in mortgage loans.

• Net financing margin in 1QFY17 improved by 11bps QoQ to 3.38%, contributed by lower cost of funds.

• 1QFY17 saw the group's CI ratio improved to 19.7% compared to 22.1% in 1QFY16.

Source: AmInvest Research - 25 May 2017