Investment Highlights

• We maintain our HOLD rating on Malaysia Building Society Bhd (MBSB) with a higher fair value of RM1.30/share (previously: RM1.15/share) after revising our net profit estimates for FY18/19 higher by 22.3%/19.9% to account for lower provisions following a write-back in provisions for loan impairment in 1QFY18. We have rolled over our valuation to FY19. Our revised fair value is based on a higher ROE of 10.2% for FY19, leading to a P/BV of 1.1x.

• MBSB reported a 1QFY18 net profit of RM316.7mil (+155.5%QoQ; +212.7%YoY). The improved earnings were mainly due to a write-back in provision for loan impairment of RM154mil. In line with the adoption of MFRS 9, we understand that the write-back was a result of the group lowering its PD and LGD estimates as well as reducing the provisions required for corporate loans where settlements have been made, consequently resulting in the cancellation of the undrawn portion of credit facilities.

• 1QFY18 net profit exceeded expectations, making up 57.2% of our and 61.8% of consensus estimates. Excluding the write-back in provisions for impairment on financing assets, earnings were within our expectation, accounting for 29.4% of our estimate.

• Total income fell by 5.3%YoY due to lower net interest and Islamic banking income.

• Day 1 impact of MFRS 9 saw provisions rose by RM244.4Mmil (+11.1%).

• Credit cost was -1.8% in 1QFY18 vs. 1.3% in 4QFY17 and 1.9% in 1QFY17. Recall, the group has completed its impairment programme in 4QFY17.

• Gross impaired loan ratio rose to 4.8% in 1QFY18 from 4.6% in 4QFY17 due to the increase in corporate loans while the group’s net impaired loan ratio fell 30bps QoQ to 1.8% due to the increase in provisions after the adoption of MFRS 9. The acquisition of Asian Finance Bank (AFB) has added RM111.4mil to its impaired loans. The group’s loan loss cover stood at 133% as at the end of 1QFY18.

• Gross loans grew modestly by 2.9%QoQ with retail loans contracting by 0.2%QoQ while corporate loans expanded by 14.4%QoQ. The expansion in corporate loan book by RM1bil was due to the acquisition of AFB. This has increased its corporate loans composition to 23.6% of total loans with the remaining 76.4% made up of retail loans. We gather that 80% of its corporate loans comprise property financing.

Source: AmInvest Research - 30 May 2018