Investment Highlights

• We maintain our HOLD rating on Malaysia Building Society (MBSB) with a lower fair value of RM1.27/share (previously: RM1.30/share). We fine-tune our net profit estimates for FY18/19/20 by -4.5%/-2.7%/-3.2% after adjusting our credit cost estimates. Our revised fair value is based on a lower ROE of 9.9% (previously: 10.2%) for FY19, leading to a P/BV of 1.1x.

• 2QFY18 net profit fell 71.8%QoQ due to a charge in impairment allowances for loans of RM124mil compared to a net write-back in provisions of RM154mil in 1QFY18, and higher operating expenses from integration cost and amortisation of IT investments. 1HFY18 net profit rose to RM402mil (+109.2%YoY), largely due to a write-back in provision for loan impairment in 1QFY18. Recall that in 1QFY18, 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 undrawn portion of credit facilities.

• 1HFY18 earnings were ahead of expectations, accounting for 59.3% of our and 63.9% of consensus estimate. The variance was due to the net write-back of loan impairment from the 1QFY18. Despite this, we are not raising our earnings as 1QFY18 net write-back in loan impairment is not expected to recur. We expect the subsequent 3QFY18 and 4QFY18 results to reflect provisions in loan losses. We estimate the full FY18 credit cost to be 0.7%.

• Total income declined by 3.6%YoY due to lower net interest income from the termination of conventional business coupled with a drop in Islamic banking income.

• 2QFY18 saw a credit cost of 1.4% vs. -1.8% in 1QFY18. This was due to changes in the credit quality of certain retail and corporate loans from stages 1 to 2 and 3. We understand that this was partly contributed by the pass due payments from borrowers which were more than 30 days as a result of the festive season. For 1HFY18, credit cost was -0.2% vs. 1.8% in 1HFY17.

• Gross impaired loan ratio continued to trend higher to 5.5% in 2QFY18 from 4.8% in the preceding quarter. This has resulted in the drop in the group’s loan loss cover to 128.3% in 2QFY18 from 133.3% in 1QFY18.

• Gross loans growth remained modest at 1.2%QoQ with the contraction in personal financing (PF-i) while mortgage financing expanded slightly by 0.6%QoQ and corporate loans grew 6.3%QoQ.

Source: AmInvest Research - 31 Jul 2018