- Based on our company visit, we understand that Malaysia Building Society Bhd (MBSB) is well on track to close the gaps in preparation for the Financial Services Act 2013 (FSA).

- The press had reported Bank Negara as saying that the new Financial Services Act 2013 is aimed at furthering financial stability, supporting inclusive growth in the financial system and the economy, and providing adequate protection for consumers. The press also reported a broad hint from Bank Negara that the FSA would empower it to look into periphery sectors of the financial markets, such as non-bank financial institutions.

- MBSB believes that it is a matter of time before it is required to meet minimum regulatory requirements of normal banking institutions. It believes the key priority areas are capital. The others are compliance, processes, risk management and best practices standards.

- However, MBSB alluded that it is well on the way to plugging the gaps, with the likely upcoming rights issue to raise anywhere between RM2.5bil to RM3.0bil aimed at first of all beefing up its capital. We estimate proforma CET1 at circa 6.0% (ex-dividend) at end-March 2013. The upcoming rights issue is in line with expectations.

- MBSB targets to complete the substantial bulk of the compliance preparatory work in 2H2013, and is now preparing for the eventuality of being designated a financial institution under FSA by the end-2013. MBSB has already appointed an external consultant for the compliance project.

- More importantly, MBSB expects to be able to expand into the low-cost current account deposits. This is positive for MBSB’ cost of funds, as MBSB is currently allowed to offer savings and fixed deposit accounts currently. MBSB is now gearing up its payment systems to target corporate current accounts. In the longer term, MBSB envisages a more competitively priced mortgage loan product with low cost deposit funding in place.

- Longer-term ROE target is 18% to 20%, assuming post-rights and a planned dividend reinvestment plan in place. We are excited over MBSB’s plans to turn itself into a banking institution given that there will be new areas of growth. We maintain BUY.

Source: AmeSecurities