- We maintain our HOLD rating on Malaysia Building Society Bhd (MBSB) with a lower fair value of RM1.80/share (from RM2.40/share previously). Our fair value is based on a lower fully-diluted ROE of 10.9% (previously 14.2%) for FY15F, leading to a lower fair P/BV of 1.0x (previously 1.6x) for FY15F.

- MBSB’s annualised 1QFY15 net earnings came in 20.6% lower than our forecast, and 28.9% lower than consensus’ FY15F net earnings. The 1Q made up 19.9% and 17.8% of our and consensus full-year net earnings for FY15F.

- The shortfall compared to our forecasts was largely due to the loan loss provisioning line, which came in higher on the back of a larger-than-expected collective assessment expense. This is due to the company embarking on a two year impairment programme, which led to a more aggressive provisioning stance.

- This is expected to lead to ongoing elevated collective impairment expense, which forms part of loan loss provision. The total collective expense arising from the impairment programme was RM177mil in FY14, and RM62mil to RM63mil in 1QFY15. Looking ahead, the collective expense is expected to be at the current elevated levels for the remaining quarters of FY15, implying a total collective expense of RM250mil in total for FY15F arising from the impairment programme.

- Credit costs was unchanged at 123bps in 1QFY15 (4QFY14: 123bps). The company is now targeting total credit costs of 130bps to 150bps in FY15F due to the impairment programme. Without the impairment programme, credit costs is expected to range around 30bps. The company targets to bring up its loan loss cover to 100% under the impairment programme, from 78.5% currently in 1QFY15.

- The latest new information with regards to its impairment programme, and new targeted credit costs and loan loss cover, has prompted us to revise our net earnings by - 16.9% for FY15F, and a correspondingly lower ROE.

- Nevertheless, on the whole the impairment programme indicates some prudence on MBSB’s part, which we think is positive in the longer run. In addition, MBSB’s revenue held up well considering that this is a shorter working quarter. We maintain HOLD.

Source: AmeSecurities Research - 8 May 2015