A Reason to Upgrade, Still in Recovery Mode

MBSB had a good start in 1Q17 as net profit saw a rebound of 191% yoy and 122% qoq (at EPS level, +42% yoy). The results is above Affin’s and market expectations on the back of lower funding cost and lower credit costs. We believe that hefty provisions will unlikely be repeated in 2017 given that the NPLs are peaking, while approvals for new personal financing are more stringent. Upgrade from SELL to HOLD, with PT raised from RM0.78 to RM1.25.

1Q17 Net Profit Outperformed Expectations – Credit Cost Eased

MBSB’s 1Q17 net profit of RM101.3m almost tripled against 1Q16 +191% yoy (+122% qoq). Its operating income improved, up 11% yoy largely underpinned by fund-based income generation (+13% yoy), which saw an improvement in the net-interest-margin (NIM) as funding pressure eased. The overall gross loan and financing rose by 4.1% yoy, and the bulk of it was driven by expansion in the corporate loans (+3.2% yoy). Pre-tax profit meanwhile grew by a significant +224% yoy as impaired loan allowances declined by 23% yoy (flat qoq), reflected by an ease in 1Q17 credit cost at 150bps vs. 207bps in 1Q16. Overall results appear to be above Affin and market expectations. We anticipate that the favourable results will prompt street upgrades.

Earning Revision of 36% for 2017E and 12% for 2018E-19E

We have revised our net profit forecasts for 2017E by 36% and 2018E-19E by 12%, as we price in a lower funding cost assumption and higher loan yields for MBSB for the forecast periods, resulting in a NIM enhancement of 10-15bps to 3.36-3.4%. For 2017E, we have also factored in some credit recoveries, resulting in a lower credit charge rate of 98bps from 150bps previously. Other assumptions on total loan growth remain unchanged at 4- 5% p.a. while credit costs for 2018-19E remain at 53-54bps.

Upgrade From SELL to HOLD; PT Raised to RM1.25 From RM0.78

We upgrade MBSB to HOLD from our previous SELL rating, as we have also raised our Price Target to RM1.25 based on a 1x P/BV multiple target on 2018E’s book value (from a PT of RM0.78 based on a 0.65x FY17E P/BV multiple target). The higher target multiple of 1x is being justified by an improving earnings outlook, with a decline in new NPL formation as the economic outlook improves, while MBSB’s loan loss cover has reached a more steady level of 113.3% (1Q17) from 93.7% (1Q16). In order to mitigate credit risks in its books, MBSB will continue to diversify into assetsecuritization programs, re-price its loans at higher rates and explore potential fee income in Takaful distribution. Downside risks: weaker loan growth, new asset impairments. Upside risks: a favourable merger deal with the Asian Finance Bank, writeback and recoveries of impaired loans.

Source: Affin Hwang Research - 25 May 2017