MBSB’s 2Q17 net profit rebounded by 44.6% yoy though was down 10% qoq. The 1H17 results came in within Affin’s and market expectations on the back of lower credit cost and lower funding cost. We believe that hefty provisions in 2016 will unlikely be repeated in 2017 given that the NPLs are peaking, while approvals for new personal financing are more stringent. We are ceasing our coverage on the stock as we do not foresee much near-term ROE improvement despite the proposal to acquire 100% in Asian Finance Bank.

2Q17 Net Profit Up a Robust 44.6% Yoy. 1H17 Saw Lower Credit Cost Yoy

MBSB’s 2Q17 net profit of RM91.1m rose +44.6% yoy due to improved operating income and a decline in allowances, while on a sequential basis, dipped by 10% qoq driven by higher operating expenses. 1H17 operating income was up 9.4% yoy as funding pressure eased, resulting in a netinterest-margin (NIM) improvement of 20bps yoy to 3.4%. The overall gross loan and financing rose by 3.6% yoy. Bulk of this was driven by expansion in the corporate loan segment (+28% yoy). Overall results appear to be within Affin and market expectations.

Recent Approval From MOF on the 100% Acquisition of AFB

MBSB had on 18 August 2017 obtained a notification from BNM on the Ministry of Finance’s approval on its proposed acquisition of 100% interest in the shares of Asian Finance Bank (AFB). In our view, the acquisition is not expected to positively impact MBSB materially based on AFB’s 1Q17 annualized ROE of 1.1%. AFB is burdened with a high cost-to-income ratio of 82.5% (1Q17) while the estimated net profit margin is thin at 1.7% vs. the average banking sector’s NIM at 2.2-2.3%.

Ceasing Coverage on MBSB

We are ceasing coverage on MBSB as the stock’s 2017-19E ROE is expected to stay below our minimum expectation of a 10% investor’s cost of equity, despite the anticipation of an improving earnings outlook (albeit from a low base). Our last Price Target on MBSB was RM1.25 based on a 1x P/BV multiple target on 2018E’s book value. In order to mitigate credit risks in its books, we understand that MBSB will continue to diversify into assetsecuritization programs, re-price its loans at higher rates and explore potential fee income in Takaful distribution.

Source: Affin Hwang Research - 22 Aug 2017