Prime Minister Datuk Seri Najib Tun Razak announcedyesterday that the Government is scrapping the New Remuneration Scheme forcivil servants (SBPA) and the existing Malaysian Remuneration System (SSM) willbe reintroduced with some enhancements. The PM added that a commission will beset up to conduct a comprehensive study of the civil servant remunerationsystem.

A more structured,transparent approach. The previous SBPA was met with criticism from thecivil servants union which claims that the scheme awards unequitable salary increasesthat favour those in the higher ranks of the civil service. We gather that the salaryadjustments announced yesterday, as shown in Figure 1, will be backdated from 1Jan this year and will be paid from this month (or the next) onwards. The PMalso announced that the Cost of Living Allowance (Cola) had been increased fromRM200 to RM250 for those in the B category while those in the C category willreceive RM150 compared with RM100 before. Given that the election is justaround the corner, the move appears to be an attempt to appease thelower-ranked government servants who make up the majority of the 1.4m civilservice force.

Already factored intoMBSB's earnings. We believe the overall effect from the pay hike showed inFigure 1 is equivalent to the upward salary adjustments under the SBPA, whichwe have incorporated into our forecasts. As depicted in Figure 2, assuming a conservative5% growth (average historical growth: ~8%) in Federal Government emolumentsfor  2012, the potential  size of the civil servant personal financing market will theoretically expand byRM4.6bn. This means that MBSB can easily expand its civil servants personalloan base by another RM204.8m, assuming that the company maintains its currentmarket share at 4.5%. However, we believe that the positive effects could onlybe measured from 2Q12 onwards as the adjusted salaries would only be paid outthis month or the next.

Maintain BUY.  Apart from the benefits arising from thecivil servant salary hike, we remain positive on MBSB's prospects as wecontinue to like the company's diversification strategy and innovativeness inexpanding its business. Thereby, we are retaining our BUY recommendation on thecounter, as well as its fair value of RM2.70, premised on 2.6x FY12 P/BV.

Source: OSK188