Spotlight still on net interest income. MBSB's 9MFY12 earnings of RM236.0m were 8.9% higher than its 9MFY11 figures even though its 3QFY12 net profit lagged behind 2Q's high base by 3.9%. We note that once again, net interest income from both conventional (+10.2% y-o-y) and Islamic banking income (+79.2% y-o-y) stole the limelight. However, the 9MFY12 earnings momentum was offset by a drop in noninterest income (-33.8% y-o-y), increase in operating expenses (+32.3% y-o-y), higher loan loss provision (+59.4% y-o-y) and higher tax expenses (+72.5% y-o-y).

Asset quality and cost controls improve. MBSB's gross non-performing loans (NPL) ratio improved to 10.9% in 3Q12 from 12.4% in 2Q12 and 23.1% in the corresponding quarter last year. Net NPL ratio improved significantly from 11.0% in 3Q11 to 4.1% in the quarter under review. MBSB's cost-to-income ratio (CIR) was 50bps better at 19.8% in 3Q12, resulting in the 9MFY12 CIR improving to 20.3%. Management still expects CIR to inch up when its Core Banking System (CBS) kick-starts at the end of this month.

Deposit growth beats loans growth. MBSB's deposits surged 48.5% y-o-y and 11.9% q-o-q, outpacing the YTD loans growth of 45%. The company's effective retail deposits campaigns also led to its loan-to-deposit ratio (LDR) falling to 115.5% from 122.4% in 2Q12. Despite the RM500m increase in securitization, the group remains focused in capital management. It remains focused on aggressive retail deposit campaigns to diversify from its reliance on securitization on loan assets.

Maintain BUY, but earnings revised lower. Following updates in the company management's guidance, we are revising lower our FY12 and FY13 net profit forecasts by 4.2% and 4.3% respectively. Maintain BUY, but with our FV revised to RM2.81, pegged to 2.4x PBV, assuming a 4% growth rate, COE of 11% and ROE of 23.1%.

Personal loans still comprises largest chunk of total loans. Gross loans in 3Q12 expanded aggressively by 45.3% y-o-y, albeit slowing down with a growth of 4.6% q-o-q (vs 2Q12's 47.0% y-o-y and 21.7% q-o-q). Net loans growth was even more aggressive at 60.1% y-o-y and 5.6% q-o-q (vs 2Q12's 65.9% y-o-y and 24.5% qo- q). This was mainly due to a continued sharp spike in personal loans, which rose 112.5% y-o-y, though the qo- q growth has slowed to single-digit at 8.0% (vs 2Q12's 132.0% y-o-y and 39.7% q-o-q). However, the group's newly-embarked auto financing segment is the fastest growing segment, expanding 167.3% from RM29.4m in 2Q12 to RM78.5m in 3Q12. Other segments, namely mortgages, continue to diminish at -4.4% y-o-y and -1.8% q-o-q (vs -4.0% y-o-y and -1.0% q-o-q in 2Q12). Corporate loans have also yet to pick up pace at -1.9% q-o-q in 3Q12 vs 0.4% q-o-q in 2Q12, and a y-o-y growth at -15.8% in 3Q12 vs -17.8% in 2Q12.

PF-i to be the main driver amid despite normalising growth. Despite the growth being normalized to singledigit q-o-q growth this quarter, PF-i schemes are expected to continue to drive loans growth due to support from the refinancing needs of the customers. MBSB CEO Dato' Ahmad Zaini bin Othman expressed that an estimated 70% of the PF-i schemes are due to refinancing from the higher rates seen in 2009/10.

Not much growth in other major loan segments. Given that other loans segments are on a decline, MBSB has reiterated its preference to engage different strategies, such as identifying niche segments for mortgages or enhancing customer services and adding dynamic features to home financing.

Long way to go to become a full-fledged bank. MBSB's tier-1 capital ratio and risk weighted capital ratio stood at 6.6% and 9.5% vs the industry's latest 13.0 and 14.8% respectively. Also, MBSB has yet to venture into trading in interbank instruments, government bonds and current accounts nor has it invested in ATMs, but these will eventually materialize as part of its efforts to close the gap with the banks.

Deposit campaigns to help sustain loans. Management attributes the success of the current quarter's deposit growth to the launch of two aggressive retail deposits campaign. These campaigns will continue as MBSB leverages on its existing campaigns like the kids' savings, as well as reach out to corporations, federal government associations and small-and-medium (SME) customers to lure corporate deposits. Given that the bulk of MBSB's deposits comprise corporate deposits, management recognizes the importance of avoiding too much reliance on deposits that are large and chunky in nature, by balancing their deposit portfolio with smaller-ticket, yet high quality SME or retail deposits.

Changes in forecasts. Management has given some updates, namely: i) net interest margin (NIMs) can be maintained at around 4.6% (vs 4% previously), but ii) the tax rate will move higher to 30% due to the under-provision of taxes in the previous financial year, and iii) a slower pick-up in non-fee income for FY12 and hence, a reduction in our forecasts.

Minor changes in dividend forecast. Despite the earnings revision, we still expect MBSB to be able to pay about 13 sen in gross dividend this year. The company has already announced an interim 6 sen gross dividend before tax.

Source: OSK