At  MBSB's  briefing  yesterday,  management  said  NIMs  will  largely  be  sustained  at the current high levels while it seeks greater clarity on its use of the AG Code, which may  potentially  give  rise  to  cost  savings  on  loan  transactions.  MBSB  said  it  will emphasize  asset quality  management, especially  NPLs,  and boost  its capital  ratios as  a  stepping  stone  toward  matching  industry  levels  and  Basel  III  requirements. Maintain BUY, with our FV unchanged at RM3.15.  
 
Cost savings from using AG Code. MBSB told the briefing that it has received approval from  many  states'  Accountant-Generals  (AG)  to  utilize  the  AG  Code.  From  what  we understand,  access to the AG Code will allow MBSB to directly deduct salaries from MOF, which will potentially allow the group to cut its transaction costs to as low as RM1 per loan. Without the direct deduction, MBSB's cost via the existing ANGKASA BPA code would have been about 1.5% per transaction.
 
Pre-emptive  provisioning.  We  are  of  the  view  that  MBSB  will  take  pre-emptive provisioning  and  NPL  management  measures  match  the  banking  industry's  asset  quality indicators. The industry NPL ratios were last reported at 2% (gross) and 1.4% (net). We are raising  our  forecasts  for  provisions,  and  adjusting  our  loan  loss  coverage  forecasts  (LLC) higher to 97.6% for FY13 and 103.1% for FY14 respectively, while projecting for total credit costs of 1.1% and 1.2% for FY13 and FY14 respectively.
 
Raising  capital.  MBSB  said  it  is  considering  boosting  its  capital  via  a  combination  of  a dividend  reinvestment  plan  and  a  rights  issue  in  order  to  sustain  its  loans  growth momentum  and  lay  the  groundwork  to  meet  regulatory  requirements.  Based  on  our estimates,  a  RM500m  boost in  the group's shareholder's  equity  will  equates to a 1.5%  to 2% boost in the company's capital ratios.
 
Keeping FV at RM3.15. Despite the upward 6.8%/2.4% revisions in our FY13/ FY14 profit forecasts, we are retaining our FV at RM3.15 as we adjust our equity estimate against our dividend payout forecast of 35%. Maintain BUY.

Maintaining loans growth target. As expected, MBSB kept FY13 20%-25% loans growth targets  but  remains  cautious  on  possible  downside  risks.  It  expects  personal  loans  to continue  to  be  the  main  growth  driver  as  about  70%  of  such  loans  are  for  refinancing purposes.  One  strategy  moving  forward  is  to  allow  branches  and  agents  to  encourage customers  to  refinance  their  existing  loans  via  MBSB.  Our  loans  growth  target  is unchanged at 21.8% for FY13 and 16.6% for FY14 respectively.

Incorporating NIMs upside. We are, however, lifting our net interest margins (NIMs) target to  4.4%  for FY13  and  4.3% for  FY14  respectively.  MBSB's NIMs  came  in  at  4.9%,  26bps higher  than  FY11's  4.6%.  Our  corresponding  estimate  for  FY12  is  4.6%.  We  believe  the high  NIMs  will  be  sustained  with  help  from  MBSB's  recognition  of  the  higher  effective interest rate corresponding to an average expected shorter tenure of five years for its PF-i schemes.
 
AG Code to create savings. MBSB said it has received approvals from many federal and various state accountant-generals (AGs) to utilize the AG's direct salary deduction Code for personal loans taken by civil servants (AG Code). As a simple comparison,  it already had access  to  the  direct  salary  deduction  code  via  Angkatan  Koperasi  Kebangsaan  Malaysia (ANGKASA), the country's centralized collection agency for participating cooperatives.  We gather  that  access  to  the  AG  Code  will  allow  MBSB  to  directly  deduct  the  salaries  of  civil servants  instead  of  having  to  go  through  ANGKASA.  Another  advantage  is  MBSB  is  not required to surrender the BPA ANGKASA code and hence is able to utilize both codes as it wishes.  Management  said  the  AG  Code  would  most  likely  result  in  direct  cost  savings  as the current ANGKASA scheme attracts a commission rate of 1.5% per transaction. The AG Code  will  allow  MBSB  to  avoid  such  transaction  costs  as  it  charges  only  RM1  per transaction, which will ultimately boost margins from the civil servant loans segment. While we are heartened by the cost savings, we are cautious on the following

Likely to maintain current loans portfolio. The company acknowledges the challenges in maintaining  a  balanced  loans  portfolio.  We  think  MBSB  will  likely  retain  its  current  loans composition whereby personal financing (personal loans and auto loans) may contribute as high as 65%-70% of total loans. Its auto loans in particular will be provided to a wider reach of customers in the North/ South regions from the Klang Valley currently. MBSB has been attempting hard to shake off the previous perception of it being a 'lender of last resort' and is in the midst of rebranding its home loans packages as being affordable, but to customers of  good  credit  quality.  Likewise  for  corporate  loans,  MBSB  intends  to  choose  only  project owners/ developers with quality, sustainable projects and has rejected corporate applicants in the past. MBSB's selective approach may be the reason why the proportion of mortgages and corporate loans in its total loans portfolio has been shrinking.

Expect  pre-emptive  provisioning  as  NPL  management  likely  to  be  tightened.  Impairment allowance was down  by 80% q-o-q in 4Q12, which is in line with the historical quarterly trend as there was a slowdown in business for that quarter. But also recall that the 6%  jump  in  gross  NPLs  to  RM3bn  was  due  to  seasonality  in  some  of  the  legacy  loans portfolio.  We  also  understand  that  the  healthy  downtrend  of  NPLs  ratios  is  less  likely  to persist as tighter management is required to pull the ratios down in line with levels achieved by  commercial  banks.  The  industry  NPLs  ratio  was  last  reported  at  2%  (gross)  and  1.4% (net).  Moving  forward  we  are  of  the  view  that  MBSB  will  take  pre-emptive  measures  to tighten  its  NPLs  management  against  potential  seasonality  in  certain  portfolios.  We understand that as MBSB is not under the purview of BNM, the NPLs recognition may have not  been  consistent  with  the  three-month  arrear  previously  followed  by  the  commercial banks. We raised our forecasts for provisions, bringing loan loss coverage forecasts (LLC) adjusted  up  to  97.6%  for  FY13  and  103.1%  for  FY14  respectively,  while  total  credit  costs forecasts at 1.1% and 1.2% for FY13 and FY14 respectively.

Capital  management.  MBSB's  current  Tier-1  Equity  capital  ratio  is  estimated  at  close  to 7%, as opposed to 6.6% in 9MFY12. However, when converted into Basel III requirements management acknowledges that the  Tier-1 ratio would be closer to 5%. Our estimates for FY12  is  5.7%,  lower  than  the  minimum  requirements  of  6%  (by  2015)  should  MBSB  be subject to BNM's purview. MBSB may consider boosting its capital with a combination of a dividend  reinvestment  plan  and  a  rights  issue  in  order  to  sustain  its  loans  growth momentum. This exercise is likely to be carried out in tranches. Based on our estimates, a RM500m boost in its shareholder equity will equate to a 1.5% to 2% boost in the company's capital ratios.

Aiming  for  loans-to-funding  ratio  of  95%.  Management retains its target for a loans-to-funding ratio of 95% vs 100.2% in FY12.While thist is possible as MBSB plans to carry out securitization, we are still keeping watch on its loans-to-deposit (LDR) ratio, depending on the success of its future retail campaigns.

Special  dividend  unlikely  to  repeat.    Management  said  the  special  dividend  of  18  sen (gross)  is  attributed  to  balances  of  Income  Tax  Section  108.  Although  no  further  details were  disclosed,  we  believe  that  this  generous  special  dividend  is  unlikely  to  be  repeated. Excluding  this  dividend,  the  gross  dividends  per  share  based  on  the  interim  and  final dividends  (6  sen  and  9  sen  respectively)  amounting  to  17  sen  will  translate  into  a  35.7% payout,  in  line  with  our  original  35%  payout  forecast  for  FY12.  Hence,  we  retain  our dividend payout forecasts at 35% for FY13 and FY14.

Tax  rate  to  stay  at  31%.    We  have  also  retained  our  effective  tax  rate  of  31%,  but  this could adjusted if MBSB manages to secure approval from MOF to allow certain deductible items/ conditions that are applicable to financial institutions governed by BAFIA. We do not know for certain when the respective regulators will revert on this request.

Net  profit  rises.    Due  to  our  higher  in  NIMs  forecasts,  we  are  adjusting  upward  our  net profit by 6.8% for FY13 and  2.4% for FY14 respectively, slightly offset by: i) higher cost-to-income (CIR) ratios at 23% and 24% for FY13 and FY14, and ii) higher provisioning.

FV  retained  at  RM3.15.  Despite the upward revision in profit forecasts, our FV is retained at RM3.15 as we adjust our equity to reflect our dividend payout forecast of 35%. Maintain BUY,  with  our  FV  pegged  to  2.1x  BV,  assuming  a  3%  growth  rate,  COE  of  12%  and  a slightly  diluted  ROE  of  21.8%  vs  22.7%  previously.  Note  that  our  FV  is  based  on  a staggered dilution of the company's warrants through five years from FY11.

Source: OSK