Period     2Q13/6M13

Actual vs. Expectations   The 6M13 net profit of RM325.8m was way above expectations, accounting for 63% and 57% of our forecast and consensus estimates, respectively.

Dividends    No dividend was declared. As a result, we have revised down our FY13 NDPS estimate from 13.1 sen to 10.0 sen. FY14 NDPS was also revised lower from 15.7 sen to 12.0 sen. These NDPS estimates are based on a 30% payout ratio.

Key Results Highlights    2Q13 vs. 1Q13: The Group’s net profit came in at RM165.1m, representing an increase of 2.7% from RM160.7m in 1Q13. The improved financial results were mainly due to the 8.7% increase in gross loans. Personal financing remains as the main loan portfolio driver, which grew 13.3% during the quarter and accounted for 72.2% of the entire loan book. Contrary to our expectations, NIM surprisingly increased by 14bps due to higher Loan-to-Deposit ratio of 109.7% vis-à-vis 107.3% in 1Q13. Cost-toIncome ratio also improved significantly by 4pps to 16.2% (from 20.2%). However, loan loss provisions jumped >200% due to a low base effect as the Group saw some write-backs of approximately RM30.5m in 1Q13. Even so, with the continuing improved asset quality (3.2% vs. 3.4%) and loan loss coverage (262.3% vs. 274.8%), annualised credit charge/ratio for the quarter only stood at 0.71% as opposed to FY12’s 0.96%.

1H13 vs. 1H12:  The 6-month net profit of RM325.8m grew 88.2% as compared to RM173.1m due to (i) a YTD gross loans growth of 27.5% especially in personal financing that grew at a faster pace of 46.1%, (ii) a lower cost-toincome ratio of 18.1% (vs. 20.5% previously); and (iii) a lower credit ratio of 0.48% (vs. 1.39% previously).  NIM, on the other hand, has also been well-maintained at 4.35% despite keen competition.

Outlook    This is a quarter that was full of positive surprises. 

While we remain cautiously optimistic over the Group’s prospect, the recent tightening in lending rules and heightened competition could potentially curb its loans growth and NIM for now. 

The Group has come out with a few business strategies to counter the challenging operating environment (see Appendix for details).

  The Group is planning to address its relatively low core capital ratio by raising fresh capital, whichmay include the securitisation of loans, issuance of debt and equity capital. Its capital raising an is expected to be finalised by end of the year.

Judging from the latest quarterly numbers and our estimates, we believe the Group should be able to meet its FY13 headline KPIs of, (i) annualised group net return on equity of 15.0%; and (ii) annualised group revenue growth of 25.0%.

Change to Forecasts     We have revised our FY13 and FY14 net earnings estimates from RM518.4m and RM623.5m, respectively, to RM596.8 (+33.6% YoY) and RM673.2m (+12.8%) by taking the following factors into consideration. 

We have imputed in lower loans growth rate of 7% for 2H13, translating into a full-year loans growth estimate of 26% (vs. 50.8% in FY12). We also forecast FY14 loans growth at a more moderate pace of 15.3%. We have also taken potential new markets such as auto financing and corporate loans into account.

As for NIM, while it has been holding up well, we have conservatively factored in a margin squeeze scenario. We have imputed 20bps cut in NIM for both FY13 and FY14.

As we understand that the Group is not allowed to charge the 1.5% loan processing fees from early-July 13, we have slashed our FY13 non-interest income substantially and zerorised this segmental contribution for FY14. While we believe there are still contributions from other businesses such as bancassurance, we prefer to adopt a conservative stance. 

At the same time, we also assume Cost-to-Income ratio to gradually normalise from the currently low level of 18.1% to 20.1%, the average for both FY13 and FY14.

In line with the improved asset quality and more loan recovery initiatives, we have estimated a lower credit ratio of 0.92% and 0.90% for FY13 and FY14 vis-à-vis FY12’s 0.96%. However, we believe our estimates are relatively conservative in contrast to 0.48% achieved in 1H13.

Rating  Maintain OUTPERFORM

The stock offers a total return of ~13% at this level.

Valuation     While we have raised our earnings estimates, we have, however, maintained our target price of RM3.40. 

This is because (i) we expect the price multiples to soften due to the weaker investment sentiment arising from BNM’s recent administrative measures and (ii) the outstanding 502.6m inthe-money warrants (with strike price at RM1.00 and maturity date at 31 May 2016) may resulted in a lower EPS as oppose to its net profit.

At RM3.40, it represents a FY14 PER of 8.8x or FY14 PBV of 2.5x (which is the +0.5SD to 3-year PBV average). 

These valuations are undemanding, in our view, as they are backed by our FY14 ROE estimate of 31.3%.

Risks    Potential tighter regulations by the central bank.

However, as we have factored in most of the potential downside risks, we do not rule out MBSB delivering better-than-expected results in coming quarters.

Source: Kenanga