Period  3Q13/9M13

Actual vs.Expectations The 9M13 net profit of RM464.0m accounted for77.7% and 77.1% of our forecast and consensus estimates, respectively, despite higher collective impairment allowance following an increase in collective allowance made for personal financing and mortgage portfolios.

Dividends  Declared an interim single-tier dividend of 5.0 sen/share (Ex-date: 1 Nov 13, Entitlement date: 6 Nov 13) vs. previous year’s interim dividend of 4.5 sen. The dividend payment is in line with our full-year NDPS estimate of 10.0 sen.

Key Results Highlights

3Q13 vs. 2Q13:

 The Group’s net profit came in at RM132.7m, representing a decrease of 19.6% from RM165.1m in 2Q13.

 The weaker set of results was due to higher loanloss provision of RM114.7m vs. RM54.2m in the previous quarter. As such, annualised credit cost almost doubled from 71bps in 2Q13 to 143bps in 3Q13. The higher provision is in line with an uptick of net impaired ratio to 3.4% from 3.2% in 2Q13. Consequently, loan-loss coverage increased slightly to 250.4% from 262.3% for the similar period.

 The higher impairment was due to an increase in collective allowance made for personal financing and mortgage portfolios. For the next two quarters, management guides that the collective allowance is expected to be at the same level (or less) as per the current quarter under review but it should smoothen out subsequently.

 Top-lines wise, the loan base continue to grow albeit at a slower rate. Despite a 26.6% YoY growth in gross loan, the QoQ growth rate was slower at 3.4% vs. 8.8% in previous quarter due to a slowdown in personal financing. This loan segment only grew 2.9% QoQ vs. 13.3% in the previous quarter. The slower growth also reflected the tighter measures announced by BNM. Corporate business lending activities (+10.1% YoY, +12.8% QoQ) are hence expected to support growth.

 While it is still marginal, NIM has started to show sign of compression, and declined by 3bps as opposed to the previous quarter. A lower loan-todeposit ratio of 102.7% vis-à-vis 109.7 in 2Q13 could partially attributable to such compression. As a result, Net Interest Income declined 10.3% QoQ while Islamic Banking Income was only able to grow at a mere 1.3% QoQ.

 Cost-to-Income ratio deteriorated slightly to 17.3% (from 16.2%).

 Effective tax rate registered at 32.4% (vs. 33.3% in 2Q13). The higher-than-statutory tax rate for the current quarter was mainly due to adjustments made for non-allowable items.

9M13 vs. 9M12:

 The Group 9M13 net profit of RM464.0m increased by RM201.0m or 76.4% higher as compared to 9M12.

 The increase was mainly due to higher income from Islamic banking operations (+66.5% YoY) via personal financing and higher net interest income from conventional business.

 Cost-to-Income ratio is considered well maintained with a lower ratio of 17.8% as opposed to 20.3% in 9M12.

 Despite higher annualised credit cost in 3Q13, the 9M13 annualised credit cost was still lower at 85bps as compared to 125bps in 9M12.

Outlook  On 5 July 2013, BNM announced measures to further promote a sound and sustainable household sector. Consequently, the personal financing and mortgage portfolios had experienced slower growth.

 Going forward, the Group has earmarked corporate loan as another leg of its portfolio which the Group has further strengthened.

 The Group continues to maintain its FY13 Headline KPIs of (i) ROE>15% and (ii) revenue growth > 25%, which should be achievable, judging from the performance reported in the 9M13 results (34.1% and 32.2%, respectively).

 We are also not overly concerned over the potential dilution to its EPS and ROE arsing from the proposed rights issue, as this capital raising exercise is required to sustain its balance sheet growth story.

 As for its KPI of net return on equity of 15.0%, this may not be a concern as well. This is because even with a doubling in shareholders funds, its ROE will only be reduced by 1/3, translating into >20% given its latest annualised ROE of >30%.

Change to Forecasts

 We have fine-tuned our earnings estimates to reflect the observed trends i.e. (i) NIM compression and (ii) higher credit cost.

 We have fine-tuned our FY13 and FY14 net profit estimates lower to RM555.0m and RM635.6m as opposed to our previous estimates of RM596.8m and RM673.2m, respectively.

Rating  Maintain OUTPERFORM but with a lower Target Price of RM3.05.

Valuation  We believe the recent price weakness could be owing to the weaker sentiment over the household loan issue and potential deterioration in asset quality as well as dilution arising from rights issue.

 However, we believe these concerns could have already been reflected in our conservative forecasts.

 Based on an unchanged target FY14 PBV of 2.5x (which is the +0.5SD to 3-year PBV average) against our revised FY14 BPS of RM1.22 vs. RM1.37 previously, the Target Price has been revised lower to RM3.05 (from RM3.40 previously).

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