Period  1Q14

Actual vs. Expectations   The 1Q14 net profit of RM196.7m (+18.4% YoY or +47.3% QoQ) accounted for 30.9% and 31.3% of our FY14 forecast and consensus estimates of RM635.6m and RM627.0m, respectively.

 However, we deem the results to be inline with expectations as the bottom-line was boosted by lower annualised credit cost of 19bps (vs. 112bps in 4Q13 and 24bps in 1Q13). Recall that the low credit cost in 1Q13 also resulted in 28% contributions to F13 earnings, which were proven not sustainable. Note that the full-year credit charge in FY13 was as high as 94bps.

Dividends  As expected, no dividend was declared for the financial quarter under review.

Key Results Highlights

1Q14 vs. 4Q13:  The Group’s net profit came in at RM196.7m, representing a surge of 47.3% from RM33.6m in 4Q13. However, EPS only grew 9.3% to 8.4 sen (from 7.7 sen) as a result of larger share base post rights issue which was completed in end-2013.

 The strong set of results was due mainly to lower allowances for impairment on loans & financing of 19bps as opposed to 112bps in the previous quarter as well as a lower effective tax rate of 26.3% as compared with 46.9% in 4Q13.

 However, we think that the low provisioning was not sustainable despite the net NPL ratio (based on 3-month classification) improving to 5.2% from 5.4% in 4Q13. Recall that the low credit cost in 1Q13 had resulted in 28% contributions to FY13 earnings and the full-year credit charge in FY13 was as high as 94bps.

 The lower credit cost was sufficient to offset higher cost-to-income ratio (CIR) of 21.7% (vs. 20.6% in 4Q13). The higher CIR was partly owed to infrastructure expansion and talent acquisition as well as higher cost associated with the increase in liquid assets portfolio in meeting their liquidity management targets.

 As for the top-lines, Total Income of the Group declined 16.3% QoQ inline with lower net interest income (-43.5% QoQ), Islamic Banking Income (-6.8% QoQ) and other (non-interest) operating income (-45.5% QoQ).

 The dip in net interest income was a function of sharper-than-expected decline in NIM. The annualised NIM declined by 67bps (vs. our estimate of ~30bps) from previous quarter to 3.84%.

 Besides, the loan base only showed a negligible QoQ improvement of 0.4% albeit growing 10.3% YoY. This growth rate is below our ful-year estimate of 13.0%. The slower growth could reflect the tighter measures announced by BNM and keener industry competition. While the Group aims to drive growth via corporate lending (-13.2% YoY) and auto financing (+44.0% YoY), these two segments only accounted for 10.2% to the total loan thus far. Besides, loans to these two segments also declined 10.8% YoY collectively.

 Total deposits from corporate and retail clients grew at a faster pace of 17.4%, hence (net) Loan to Deposit Ratio (LDR) declined to 104.7% from 107.5% in 4Q13 and 107.3% in 1Q13.

1Q14 vs. 1Q13:

 Despite seeing higher operational cost with CIR increasing from 18.5% to 21.7%, as per the aforementioned reasons, the Group’s 1Q13 net profit surged 18.4% YoY from RM166.1m in 1Q13.

 Apart from the slightly better annualised credit charge-off rate of 19bps vs. 24bps in 1Q13 and lower effective tax rate of 26.3% vs. 29.9%, Total Income of the Group also improved 15.9% YoY attributable to all income streams.

 Net Interest Income grew 12.2% YoY inline with the 10.3% and 14.6% growth rates in both gross and net loans despite a 44bps decline in NIM. Islamic Banking Income also grew, by 16.0% YoY inline with the 16.8% YoY growth in PF-i. Other operating income jumped 22.7% YoY.

Outlook  We understand that MBSB will increase its focus on the expansion of corporate business, which includes Project Financing, Contract Financing, SME Cash Express and Wholesale Banking along with new strategic growth areas such as Oil Palm Plantation and Industrial Hire Purchase (apart from the conventional retail lending and property-related loans).

 For corporate business, we understand that the Group has secured loan approvals of RM0.8b and financing for 26 PRIMA projects worth RM1.8b in 1Q14. Excluding a disbursement of RM0.2b, the Group should see approximately a loan pipeline of RM2.5b for the next few quarters. For wholesale banking, MBSB has also secured loan approvals of RM0.7b in 1Q14. Excluding a disbursement of RM60m, there is still c.RM0.8b of loan pipeline for the year.

 Should these loans are fully disbursed within the year; the Group’s loan base may grow at a higher rate as opposed to our FY14 loan growth estimate of 13.0%. Our FY15 loan growth estimate is pegged at 12.1%.

 Apart from intense industry competition, the change in loan mix should see NIM declining further. While we maintain our expectations of a 32bps decline in NIM, we do not rule out more substantial declines judging from the 44bps YoY decline in 1Q14.

 As for other major lower line assumptions, we reckon that CIR should be sticky in the range of 23.0%-23.5% for the next two years. Credit cost, on the other hand, is expected to register at around 95bps for the next two years as well.

Change to Forecasts We maintain most of our assumptions. Nonetheless, we have made minor adjustments in our estimates due to house-keeping purposes. Our FY14 net profit estimates are now at RM678.8m, representing a +6.8% revision from the previous estimates of RM635.6m.

 We also introduce our FY15 estimate of RM764.4m. While this estimate is >15% higher than consensus FY15 estimate of RM663.3m, we are comfortable with our forecast as we have factored the foreseeable uncertainties and concerns into our forecasting model.

Rating Maintain OUTPERFORM

 While there are some concerns over its loans growth prospect as well as its credit cost and asset quality directions, we are generally optimistic of its prospects. This is because we have factored in most of the potential downside risks, hence we do not rule out better-than-expected results in coming quarters.

 As negative expectations could have been priced in, the stock could potentially offer >20% Total Return from here.

Valuation  We maintain our Target Price (TP) of RM2.65 (cum-rights at RM3.05).

 This TP is based on FY15 PBV of 1.5x or FY15 PER of 9.1x.

 The PBV valuation represents -2SD below its 2-year mean due to lower expected ROE of 21.6% and 17.5% for FY14 and FY15 vis-a-vis its 3-year range of 34%-43%.

 The PER valuation represent the historical PER of MBSB as at end-2013.

Risks to Our Call Potential tighter regulations by the central bank.

 Higher credit cost arising from weaker asset quality.

 Higher credit risk as the Group has started to grow its loan book via industrial HP and property related projects.

Source: Kenanga