News

Media reported that MBSB is aiming to become an Islamic Bank in the next 5 years.

According to the reports, the plan was put on hold in view of the CIMB-RHBCAP-MBSB mega-merger (discussions began 10 Jul 2014) which was subsequently called off on 14 Jan 2015.

Comments

This serve as a confirmation on the Group's aspiration to become an Islamic Bank. There were already hints of this in the past few months.

Currently an exempt finance company, the transformation will allow the Group to tap into cheaper sources of funding presently not available to it (e.g. current accounts), and to increase its product offerings (e.g. treasury products) which could become a future source of non-interest income (FY14: 7% of total income)

The takeaway from our previous meeting with management was that the Group is still open to corporate exercises that will help it to achieve or accelerate its aspirations and transformation plans. Hence, it is possible that we may see the Group in another merger and acquisition (M&A) scenario in the next 5 years.

At present, there are 16 licensed Islamic banks in Malaysia (please see Table 1), which could be future competitors if MBSB were to become an Islamic bank. On the flip-side, they could also be potential partners (including foreign players whose shareholdings are restricted to 49%-ownership) to help MBSB achieve its aspiration. Rumour has it that Bank Islam (which is aiming to grow its local footprint) could be a potential partner. However, MBSB has since denied that it has begun discussions with any party.

The aspiration runs along-side its 2015-2020 "second marathon" aspirations of, amongst others, elevating its fee income contribution (FY14: 4% of total income) and expanding its corporate loans (in selected industries such as plantation, property and industrial equipment) to make up 30% of its portfolio (FY14: 11% of gross loans).

Outlook

We believe that the Group would likely be an acquisition target in an M&A scenario given the Group’s smaller market capitalisation of RM6b (larger only compared to AFFIN).

Its share price could re-rate up to the offer price if the deal is made attractive enough to succeed.

Forecast

No changes to our forecasts.

Rating

Maintain MARKET PERFORM

Those invested in the counter may consider staying invested as things could get interesting. Meanwhile, potential investors should keep an eye out for further developments.

Valuation

TP of RM2.40 maintained based on a FY15 blended pricebook/ price-earnings ratio of 1.4/7x.

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 hire purchase and property-related projects.

Source: Kenanga Research - 16 Apr 2015