Period

4Q15/12M15

Actual vs. Expectations

The reported full-year net profit of RM259.2m (≈-75% YoY) was below expectations, accounting for 81%/74% of our/consensus estimates, dragged by high allowances for impairment losses.

Dividends

A 3.0 sen/share dividend was declared, as expected.

Key Results Highlights

12M15 vs 12M14, YoY

12M15 reported Net Profit (NP) fell by 74.6% (12M14: +69.9%), dragged by higher allowances for impairment losses of RM697.2m (12M14: RM126.2m).

Total income fell slightly by 0.2% (12M14: -9.3%) dragged by fall in Non-interest income (NOII) and Net interest income (NII) of 31.9% and 14.5% respectively (12M14: 34.7% and 149.8% respectively). The meagre fall was mitigated by an improvement in Islamic Banking Income of 6.0% (12M14: -18.8%).

NIM compressed by another 20bps while Cost-toincome ratio (CIR) was contained as it went up only 30bps to 22.7%.

Loan and deposits growth rates were almost even at 4.4% and 3.8%, respectively, (12M14: +2.4% for both) resulting in flattish Loan-Deposit Ratio (LDR) at 119%. We expected loan and deposit growth of +3.8 and +3.5% respectively.

Corporate loans/financing accounted for 15% of total loans/financing (12M14:11%) whilst Personal Financing fell by 4ppts to 68% and mortgage financing was flattish at 16%.

Asset quality deteriorated as gross impaired loans ratio (GIL) went up by 80bps to 7.4%. Credit costs went up by 180bps to 2.2%. However, Loan loss coverage was up by 15.5ppts to 92.2%.

Annualised ROE fell to 17.4 ppts to 5.3%. 4Q15 vs. 3Q15, QoQ

Estimated Core NP was in the red at RM14.2m (3Q: RM63.5m) due to higher allowances for impairment at 36.1% and higher taxation at RM17.1m (3Q: RM3.3m).

Top line growth was better at 2.3% brought about by higher NOII and NII at 18.7% and 14.4%, respectively.

NIMs improved by 10bps to 3.3% while Cost-to- Income ratio (CI) was flattish at 22%.

Deposits declined by 3.7% vs loan growth of 0.9% resulting in a higher LDR by 5ppts to 119%.

Asset quality deteriorated further as GIL went up by 70b bps to 7.4% and credit charge went up by 80bps to 3.1%.

Outlook

We expect MBSB to continue suffering high credit costs as it continues its impairment programme which we expect to continue until 1Q16.

Loan growth will be tight due to its high LDR ratio and we expect further NIMs compression as it continues to chase for deposits.

We revised our assumptions for FY16E/17E; i) Loans growth at 3.0%/3.0% (previously at 3.6%/4.2%) ii) Deposits growth at 4.5%/4.4% (previously at 3.0%/3.5%) iii) NIMs at 3.2%/3.1% (previously at 3.3% for both years) and iv) We maintained credit charge at 1.3%

Change to Forecasts

FY16E earnings slashed by 11% to accommodate the Group’s impairment programme which we understand will see another quarter of elevated credit cost and lower loan growth.

Rating

Downgrade to Market Perform

Valuation

Target price is reduced to RM1.53 (from RM2.08), based on blended FY16E 1.3x P/B and 5.2x FY16E PER (implying -0.5SD below 5-year average PE).

Previously, we use FY16E PB/PE 14x/10.4x with a +1.5SD due to the possibility of merger with Bank Muamalat.

Risks

Capital raising activities which could dilute ROE.

Corporate exercises, M&A and MSS.

Slower-than-expected growth in corporate lending/financing.

Higher credit cost arising from faster-than-expected deterioration in asset quality or lower disposable income.

Source: Kenanga Research - 25 Feb 2016