Post-analyst briefing with management last Friday, we reduced our TP to RM1.40 (previously RM1.53) for MBSB but maintain our MARKET PERFROM call. At the briefing, while reviewing its FY15 results, management gave guidance on its loan loss provisions for the next two financial years and reiterated its aspiration to become an Islamic Bank.

Results reviewed. To recap, MBSB reported net profit of RM258m in FY15, a fall of 75% dragged by higher allowances of impairments of RM697m. Higher allowances for impairments have been the bane of MBSB’s earnings since as it embarked on a collective assessment programme in late 2014. The programme is part of its efforts to adopt banking industry standards, as it strives to become a full-fledged banking entity. Recall that the proposed CIMB-RHBCAP-MBSB merger was called off last year in which we believed partly due to the differences in MBSB’s provisioning standards.

Collective assessment to continue into 2017. The programme was expected to last in the 1H2016, but management reiterated that it will last for two more years until 2017. This is due to adopting of a new methodology coincide with FRS 9 BNM guidelines. Thus management guided that credit costs which was at 2.1% for FY15 will remain around 2.0% for FY16/FY17. We understand that management expects loans growth of between 5-6% for FY16 (FY15: 4.4%) as it strives for higher composition of corporate loans & financing which currently stands 15% of total loans & financing. Management also guided that NIM will be under 3.0% (vs. FY15 NIM of 3.4%) as it strives to boost its liquidity funding.

Moving ahead. Despite the failure of two merger talks, Management reiterated that its still aspiring to become an Islamic Bank and is still open to corporate exercises that will achieve or accelerate its aspirations and transformation plans. Hence its possible that we may see the Group in another merger and acquisition (M&A) scenario, although we believe this could be unlikely to happen in the shortterm. Management believes that the rapid adherence of the BNM guidelines will support its claims in future pre-merger talks.

Forecast earnings revised. With this new guidance, we revised our assumptions for FY16/FY17; Our new assumptions for FY16E/17E; i) Loans growth at 5.0%/5.0% (previously at 3.0%/3.0%); ii) Deposits growth at 6.0%/6.0% (previously at 4.5%/4.4%); iii) NIMs at 3.0%/3.0% (previously at 3.2%/3.1) and iv) credit charge at 2.0% for FY16/17 from 1.3% previously). Our FY16/FY17 earnings are slashed downwards by 63%/57% to RM152m/RM166m.

TP reduced to RM1.40 with MARKET PERFORM. Post briefing, we reduce our TP to 1.40 (from RM1.53), based on a based on blended FY16E 1.4x P/B and 6.5x FY16E PER (5-year average PB/PE). Previously, we use FY16E PB/PE 1.3x/5.2x (5- year average) with a - 0.5SD. We maintain our Market Perform rating. Nonetheless, we believe any new merger talk will see renewed interest in the stock.

Source: Kenanga Research - 1 Mar 2016