1Q16 core earnings of RM35m were within our expectation but below consensus, accounting for 23%/10 of our/consensus estimates. No dividends declared as expected. We keep our earnings estimates for the Group unchanged but TP is reduced to RM1.34 as we rollover to FY17 and maintained our MARKETPERFORM call.

MBSB 1Q16 core net profit (CNP) was within expectations but CNP declined by 72% yoy attributed to higher impairments.

3M16 vs 3M15, YoY

• 3M16 reported Net Profit (NP) fell by 72% (3M15: -37%), dragged by higher allowances for impairment losses of RM218m (3M15: RM101m).
• Total income fell by 4% (3M15: -5%) dragged by fall in Noninterest income (NOII) and Islamic Banking income of 22% and 3%, respectively (3M15: -2% and -8% respectively). The meagre fall was mitigated by a subdued Net interest income (NII) improvement of 2% (3M15: +18%).
• NIM compressed by another 30bps to 3.2% while Cost-toincome ratio (CIR) improved by 2ppts to 22%.
• Deposits growth outpaced Loan growth at +11% and +5%, respectively, (3M15: -5% for deposits and +3% for loan) resulting in Loan-Deposit Ratio (LDR) dropping by 7ppts to 113%. We expected loan and deposit growth of +5 and +6%, respectively.
• Corporate loans/financing accounted for 16% of total loans/financing (3M15: 12%) whilst Personal Financing fell by 4ppts to 67% and mortgage financing was flattish at 16%. The rise in corporate loans/financing is in line with management strategic focus to grow the segment while reducing its personal financing.
• Asset quality deteriorated as gross impaired loans ratio (GIL) went up by 90bps to 8%. Credit costs went up by 120bps to 2.5%. However, Loan loss coverage was up by 16ppts to 94%.
• Annualised ROE fell 7 ppts to 3% as earnings were shaved drastically by higher impairments.

1Q16 vs. 4Q15, QoQ

• Estimated Core NP was at RM35m (4Q15:RM14m) due to lower allowances for impairment at RM218m (4Q15: RM266m ) and lower taxation rate at 11% (4Q15: 878%).
• Top line growth declined by 4% brought about by decline in all 3 segments; NII (-6%), Islamic banking income (-2%), and NOII (-
• 16%).
• NIMs fell by 10bps to 3.2% while Cost-to-Income ratio (CI) was flattish at 22%.
• Deposits growth at 7% vs loan growth of 1% resulting in a lower LDR by 6ppts to 113%.
• Asset quality was mixed as GIL went up by 50b bps to 8% but credit charge went down by 60bps to 2.5%.

Outlook. No change in our outlook as MBSB continues with its impairment programme which will see credit charge ratio at 2% for FY16/FY17 (as guided by management). Management guided for higher loan growth of 5% to 7% for FY16 (from 5% to 6% previously guided) as it believes its focus on corporate loan financing is bearing fruit (contributing 16% vs 15% in FY15 of gross loans) whilst at the same time reducing its focus on personal financing and auto financing (which contributed 1% of gross loans vs 1% in FY15. Management do not see the high LDR ratio (113%) as a hindrance to its ability to grow loans/financing as management is adjusting its LDR ratio which includes deposits plus sukuk and Cagamas (as per BNM guidance) which gives an adjusted LDR of 95%. Management expects to maintain this adjusted ratio for FY16.

No change in Forecasts but EPS and ROE diluted due to impending Rights Issue. NO change in our earnings forecasts as results were within our expectations. We thus maintain our assumptions for FY16E/17E; (i) Loans growth at 5.0%/5.0% (management guidance at 5% to 7% for FY16, (ii) Deposits growth at 6.0%/6.0%, (iii) NIMs at 3.0%/3.0% (management guidance for under 3% for FY16), and (iv) credit charge at 2.0% for FY16/FY17 (as per management guidance). However, with the impending Rights Issue (to be completed by July 2016) our EPS and ROE for FY16/FY17 are slashed by 40%/30% (EPS) and 16%/12% (for ROE). Post-Rights our diluted EPS/ROE for FY16/FY17 will be 3.0 sen/4.0 sen (EPS) and 2.6%/2.9% (ROE).

Target Price reduced. We reduce our TP to 1.34 (from RM1.40) as we roll over our valuation to FY17, based on blended FY17E 1.4x P/B and 6.5x FY17E PER (5-year average PB/PE). Previously, we use FY16E PB/PE 1.4x/6.5x (5- year average). Our Theoretical Ex-Right TP is RM1.26.

Maintained MARKETPERFORM. We maintained our MARKETPERFORM call with potential upside around 4%. Risks to our call are: (i) lower than expected margin squeeze, (ii) higher-than-expected loans and deposits growth and (iii) worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 12 May 2016