12M16 core earnings of RM201m were in line with our estimate but below consensus’, accounting for 101%/90% respectively. A full-year dividend per share of 3.0 sen was declared (above our expectations). We revised our earnings estimates for FY17 with TP raised to RM1.01 but downgrade to UNDER PERFORM.

Fall in earnings expected due to higher impairment allowances. 12M16 core net profit (CNP) was in line with our estimates declining by 22% YoY attributed to higher impairments (as expected) and reversal of deferred tax assets (mainly occurring in Q4). Top-line was better YoY rebounding by 4% YoY to RM1,409m. The biggest contributor to top-line revenue, Islamic Banking income surged ahead at 6% YoY while Net Interest Income (NII) and Non-Interest Income (NOII) mitigated the top-line surge falling 5% YoY and 9% YoY respectively. NIM was healthier widening by 5bps to 3.5% (vs. our earlier expectation of 40bps compression) while cost-to-income ratio (CIR) fell 190bps to 20.8% (vs. our expectations of 25%). LoanDeposit Ratio (LDR) dropped by 4 ppts to 115% as deposits grew 7%, outpacing loans growth of 3% (vs our expectations of 6% and 5% growth, respectively). Corporate loans/financing accounted for 19% of total loans/financing while Personal Financing fell by 3ppts to 65%. The rise in corporate loans/financing is in line with management’s strategic focus to grow the segment while reducing personal financing. Asset quality deteriorated as Gross Impaired Loans Ratio (GIL) went up by 60bps to 8% while Credit Costs went up 20bps to 2.4%. Annualised ROE fell 180bps to 3.5% as earnings faltered on higher impairments.

Impairment programme continues into 2017. MBSB will continue with its impairment programme in 2017, which will see credit charge ratio staying around 2% for FY17.Management guided for a loan growth of between 5% and 6% for FY17 driven by corporate finance and affordable home financing. Currently, MBSB has nearly RM3.5b of approved financing waiting to be disbursed. However, FY17 loans growth might still pose challenges as management focus on asset quality. Management’s strategic plan to reduce Personal Financing on its loan portfolio and focusing on Corporate Loans and Financing is showing results slowly but its target of reaching a 30:70 ratio (Corporate: Personal) by end of FY17 looks challenging in view of the expected subdued environment going forward and is a dampener in achieving respectable loans growth. Although corporate financing will rise in FY17, management are confident risk will be minimal as its seeking quality corporate financing. As management is comfortable with the current LDR of 115%, we believe downward pressure on NIM will be flattish going forward due to less intense deposit taking activities.

Target Price raised, but rating downgrade. We raised our TP due to earnings revision to RM1.01 (from RM0.96) on an unchanged blended FY17E 1.3x/9.4 P/B/PE. We downgrade to UNDER PERFORM as there is a potential 12% downside from current price level. Risks to our call are: (i) lower-than-expected margin squeeze, (ii) higher-than-expected loans and deposits growth, and (iii) worsethan-expected deterioration in asset quality

Source: Kenanga Research - 23 Feb 2017