Post 1QFY21 analysts’ briefing, we are feeling neutral on MBSB’s near- term prospects. Management hopes to close the year with a credit cost of 50-60 bps, which we think is overly optimistic (1QFY21 annualised: c.200bps). The group aims to propel itself digitally to stir growth in its trade and personal financing which we think could see some challenges given saturation by market leaders and tightened MCO. We cut our FY21E/FY22E earnings (by 15%/9%) and valuations. Downgrade to MP with a lower TP of RM0.650 (from RM0.720).

3MFY21 disappointed from higher-than-expected provisioning. 3MFY21 earnings of RM63.4m were an improvement of 187% with the prior year having recorded a loss of RM73.3m. The return to profit was thanks to better total income growth (+7%), lower operating expenses (-7%) and more favourable impairment exposure (3MFY21: RM182m vs 3MFY20m: RM278m). However, we had imputed more optimistic expectations with regards to income performance but more so for impairments to be lower during the quarter as it came in larger than 4QFY20’s RM116m where most banks induced heavy pre- emptive buffers amidst Covid-19 uncertainties.

Management is confident with its FY21 targets, which includes: (i) 3-5% loans growth (3MFY21: +0.5%); (ii) GIL to remain at c.5% (3MFY21: 5.8%); and (iii) credit cost of 50-60 bps. The group’s key strategy going forward includes expanding its digital outreach and products to more targeted consumers, which now mainly consist of personal financing accounts (55% of total gross financing). Currently, the group has its MBSB Bank e-wallet and MFast platforms which will continue to enhance customer experiences. Eventually, a mobile application for corporate clients will be introduced to the market to boost its presence amongst SMEs. Until then, management will allocate more physical resources for its SME acquisition.

With regards to credit cost management, management believes that its collection efforts and recalibration of its Stage 2 accounts should reflect positively in the coming quarters. That said, the group will continue to provide assistance to its accounts-in-need which we believe could expose the group to further modification losses (3MFY21: RM36.5m), especially given recent reinforcement of economic lockdown measures.

We are cautious with near term outlook. Our conservatism mainly comes from the group’s poorer QoQ performance (-34%) whereas most financial institutions have painted favourable recoveries. While management has set a loans growth target of 3-5%, the slow traction seen in 3MFY21 (+0.5%) indicates softness in the market for the group’s products given that the industry registered 3.9% growth (according to BNM March 21 statistics). Additionally, the group’s GIL has always remained as one of the highest amongst its peers. With the nation looking to enter another phase of economic lockdown, we believe the group could be more vulnerable as compared to its peers with higher quality of assets. This leads to us believing that credit cost pressures could be higher with the current scenario likely requiring more attention.

Post-update, we cut our FY21E/FY22E assumptions by 15%/9% as we reduce earnings growth and raise credit cost estimates (88 bps from 85 bps).

Downgrade to MARKET PERFORM (from OUTPERFORM) with a lower TP of RM0.650 (from RM0.720, previously). In addition to our lower earnings estimates, we also trim our GGM-derived PBV to 0.45x (from 0.49x, still closely within 1.5SD below mean) against FY22E BVPS, mainly due to lower ROE outlook. We believe the sentiment for the stock could be muted for now, favouring larger banks which could be more sheltered against pending movement restrictions. For the moment, we believe the strongest positive re- rating for the stock could be the materialisation of its restructuring plan. Although management is still firm with its targeted completion to be mid-2022, necessary approvals have yet to be obtained and it could be delayed.

Source: Kenanga Research - 31 May 2021