1HFY21 net earnings of RM466.8m (+644%) came above our expectations which were overly bearish on credit cost assumptions. That said, some normalisation is anticipated in 2HFY21 as more overlays could be booked, in tandem with our slow-moving economy. Management maintained a credit costs guidance of 50- 60bps, less if we see stronger-than-expected recovery. We up our FY21E/FY22E earnings by 12%/5% and raise TP to RM0.610 (from RM0.600) on said increase. MP call maintained.

1HFY21 above our expectations. 1HFY21 net profit of RM466.8m made up 76% of our full-year estimate as we had been highly conservative with our credit cost assumptions (c.80bps, greater than management 50-60 bps guidance) on the back of high level of uncertainties. However, we deem consensus’s estimates (65% of full-year) to be broadly within as 2HFY21 is expected to be heavy with overlays. No dividends were declared, as expected.

YoY, 1HFY21 net income from Islamic operations gained 18% mainly due to lower income attributable to depositors. Meanwhile, its net interest income and NOII declined by 46% and 78%, respectively, owing to unfavourable macro and trading environments. Notably, 1HFY21 saw a net writeback of RM54.5m from improvements in asset staging in 2QFY21 (RM229.5m) as opposed to 1HFY20 net allowance for impairment of RM237.9m. Consequently, 1HFY21 earnings reported at RM466.8m (from 1HFY20 LAT of RM85.8m). Due to the abovementioned writebacks, annualised credit cost came in at -25 bps, as compared to 130 bps in the prior year. Meanwhile, CIR remained flattish at 24.0% with gross impaired financing ratio improving to 5.4% in 1HFY21 (1HFY20: 6.1%) absent a stricter MCO 1.0.

QoQ, 2QFY21 total income was marginally lower (-2%) due to a softer economic landscape during the period. Thanks to the abovementioned net writebacks (1QFY21 saw a net provisioning of RM175.0m), net profit of RM403.4m reflected a 536% improvement.

Fair share of challenges in 2HFY21. July 2021 saw the implementation of an opt-in blanket moratorium, which MBSB indicates to be a stable mix of its existing TRA proportion of 33% retail and 11% non-retail clients. With movement controls appearing ever present, the group is ramping up on more digital initiatives to enable better outreach while anticipating more meaningful change to come in the later part of the year when a vaccinated nation could contribute wholly to the economy once more. That said, management is sticking with its earlier 50-60bps credit cost guidance, indicating lumpy provisioning and overlays to be expected in light of the slower-than-expected economic recovery. Meanwhile, management is toning down its previous financing growth guidance from 3-5% to 2-3%, citing movement restrictions impeding physical application procedures, which we reckon also extends to softer appetite for debt by consumers.

Post results, we raise our FY21E/FY22E earnings assumption by 12%/5% mainly as we recalibrate our credit cost to be closer to management’s 50- 60bps guidance (from our previous c.80bps)

Maintain MARKET PERFORM with a slightly higher TP of RM0.610 (from RM0.600). The higher TP arises from our updated earnings, as we leave our GGM-derived 0.42x FY22E PBV valuation unchanged (-1.5SD below 5-year mean). At present, we see MBSB’s risk-to-reward ratio to be fairly balanced. We opine that meaningful market interest could emerge from the eventual restructuring of the group to a Shariah-compliant organisation but progress and timeline needs to be firm (2Q-3QFY22).

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) further slowdown in capital market activities, (v) adverse currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 26 Aug 2021