Post 1QFY22 analysts’ briefing, we maintain our conservative tone on MBSB as we believe more deliverables are needed to achieve management’s FY22 ambitions, following the 1Q earnings disappointment. We cut our FY22E earnings by 9% but keep FY23E earnings. Maintain UP and GGM-derived PBV TP of RM0.520.

Management sticking to 10-11% financing growth target. 1QFY22 financing portfolio only marked a 2.7% YoY increase (+0.7% QoQ) with some erosion in corporate accounts but supported by a better retail book (personal financing and mortgages). Management opines that it could see recovery in its corporate portfolio with lumpy disbursements ahead. That said, we believe that an equal momentum might be required from its retail accounts (which only gained 1.7% QoQ) given that it accounts for c.75% of its financing book.

Credit costs target breached with 1QFY22 already registering an annualised rate of 176bps (vs FY22 target: 45bps). This appears to be attributed to certain accounts requiring further restructuring but management does not anticipate prolonged detriments to the overall asset quality. While they reserve to update its credit cost guidance for now, an indicative level would be above 60bps. Meanwhile, the troubled accounts from its repayment assistance mix appear to be graduating at an encouraging rate, with only 5% of the mix missing payments (coincidentally consisting of non-salary deductible accounts).

NIMs may erode, CASA strategies to mitigate. With the OPR hike of 25bps, management anticipates that there could be an annualised compression of 15-20bps which drags it FY22 target to 3.15-3.20% against FY21’s 3.24%. Management will likely revisit its target should another 25bps hike take place. For now, the group’s deposit mainly consists of corporate accounts (80-85%) which are likely termed given its retail CASA mix only stands at 5%. To reduce its cost of funds, management hopes to increase its CASA proportion to 10% possibly with competitive rates but still lower than that of its corporate books.

Overheads expansion to drive operations. With regards to the 50% YoY increase in 1QFY22 operating expenses, management indicated that personnel cost was driven by an increase in headcount, which we believe could be a going rate. Meanwhile, lumpy IT cost was seen as the group invests into compliance and digital-related investments with future spends likely to only be maintenance and upkeep in nature. These expenses could support top line growth in the medium term.

Post update, we cut our FY22E earnings by 9% to factor in a more austere operating landscape which might pay off at a much later period, riding a normalisation in asset quality and NIMs as fund costs ease. On that note, we leave our FY23E earnings largely unchanged.

Maintain UNDERPERFORM and TP of RM0.520. As our FY23E BVPS of RM1.30 is still mostly intact, we keep our TP after applying an unchanged GGM-derived PBV of 0.40x (1.5SD below mean). We maintain our conservative valuations on the stock on soft sentiment in lieu of recent earnings misses. In addition, the expectation of eroding NIMs with OPR expansion is averse to its conventional banking peers, which may trigger investors to position accordingly. That said, we stand that any developments on its acquisition on MIDF could be a short-term booster for the group, ahead of BNM’s deadline in Oct 2022. Management believes that there will be many synergistic gains if the deal is successful given that there are no overlapping business units. Meanwhile, the group maintains its ambition to restructure the group to be a shariah compliant in status, but we believe MIDF could be the main focus for now.

Source: Kenanga Research - 30 May 2022