We maintain our GGM-derived PBV TP of RM0.59 (COE: 9.2%, TG: 2.0%, ROE: 6.0%) and UNDERPERFORM call with forecasts relatively unchanged post briefing The group reflected on further efforts to drive profits. While we are encouraged by new streams brought about by MIDF’s business units, we prefer to remain conservative with the group’s medium-term trajectory going forward as it could be exposed to integration risks.

We came away from MBSB’s 1QFY24 results briefing with the key takeaways as follows:

- On track to growing fund-based streams. The group’s combined entity saw net fund-based income growing by 23% YoY, with headway attributed mostly to gains in the commercial business. That said, the group expresses a target to be more corporate- centric, aspiring to bring its 68:32 retail:corporate loans mix closer to 60:40 in the medium term.

- Eyeballing stable NIMs at 2.00%. From its 1QFY24 NIM of 2.1%, the group hopes to maintain this and meet its target of 2.0% for FY24. Its recent quarter showed that the group had brought up CASA mix to 7.1% (1QFY23: 6.2%) but this could be attributed to a seasonal need for cash. To build stickiness, the group aims to launch new app-based solutions with transactional tools by 3QFY24.

- New fee-based services a decent support. Following MIDF’s injection, the group now has exposure to deal-dependent advisory services in addition to brokerage fees which typically do well in more vibrant investment markets. Meanwhile, government grants awarded by MIDF are also captured into the group’s books. Following its plan to offer more holistic banking solutions, the group estimates for the synergising of its business units to be completed by 3QFY24, whereby cross selling opportunities may be more easily capitalised.

- Scrubbing up the books. Excluding its Ihsan-I accounts, MBSB’s gross impaired financing has improved to 6.3% (4QFY23: 6.6%), and could be working its way to its 4%-5% target. This target was previously earmarked as the group sees opportunities in disposing several long-term NPLs. Meanwhile, with up to 40% of its impaired financing fully collateralised, which could indicate that a financing loss coverage of 54% to be sufficient.

Forecasts. Relatively unchanged.

Maintain UNDERPERFORM and TP of RM0.59. Our TP is based on an unchanged GGM-derived FY24F PBV of 0.42x (COE: 9.2%, TG: 2%, ROE: 5%). Although the merger with MIDF is complete, the synergies between the two may only be extracted in a longer term. Additionally, the group may also require greater efforts to reoptimize its funding mix especially given its low CASA levels, which may make it less attractive than its peers. Additionally, the group’s ROE prospects still leave plenty of room for improvement against its peer average of 10%.

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

Source: Kenanga Research - 4 Jun 2024