We maintain our GGM-derived PBV TP of RM0.60 (COE: 9.2%, TG: 2.0%, ROE: 5.0%), UNDERPERFORM call and forecasts. We are of the view that its fund-based operations may still require further legwork for a meaningful turn-around, although we have seen a restructuring of its fixed rate-based financing and CASA efforts to narrow funding cost, in addition to the group also doing well in recent quarter in investment gains.

We came away from MBSB's 3QFY24 briefing with the following key takeaways:

- All-round strive to grow financing books. MBSB's 9MFY24 gross financing growth of 6.4% YoY appears short of the group's 8%-9% target for the year (FY23: +9.0%), especially given 3QFY24's 1.2% QoQ drop following redemptions within its corporate books.

That said, the group is holding to this target with more consumer banking, namely mortgage and personal finance expected to flow through in year-end, albeit we believe there could be seasonal competition in this space which may result in thinner margins. Given its corporate portfolio acquisitions will be focused on syndicated financing and better quality assets (including construction-based clients), we believe MBSB's selectiveness here will not translate to meaningful expansion in the coming period.

- Margins materialising from progressive rebalancing. Addressing previous struggles in sustaining NIMs, we saw several structural changes with: (i) a transitional shift of fixed rate financing from 31% to 19% of its total books to variable, namely on personal financing, (ii) more fluid balance sheet management with the tactical monetisation of fixed income holdings, and (iii) gradual push on CASA by acquiring T40 retail deposits.

- Ironing out of GIF could be a long journey. MBSB's GIF of 6.7% remains lofty. Excluding EPF-secured Ihsan-I accounts which would led to 5.8%, the group eyes bringing it closer to 5.0% by year-end with a more aggressive approach to recoveries. However, we believe this may only be realised in the medium term as it would entail write-offs amounting to RM300m in 4QFY24 and surging credit cost for the year to 150 bps, away from a 50 bps target.

Forecasts. Relatively unchanged following our earlier positive adjustments to the group's NOII, driven by better investment results.

That said, we still believe our model assumptions remain sufficient with conservatism stemming from the group's past earnings disappointment.

We have several headline inputs for FY24 which are below the group's targets i.e. (i) loan growth at 6.6% vs. 8% target; (ii) GIF ratio at 6.9% (including ihsan-I vs. 4%─5% target; and (iii) ROE at 3.6% vs. 4%─5% target.

Maintain UNDERPERFORM and TP of RM0.60. Our TP is based on an unchanged GGM-derived FY25F PBV of 0.42x (COE: 9.2%, TG: 2%, ROE: 5%). Although the merger with MIDF has been completed, the synergies between the two may only be extracted over the 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. Furthermore, 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 loan growth, (iii) slower-than- expected deterioration in asset quality, (iv) further gains in capital market activities, (v) favourable currency fluctuations, and (vi) changes to the OPR.

Source: Kenanga Research - 28 Nov 2024