INVESTMENT HIGHLIGHTS

• MBSB’s 9MFY16 net profit of RM155.8m (-43%yoy) were below our estimate.

• The Company continuously deliver satisfactory quarter earnings since net loss in 4QFY15.

• However, we revised lower both our FY16 and FY17 numbers as interest income missed our expectation.

• We trimmed our TP to RM1.08, but maintain BUY recommendation

9MFY16 earnings below our expectation. MBSB’s 9MFY16 net profit came in lower to RM155.8m (-43%yoy), which was surprisingly below our estimate at 60% of our full year forecast. The negative variance was due to higher allowance for impairment of RM210m (+7%yoy and +17%qoq) in 3QFY16 despite partially offset by higher top line recognition of RM830.3m (+8%yoy and +2%qoq). Having said that, we are still positive with the results as the impairment was within management guidance.

Continued effort is still going on. The key takeaways from MBSB’s analyst briefing that we attended yesterday are as follow:

• The impairment programme is going on as planned, whereby total plan charged as at 3QFY16 stood at RM1.2b. Management guided that provision is likely to be between RM160m and RM170m and at circa RM700m for 4QFY16 and FY17 respectively.

• The Company is still assessing situation for the post-impact of implementation of MFRS9

• The effort to become an Islamic Bank has not been eroded despite the failed mergers and it is a long-way exercise. The planning is still on track regardless of the outcomes.

• The Management indicates that they are not facing any obstacles to convert conventional assets into Islamic. As 80% of the Group’s loan book have already Islamic, they are looking for only 15-20% of conventional loans to be converted.

• The Management is targeting to increase composition between corporate loans and retail loans closer to 30:70 over the next 12 months. It is achievable in respond to slowdown in retail business.

Impact on earnings. We revised slightly lower our FY16 numbers as cumulative interest income thus far missed our estimates. We also make some changes to FY17 figures to take into account of another potential rate cut of 25 basis points next year.

Recommendation. We maintain our BUY recommendation on MBSB with an adjusted TP of RM1.08. Our valuation is pegged to PBV of 0.9x, which is 1 standard deviation below its 3-year average PBV of 1.6x. As the impairment is line with the Management’s plan, we believe all negative should have already been priced in and the share price should start to reflect the positive prospect of the Company. We maintain our positive view on the Company backed by (1) continuous earnings recovery from a net loss in 4QYF15, (2) intense retail collection and assets’ recovery channel that will lead to improve further asset quality in the coming quarters, (3) sustainability of net financing margin of 3% and (4) strong total undisbursed corporate financing of RM7.4b.

Source: MIDF Research - 25 Nov 2016