• MBSB’s 6MFY17 net profit of RM192.4m (+96.6%yoy) came in above ours and consensus’ expectation

• Higher income in net financing loan

• FY17 earnings forecast is revised upwards

• We maintain our BUY recommendation with an unchanged TP of RM1.50

2QFY17 earnings above expectation. MBSB’s 6MFY17 net profit of RM192.4m was above ours and consensus’ expectation, which accounted a respective 61.7% and 69.1% of respective full year forecasts. For the 1HFY17, the group recorded a growth of +96.6%yoy despite revenue being flattish.

Due to higher income in net financing loan. The strong growth was attributable to higher income from net financing/loans, investment activities and lower cost of funds. The group’s gross loan and financing grew by +2.2%yoy in the 2QFY17, attributable to higher corporate financing disbursement.

Asset quality improved. Overall, the Group’s net impaired financing/loans ratio continue to strengthen at 2.8% as at 2QFY17 (- 0.5ppts yoy). This mainly driven by its recovery strategies and strengthened collection. Notably, the cost-to-income ratio showed further improvement of -2.1ppts yoy from 23.5% in 2QFY16, well below industry’s average of 44.8%.

On merger with AFB. Despite the consistent improvement in cost, we foresee the ratio will be impacted as a result of the merger with AFB. We view the Group will incur additional cost mainly from integration, the various expenses associated with the rolling out of new products and customer acquisition. Management highlighted that it will ramp up efforts to improve its banking platform, building up its IT capacity to cater to retail customers. The implementation is expected to complete by early 2018.

Impact on earnings. As the earnings came above expectation, we are revising upwards our FY17 earnings forecast by +4.3% to take into account higher income from net financing/loans. However, in order to be conservative and account for the integration cost from the merger with AFB, we are revising downwards our FY18 net profit forecast by -19%.Nevertheless, we are optimistic that its earnings will stabilize by FY19. On the back of MFRS 9 implementation, the group is currently doing a stimulation to prepare for any adjustment in its accounting treatment. The impact is yet to be clear, but we are comforted on the group’s financial standing as the management highlighted no additional capital is required for MFRS9 adjustment.

Recommendation. As we remain optimistic on the group’s performance moving forward, supported by the current and future initiatives being planned and executed, we maintain our BUY call on the stock with TP of RM1.50. This is pegging its FY18 BVPS to PBV of 1.1x.

Source: MIDF Research - 22 Aug 2017