INVESTMENT HIGHLIGHTS

• MBSB posted 1QFY18’s net profit of RM316.8m

• Driven by write-back of loan provision

• Cost-to-income ratio slightly higher

• Earnings forecasts adjusted higher

• We maintain our BUY recommendation with an adjusted TP of RM1.54 (from RM1.50)

Net profit contributed by write-back. MBSB recorded 1QFY18 net profit of RM316.8m. The results came in above ours and consensus expectation, largely accounting our full year estimates. Cumulatively, the group’s net earnings grew by >100.0%yoy despite flat revenue from the same period last year. The jump in net earnings was due to higher than expected write-back from loan loss provision which amounted to RM154m. We opine the considerable amount of write back reflected positively on MBSB’s asset quality, stemming from its highly prudent impairment program previously.

Interest income declined due to conversion to Shariah. In 1QFY18, interest income went down by -30.1%yoy due to acquisition of only Shariah-compliant financial assets and continued conversion of conventional of conventional loans to Shariah compliant financings. However, interest expenses moved in tandem with interest income, by higher magnitude of -58.9%yoy, resulting in net interest income to decline slightly to RM64.1m, over the same period last year. Meanwhile, net income from Islamic operation was down by -7.6%yoy as, due to higher cost of funds, and costs incurred associated with AFB acquisition.

Cost-to-income ratio ticked up. The group’s cost-to-income ratio in 1QFY18 stood at 26.7%, showing marginal increase from corresponding period at 19.7%. This was due to the necessary merger expenses and the expansion of business products and segments. Nonetheless, we opine the level as healthy, in comparison to industry’s average of 49.7%. Management mentioned that the CTI ratio will not possibly breach 30%. However, we pleased to find that the group’s 1QFY18’s asset quality as measured by Net Impaired Financing/Loans (NIFL) improved by - 0.94ppts yoy to 1.82%, showing consistent improvement in asset quality.

Short-term pain, long-term gain. While we see the group’s 1QFY18 experienced slight decline in its key revenue segments and ratios, we attribute this to the structural cost associated with its transition to a banking platform. Nonetheless, asset quality remained strong with cost-to-income below the industry’s average. This reflects its ability to operate competitively in the industry as the second largest Islamic bank, while enhancing its presence in key business segment such as property financing.

Maintain BUY. We raised our profits estimates for the stock in FY18 by +28.0%, taking into account the higher than expected write-back assumptions. With demand for affordable housing expected to continue to be high, we believe the group’s long exposure in this particular segment will benefit its property financing business in the long run. Given these factors, we are maintaining our BUY call on the stock with adjusted TP of RM1.54 (from RM1.50), pegging its FY19 BVPS to PBV of 1.1x.

Source: MIDF Research - 30 May 2018