INVESTMENT HIGHLIGHTS

• Earnings within expectations

• Earnings growth on lower provisions

• Cost-to-income ratio higher on investments

• Business plan on track

• Earnings forecasts maintained at this juncture

• We maintain our BUY recommendation with an unchanged TP of RM1.25

Earnings for 9MFY18 within expectations. MBSB's 9MFY18 earnings came in within ours expectations coming in at 75% of full year estimates. The strong net profit growth was due to lower provisions which fell -94.1%yoy.

Lower provisions due to continuing write backs. The impairment allowance for loans, advances and financing was -91.9%yoy lower to RM39.9m. This was due to continuous write backs, such as the RM73.4m posted in 3QFY18. For 9MFY18, the total write backs amounted to RM259.8m. We understand that this was due to lower CPI which affected the forward looking factors that is pegged to the CPI.

Income lower possibly due to higher cost of fund. Net interest income in 9MFY18 fell by -15.3%yoy but this was expected following the cessation of conventional business since 1QFY18. Net income from Islamic operations fell -4.5%yoy possibly due to higher cost of fund as income attributable to depositors rose +23.4%yoy to RM956.9m. This was despite deposits contracting by -4.3%yoy to RM31.73b and term deposits by -4.2%yoy to RM31.65b.

Non-interest income growing steadily from new business. Noninterest income increased +54.1%yoy underpinned expansion in fee income of +91.8%yoy to RM23.9m. The strong growth in fee income was mainly due to the new business such as Trade Finance. MBSB had approved RM958.7m worth of facilities and the Trade Finance system has been successfully deployed in October CY18.

Higher operating expenses caused by investments. Operating expenses went up +33.7%yoy. However, we had expected this as MBSB continue to invest to transform into full fledge bank. This include hiring of talent as well. Personnel cost grew +35.4%yoy to RM162.3m. Nevertheless, its level of cost-to-income ratio was still below industry's average.

Gross financing flattish due to asset reorganization. Gross financing as at 3QFY18 was almost flat at -0.6%yoy to RM35.9b. However, this was due to reorganization of its asset mix. It had purposely decelerated its personal financing segment, which fell by -6.5%yoy to RM21.1b. To grow its asset, management is targeting the corporate segment. Financing to domestic enterprise, which includes SMEs, Corporates and Government, expanded +20.0%yoy to RM9.3b.

Asset quality improving. Gross impaired financing ratio was still high at 5.54%. However, net impaired financing ratio improved to 1.76% as at 3QFY18 from 1.91% and 2.11% registered as at 2QFY18 and 1QFY18.

Earnings forecast maintained. We make no change to our forecast for now.

Reorganizing to realise potential. We believe that MBSB have the potential to grow out of its current shell and flourish as an Islamic bank entity. However, we are cognizant that investments will be needed to prepare for its next stage of growth. Nevertheless, we are optimistic of its prospect to stage an income rebound in FY19. This is predicated on the fact that most of its FY18 business initiatives on track including offering of current account, retail internet banking and other banking services such as cash recycling machines. We opine that the status of MBSB will be significantly enhance once it becomes a full fledged Islamic bank. Therefore, we are maintaining our BUY call with unchanged TP to RM1.25 based on PBV multiple of 0.9x.

Source: MIDF Research - 14 Nov 2018