INVESTMENT HIGHLIGHTS

• Below expectations. Earnings growth on lower provisions

• Reversal of net interest income and non-interest income in 4QFY18

• Islamic income rebounded in 4QFY18

• Gross financing finally showed growth

• Business plan on track with new products expected in FY19

• FY19 earnings forecasts revised -4.1% downwards

• We maintain our BUY recommendation with an adjusted TP of RM1.23 (from RM1.25)

Short of expectations. MBSB's FY18 earnings fell short of our expectations coming in at 92% of full year estimate. The variance was due to our over estimation of its net interest income and non-interest income. In particular, we did not expect the magnitude of the decline of these incomes in 4QFY18.

Earnings growth led by lower provisions. The impairment allowance for loans, advances and financing fell -81.9%yoy in FY18. This was due to continuous write backs, such as the RM73.4m posted in 3QFY18. We understand that this was partly due to lower consumer price index (CPI) which affected the forward looking factors that is pegged to the CPI.

Islamic income rebounded in 4QFY18. Net interest income in FY18 fell by -29.2%yoy but this was expected following the cessation of conventional business since 1QFY18. Net income from Islamic operations was flat at +0.1%yoy as it rebounded in 4QFY18, where it grew +12.6%qoq and +15.7%yoy. This was possibly due to the recovery in gross financing.

Gross financing recovered to show growth. Gross financing as at 4QFY18 grew +2.8%yoy to RM35.2b. Comparatively, it was almost flat as at 3QFY18 at -0.6%yoy. We understand that the slow growth of the gross financing was due to reorganization of its asset mix. It had purposely decelerated its personal financing segment, which fell by - 6.5%yoy as at 3QFY18, but this also recovered to register a decline of - 3.9%yoy to RM20.6b. To grow its asset, management is targeting the corporate segment. This segment saw strong growth in FY18, expanding +23.0%yoy to RM8.93b.

Source: MIDF Research - 1 Mar 2019