INVESTMENT HIGHLIGHTS

• Below expectations as expected credit losses came in higher than expected

• No deterioration in asset quality though

• Income growth robust

• Business plan on track with new products expected in FY19

• Maintain earnings forecast for now due to potential writebacks in later quarters

• We maintain our BUY recommendation with a revised TP of RM1.25 (from RM1.23) as we rollover our valuation

Below expectations on higher ECL. MBSB posted its 1QFY19 net profit at 12.5% and 12.7% of our and consensus’ full year estimate respectively. The reason for the variance was due to higher than expected expected credit losses (ECL) which was 56% of our full year estimate. However, we should note that pre-provisioning operating profit (PPOP) was within our expectations at 24.5% of our full year estimate.

Sequential quarter higher ECL due to timing factor. The ECL for 1QFY19 grew +75.5%qoq due to timing of payments by its borrowers, which automatically triggered the provisions. However, the management expects that this will be recovered in the coming quarters. There were also forward looking factors which caused the higher ECL. Comparing on a sequential year basis, MBSB had a one-off writeback as it migrated to MFRS 9 last year.

Asset quality improved slightly. Gross impaired financing ratio was better by -17bps qoq to 5.3%, suggesting an improving trend.

Robust income growth. While the ECL was a dragging factor, its PPOP remains robust, growing +5.5%yoy. This was due to good income growth and contained cost. Operating expenses (OPEX) went up only +3.5%yoy despite investments done in terms of personnel and systems to bring its operations up to speed. Net interest income fell -35.7%yoy but this was expected as it transitioned to an Islamic bank. More importantly, Islamic banking income expanded +4.5%yoy. Non-interest income more than doubled due to income from gains its treasury operations, as it benefitted from the banking platform. We understand that the management will be pushing hard to grow this income segment.

Loans/financing growth coming from corporate. Loans and financing grew marginally by +0.7%yoy to RM35.4b as at 1QFY19. However, this was due to reorganization of its financing portfolio mix. Retail financing fell - 2.4%yoy to RM26.3b as it reduce its exposure in personal financing and auto loans. These contracted -4.0%yoy o RM20.5b and -18.8%yoy to RM0.22b respectively while mortgages expanded +4.8%yoy to RM5.6b. Meanwhile, corporate loans grew +10.6%yoy to RM9.2b. The retail to corporate loans book mix was 74:26 as at 1QFY19 as opposed to 76:24 same quarter last year and 75:25 as at last quarter.

Better deposits growth. Deposits growth came in better than last quarter as it grew +4.3%yoy to RM34.7b. Comparatively, it was +0.1%yoy to RM32.8b as at 4QFY18. This was due to better current account and savings account deposits (CASA) growth as CASA rose +15.4%yoy to RM250.4m. We expect that CASA growth to accelerate as MBSB have introduced more offerings such as debit cards. Also, FY19 will be a watershed year as MBSB will be offering a slew of products that could attract deposits such as cash management systems.

Earnings forecast maintained. While its earnings were below expectations, we are maintaining our FY19 forecast for now as we expect the ECL to improve in coming quarters with potential writebacks. Also, we should note that operationally it was within our expectations.

Still establishing a base. While we opine that FY18 was more of a foundational year, we believe that the base building will continue into FY19. Recall, MBSB was only converted to a banking entity in 2QFY18. The necessary infrastruture have been put in place to operate as a new entity. We believe it will take time before MSBS could reap the full benefit. Nevertheless, some benefits have been attained with its new entity. We believe that MBSB have the potential to grow out of its current shell and flourish as an Islamic bank entity. We remain cautiously optimistic of its prospects in FY19. 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 a revised TP to RM1.25 (from RM1.23) as we rollover our valuation to FY20. Our TP is based on PBV multiple of 0.9x.

Source: MIDF Research - 16 May 2019