MBSB’s 1QFY13  core  profit of  RM166.1m was above  expectations, with its  bottom-line  growth  sustained  by  (i)  net  interest  income  as  its  civil servants’ personal loans base expanded  by  80.2%  (ii)  low  loan  loss provisions  and  (iii)  the  decline  in  operating  costs.  We  adjust  our forecasts post the results and upgrade our FY13/FY14 EPS by 23%/24%. Maintain BUY, with our FV raised to MYR3.40 from MYR3.05.  

-  LLP, CIR down substantially. MBSB’s 1QFY13 earnings of RM166.1m beat  our  and  consensus’  estimates,  at  34.6%  and  30.9%  of  both  FY13 forecasts respectively. The company’s core earnings growth (+109.2% y-o-y,  +24.8%  q-o-q)  exceeded  its pre-provision  operating  profit  (POP) growth  (+45.3%  y-o-y,  -4.4%  q-o-q),  which  was  slightly  below  our forecast of 22%. The deviations were due to: 
o  A lower loan loss provision (LLP) of MYR16.5m (-73% y-o-y). o  Historically  lower  cost-to-income  ratio  (CIR)  of  18.5%  due  to  cost savings  from  increased  utilization  of  the  Accountant-General  (AG) code. 
o  This  was,  however,  offset  by  lower  non-interest  income  (NII),  which contributed a mere 5% of total PPOP vs 12% in both 1Q/4QFY12.

-  Loans  growth  robust  amid  NIMs  compression.  Gross  loans  surged 43.3%  y-o-y  and  8.2%  q-o-q,  mainly  due  to  the  strong  performance  of personal  loans  for  civil  servants  (PF-i),  which  jumped  80.2%  y-o-y  and 12.7%  q-o-q.  Its  net  interest  margin  (NIM),  however,  dipped  to  4.65% from 4.92% in FY12 due to the competitive promotions for loans (ie PF-i New Year offering at a 3.99% rate) and the offering of fixed deposits with longer tenures at a promotion rate of 4.75% for a five-year tenure). 

-  Changes to forecast. We upgrade our FY13/FY14 earnings forecasts by 23%/24%  to  arrive  at  a  new  FV  of  MYR3.40.  Our  new  assumptions  are 2.1x FY14 P/BV, with a 3% growth rate, COE of 13% and ROE of 26.0%. Our  previous  assumption  was  based on  ROE  of  21.9%.  The company’s annualized  ROE  of  37.6%  was  significantly  above  its  target  of  15% despite the 22.8% revenue growth coming below its target of 25%.

Deposits outgrow loans. The y-o-y net loans growth of 50.7% suggests plenty of upside to our original assumption of 21%, mainly due to the resilient growth of PF-i products. However, MBSB’s y-o-y deposits growth surprised on the upside at a much stronger 63.4%, mainly due to the strong response to corporate and governmentlinked company deposits. The loan-deposit ratio (LDR) and loans-to-funding ratio including securitization (LFR) have improved to 107.3% and 96.8% YTD.

NPLs indicators not yet reclassified to three-month arrears. While gross impaired loans inched up 6% to MYR3m in 4QFY12, it fortunately dipped by 9% in 1QFY13 to MYR2.7m. This led to the group’s gross non-performing loans (NPL) ratio improving by 180bps to 10.3%, while its net NPL ratio dropped 90bps to 3.6%. Both the old-bank and new-bank NPL ratios (for NPLs after April 2009, when the new management team took over the running of the company) showed improvements. The old-bank net NPL ratio came in at 16.5% while the new-bank ratio stood at 1.1%. MBSB’s management has started classifying NPLs on a three-month basis (from the current six-months-and-above), although the ratios reported here have yet to reflect this. We expect the company to unveil the indicators comparable to the commercial banks’ classification by 2HFY13, when the Financial Services Act (FSA) is expected
to come into effect.

Abnormally low CIR. We had previously projected that MBSB’s FY12 cost-toincome ratio (CIR) could surge to 25% after it rolled out its integrated Core Banking System (MICoB), estimated to cost RM100m over five years. As such, we believe the CIR of 18.5% recorded in the current quarter is abnormally low and could likely revert to our 23%-24% assumption for FY13 and FY14. Its management may likely incur more IT-related investments and human capital expenses in streamlining itsoperations and ‘closing the gap’ with the financial institutions.

NIM compression expected. We gather that its NIM compressed slightly from 4.9% to 4.65% in the quarter. We expected this after making our channel checks, due to: i) its New Year 2013 PF-i promotion was offering loan rates as low as 3.99%, and ii) its promotional offers for fixed deposits offered rates for as high as 4.75% for a five-year tenure (or 4.8% if the customer opens a savings account with minimum of MYR1k). For the second reason, we believe there was a surge in longer-term tenure fixed deposits, resulting in a higher effective cost of funds. The company’s NIM may be squeezed further, but its management is targeting to keep it above 4% for the remainder of the financial year.

No timeline yet for capital raising plan. MBSB has plans to raise MYR2bn-MYR5bn in capital, which we believe will boost its capital ratio from the current Tier-1 ratio of 7.4% to 12%. Although the company has not given a timeline, we gather that MBSB is in the midst of discussing this option with its major shareholders, and that the plan is likely to be put into action in 2HFY13, regardless of capital markets and political conditions.

Concentration risks
Still reliant on PF-i. Due to the lackluster performance of MBSB’s mortgages and corporate loans, the PF-i segment now makes up 69% of total loans. Auto loans are gaining traction, especially since the company tied up with the Naza Group to facilitate financing of Chevrolet vehicles, but are still at <1% of the group’s total loans.

Large exposure to education sector. The growth of MBSB’s corporate loans portfolio is dependent on its exposure, which includes corporate projects with some university campuses. The company has some exposure to the O&G sector, but given that the corporate loans portfolio is relatively small and the education sector should remain resilient against country-specific factors, we do not see any huge downside. Overall, we still do not see positive catalysts for corporate loans vs PF-i prospects. Huge government deposits. We are also concerned over the concentration risk in terms of the customer composition of its deposits. Among the major financial
institutions, MBSB has a unique composition of deposits, where its corporate and individual deposits are split by 90:10, based on its 2012 annual report. Its Government and state authorities’ deposits are particularly substantial, surging from MYR3bn in FY11 to MYR12bn in FY12 due to government agencies taking advantage of the company’s attractive rates, which we understand are not lumpy in nature. Also, its management is aiming to market its products to small-and-medium enterprises to boost deposits from that customer profile. The pipeline for such deposits is supported with the recent tie-up with Felda to finance contractors under
SME Cash Express and Contract Financing. Despite notable improvements in LDR, we are however wary of any risk of slowdown in deposits growth as we think the company has limited avenues to grow its very small base of individual deposits, and corporate deposits (which shrank from FY11).

Valuation changes
Raising net profit forecasts by 23%/24%. Due to the surprising results, we are making several changes to our FY13/14 assumptions:

Source: RHB