We retain our NEUTRAL call on MBSB with a revised MYR2.10 TP (4.5% upside). Its 1Q15 results missed estimates as credit cost stayed elevated – a reflection of the group’s ongoing move to raise loan provisioning standards. While this should result in improved loan loss coverage levels ahead and ease concerns regarding asset quality, its bottomline, however, is likely to stay subdued in the near term.

1Q15 results miss expectations. Malaysia Building Society’s (MBSB) 1Q15 net profit of MYR124m (-37% YoY, -68% QoQ) missed our and consensus expectations, making up just 17% of our and 20% of consensus full-year estimates. Loan impairment allowances remained elevated (1Q15 annualised credit cost of 114bps vs our earlier assumption of 32bps) as MBSB continues to move towards more stringent provisioning standards relating to its non-performing loans (NPLs).

Loan and deposit growth. Loan growth was muted (+3% YoY), reflecting a tougher environment for personal loans (flat YoY and QoQ) post the various regulatory measures introduced. Working capital loans, however, rose 30% YoY and 7% QoQ – thanks to its small and medium enterprise (SME) and corporate segments. Meanwhile, customer deposits fell 5% YoY (flat QoQ), resulting in the loan-to-deposit ratio (LDR) rising to 114% from 113% as at end-2014 (1Q14: 105%).

Asset quality. Absolute gross NPLs ticked up 4% QoQ (-8% YoY) but the gross NPL ratio was broadly stable QoQ, at 6.2%. Meanwhile, loan loss coverage improved to 78.5% from 76.7% at end-4Q14 (1Q14: 67.3%).

Briefing highlights. As mentioned previously, the move to more stringent provisioning standards is ongoing and expected to take two years. This is expected to keep credit cost elevated ahead. As for BNM’s recent guidelines for rescheduled and restructured loans, MBSB said the impact would be more on its retail book, but did not provide more details. However, further details on its capital needs should be out soon.

Forecasts and investment case. We cut our 2015-2017 net profit forecasts by 15-26% mainly on the back of higher credit cost assumptions of 98bps/67bps/50bps (vs 32bps/30bps/10bps) for 2015F/2016F/2017F. Our TP drops to MYR2.10 from MYR2.55. Our Gordon Growth Model (GGM) valuation assumes: i) a cost of equity of 10.9%, ii) ROE of 12% (from 13.5%), iii) long-term growth of 4%, and iv) 2015F BV/share of MYR1.81 (MYR1.88 previously).

Financial Exhibits

SWOT Analysis

Company Profile

Malaysia Building Society is an exempt finance company involved in lending and deposit-taking activities.

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Source: RHB Research - 8 May 2015