MBSB’s loan impairment programme – a reflection of its efforts to bridge best practices as part of preparations to turn into a full-fledged Islamic financial institution – should be a longer-term positive for the company. However, we caution that investors will need to exercise patience as regulatory costs would dampen medium-term returns. We stay NEUTRAL with a revised MYR1.56 TP (11% upside).

Outlook. MBSB’s loan impairment programme (initiated in 4Q14 as part of efforts to close the gap with banking standards) has helped improve loan loss coverage significantly to 92% from 77% a year ago. Moving into the second year, it remains to be seen whether the heavy lifting in 2015 is sufficient for a significant reduction in credit cost ahead. Capital is also a potential area that may need to be addressed this year. Final DPS of 3 sen was declared (2014: final and special DPS declared were 10 sen and 2 sen respectively).

Risks. The key risk is loan provisioning staying elevated for a prolonged period – as part of efforts to improve coverage levels further and/or deterioration in asset quality. A potential capital-raising exercise is also a risk. Forecasts and investment case. We cut our 2016F-2017F net profit by 11-13% on the back of higher credit cost assumptions of 105bps/82bps from 84bps/59bps respectively. Our GGM-derived TP is lowered to MYR1.56 from MYR1.65 and assumes: i) COE of 12.1%, ii) ROE of 10.75%, and iii) long-term growth of 4%. Maintain NEUTRAL.

Results highlights. MBSB’s 4Q15 results were below our and consensus estimates as 4Q15 slipped into the red. 2015 pre-impairment operating profit was within estimates but full-year credit cost of 195bps was higher than our 171bps assumption. Notably, 4Q15 individual allowance was MYR62m, which suggest some “one-off” chunky provisioning. Excluding this, 2015 credit cost would have been 177bps. Overall, MBSB attributed 75% of the loan provisioning made in 2015 to its impairment programme.

SWOT Analysis

Source: RHB Research - 25 Feb 2016