Malaysia Building Society - Mounting Margin Pressures

Date: 
2024-02-28
Firm: 
KENANGA
Stock: 
Price Target: 
0.59
Price Call: 
SELL
Last Price: 
0.76
Upside/Downside: 
-0.17 (22.37%)

MBSB’s FY23 core net profit (-70%) missed expectations as it continued to be strained by poor interest margin mix, leading also to several missed earnings targets. With the completion of MIDF, the group is due to extract synergies in the long term but near-term outlook may remain cloudy until it can optimise its portfolios. We slash our FY24F earnings by 32% and lower our GGM-derived PBV TP to RM0.59 (from RM0.63). Maintain UNDERPERFORM.

FY23 disappointed. After adjusting for a RM354m gain on acquisition from MIDF, MBSB’s FY23 core net profit came in at only RM137.4m, missing our full-year forecast by 45%. The negative deviation could be attributed to the significant dilution of its NIMs likely stirred by 4QFY23 intense competition for deposits. No announcements on dividend has been made, which is also a disappointment to our anticipated 1.5 sen payment.

YoY, FY23 total income decreased by 5% where it saw NIMs plunging to 1.70% (-108bps) on the back of a 9% financing growth. Non-interest income was significantly stronger (+640%) but this was attributed by the abovementioned gain on acquisition. Excluding this, a 26% dip would otherwise be reported from wider losses from investments. Operating expenses risen by 9% mainly driven by higher personnel expenses while credit cost saw some relief at 29bps (-3bps) from generally fewer staging. All in, reported net earnings for FY23 would land at RM491.8m (+7%). However, adjusting for the one-off gain, it would only amount to RM137.4m (-70%).

QoQ, 4QFY23 total income doubled with the inclusion of MIDF’s gain on acquisitions, which would otherwise declined by 26% from heightened funding cost pressures. Operating expenses were heavier (+36%) from inflated personnel and establishment costs, but was offset by lower credit charges as well (7bps, -72bps). Overall, 4QFY23 arrived at a core net loss of RM53.2m.

Outlook. Based on its previous guidances, MBSB has held up on its financing growth target of 7%-8% and ROE of 5%-6% but fell short in the other metrics. Most jarring would be its NIMs target of 2.0%-2.1% which was already at a decline against FY22’s c.2.8% delivery, no thanks to the group’s adverse relationship on rising interest rates which could have led to the cost-income (<50%) miss from the lower top line.

The group is in the works to iron out its shortcomings by restructuring its high proportion of fixed-rate financing and to increase its CASA proportions by catering to the T20s to resolve its lower margin spread. Meanwhile, improving the functionalities of its platform may keep its SME clientele sticky and aid in acquiring a wider range of customers.

Forecasts. Post results, we slashed our FY24F earnings by 32% as we recalibrate our NIMs projection to mark a gradual improvement from FY23. Meanwhile, we introduce our FY25F numbers.

Maintain UNDERPERFORM with a lower TP of RM0.59 (from RM0.63). While we roll over to FY25F, we also lower our ROE input to 5% (from 6%) in our Gordon Growth Model, translating to a PBV of 0.42x (from 0.56x) as we remain cautious on the group’s long-term earnings. Our other inputs are unchanged at COE: 9.2% and TG: 2.0%.

Although the merger with MIDF is complete, the synergies between the two may only be extracted in a longer term. Additionally, the group may also require greater efforts to reoptimize its funding mix especially given its low CASA levels, which may make it less attractive than its peers.

Risks to our call include: (i) lower-than-expected margin squeeze, (ii) higher-than-expected loans growth, (iii) slower-than- expected deterioration in asset quality, (iv) further gains in capital market activities, (v) favourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 28 Feb 2024

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