MBSB’s 1QFY24 core net profit (+6% YoY) beat expectations, thanks to stronger non-interest income on contributions from MIDF’s business units. This led us to upgrade our FY24F-FY25F earnings by 14%-5%. While the group appears to be gradually improving, further effort may be needed to see earnings meaningfully turn around in the near term. Maintain UNDERPERFORM and GGM-derived PBV TP of RM0.59.

Above expectations. MBSB’s 1QFY24 made up of 31% of our full-year forecast, where we had under-accounted for a higher fee based income generated by the injection of MIDF to the group.

YoY, 1QFY24 total income rose by 36% where the group appear to have regained its NIMs (2.03%, +5 bps) while supported by a 10% growth in gross financing. Meanwhile, its non-interest income surged by >800% thanks to new fee-based income streams courtesy of MIDF’s investment and advisory services. In spite of this, core net profit only improved by 6% as operating expenses also increased drastically (+69%) from MIDF’s consolidated operations.

QoQ, 1QFY24 net Islamic income gained 63% with significant recoveries to NIMs which led to total income to surge by 78%. On the flipside, excluding a one-off gain on the acquisition of MIDF of RM354m, core net profit would have translated to an improvement of 247% from the stronger top line.

Outlook. MBSB appears to show an encouraging recovery in most of the revenue streams as it continues to capture a greater financing share within the retail segments. Meanwhile, its rising CASA mix at 7.1% (+0.9ppt) will serve the group well in better managing its funding costs. The group also appears to be reaping the fruits from the integration with MIDF, where it hopes to benefit from synergistic gains in terms of crossing selling services and operational efficiency.

Forecasts. We raise our FY24F-FY25F by 14%-5% as we increase the group’s fee-based income contributions.

Maintain UNDERPERFORM and TP of RM0.59. Our TP is based on an unchanged GGM-derived PBV of 0.42x (COE: 9.2%, TG: 2%, ROE: 5%). 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. Additionally, the group’s ROE prospects still leave plenty of room for improvement against its peer average of 10%.

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 - 31 May 2024