Investment Highlights

• We maintain HOLD on MBSB with a higher fair value (FV) of RM0.80/share from RM0.73/share. Our FV is based on a rolled-forward FY25F P/BV of 0.7x, supported by ROE of 4.5%. No change to our neutral 3-star ESG rating.

• The group’s cost of funds (COF) has been high, attributed to a low CASA ratio of 7.6% with non-retail funds making up a substantial 85.8% of total customer deposits as of the end of 1Q24. MBSB is presently running a campaign (Peak Saver) from 1 April 2024 to 31 Mar 2025, offering a promotional profit rate of 2.8% on savings account balances of more than RM10,000 to raise CASA ratio. Management hopes to lift the ratio higher to reduce funding cost. Additionally, asset quality could be improved with focus shifted towards growing higher quality financing once COF trends lower.

• MBSB aims to raise its CASA ratio to 20% by 2026 to improve ROE to 8% from 5.2% in 1Q24 under Flight 26 strategy.

• However, room to lower COF looks limited in the near term as banks continue to compete intensively for CASA while deposit rates in the industry stay elevated with digital banks (3 that commenced operations) offering attractive rates on savings deposits (GXBank: 3% p.a., Aeon Bank: 3.88% p.and Boost Bank: up to 3.6% p.a).

• Aside from CASA, the group is running a campaign from 12 Aug to 31 Dec to attract funds for Term Investment Account-i, offering a profit rate up to 4.1%. The principal of funds placed for this product will not be guaranteed nor protected by PIDM.

• MBSB has a fixed rate financing mix of 38%, higher than the larger cap banks, which led to a mismatch between assets and liabilities. This is due to high fixed rate personal financing, which accounted for 32.4% of total gross financing.

• Our earnings estimates have incorporated assumptions on FY24F/25F/26F gross financing growth of 8%/9%/9% with the expansion to be coming largely from the consumer book, followed by smaller contributions from commercial and corporate segments.

• The impact of high COF on net fund-based income and a low fee-based income have resulted in slower net income growth compared to operating expenses (OPEX), and consequently negative JAW. The group’s cost-to- income ratio (CIR) of 58.7% was higher compared to the industry average of 48.7% in 1Q24. Looking ahead, CIR is likely to stay elevated at 50%-55% between FY24F to FY26F. OPEX will be high in the initial years of Flight 26 strategy before gradually tapering off. Contributing to the increase will be higher personnel costs and IT investments to improve customer experiences, enhancing cybersecurity and fraud controls. Besides, establishment cost is likely to climb to enhance physical footprints and digital channels, supporting the transformational plans of Flight 26 strategy.

• The group intends to gradually raise the contribution of non-fund-based income/total net revenue to 15% by FY26F from 4% in FY23. Plans are in place to introduce new products such as gold investments to expand product range to customers and offer wealth management solutions targeting the T20s. Also, MBSB intends to grow its credit cards and bancassurance business. The wealth management business is under intense competition amongst banks. We expect it to be challenging to penetrate the T20s who are well-banked with multiple product holdings and great customer experience with other banks that have a head start in digital apps and banking with transactional capabilities.

• GIL remained high at 7.1% above the industry’s 1.6% in 1Q24 while financing loss coverage ratio stood below 100% at 56.3% (71.3% if collateralised financing were to be excluded). GIL and financing loss coverage ratios have improved modestly in 1Q24 compared to 4Q23, attributed to the resolution of an impaired corporate loan of RM80mil. Moving ahead, these ratios are likely to improve further with the reclassification of several corporate financing out of impaired status. However, overall GIL ratio is expected to still stay above the industry level.

• We have imputed into our forecast credit cost assumptions of 40bps/40bps/35bps for FY24F/25F/26F.

• ROEs for FY24F/25F are projected to be lower at 3.5%/4.7% vs. the industry average’s 10%-11%. This considers the challenges to net fund-based income from a relatively higher COF and a need to increase OPEX in the near term on its transformation plans to be more competitive for a revenue uplift in future.

• MBSB has a strong capital position based on a group CET 1 ratio of 19.5% vs. industry’s 14.3%. Meanwhile, liquidity is high with an LCR of 206.8% (banking sector: 155%).

• The stock is trading at fair FY25F P/BV of 0.7x based on a projected ROE of 4.7%.

Source: AmInvest Research - 21 Aug 2024