MBSB’s 1HFY24 net profit (-16%) met our expectations. The group continues to juggle taming high credit costs with expanding its income streams. With several headline targets seemingly behind their full-year targets (i.e. financing growth, gross impaired financing, ROE), MBSB may need to take larger strides in 2HFY24 to meet them. Maintain UNDERPERFORM and GGM-derived PBV TP of RM0.59.

1HFY24 our within expectations. MBSB’s 1HFY24 net profit made up 47% of our full-year forecast but missed consensus full-year estimate by coming in at 42%, as we had been more conservative than guidance in the area of financing growth. No dividend was declared this quarter, as expected.

YoY, net profit declined by 16% due to significantly higher credit cost of 68 bps (+65 bps), albeit from a low base as the preceding period saw writebacks from pandemic-related overlays. Without such writebacks, 1HFY23 credit cost would have amounted to a higher 80 bps with net profit of only c.RM5m.

There were significant gains in total income with improved NIMs (+29 bps) likely driven up by better asset yields. Meanwhile, its fee-based income (+c.150%) was greatly supported by the injection of MIDF’s investment and advisory income streams, which are expected to do well in an active trading market.

QoQ, 2QFY24 net income declined by 30% on the back of similarly higher credit costs (93 bps, +51 bps), no thanks to further staging. This kept GIF lofty at 7.3% (1QFY24: 7.1%).

Highlights. We await updates from the group in today’s results briefing, including updates on synergies What caught our attention was strong uptick in NIMs which likely came from the group’s increased financing books of 4%, albeit still far behind their 8%-9% target. However, the group’s NIMs are typically quite volatile no thanks to its shallow CASA of c.7% and high fixed rate financing. For now, optics indicate that the group has been able to increase its variable rate financing to 69% (2QFY23: 62%) and a slightly higher SME mix of 26% (2QFY23: 25%) as the group had intended.

MBSB’s GIF continues to be thorny issue, no thanks to EPF’s ihsan-i scheme. Still, the group looks towards some resolution of its legacy assets which may lower its BAU-impaired financing to a more palatable 4%-5% in the near-term, albeit still a great gap from the industry’s GIL of 1.6%.

Forecasts. We tweak our FY24F-FY25F earnings by +2%/-4% post- 2QFY24 updates, mainly adjusting for higher NOII and operating expenses.

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 anticipated 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 - 28 Aug 2024