We maintain our GGM-derived PBV TP of RM0.59 (COE: 9.2%, TG: 2.0%, ROE: 6.0%), UNDERPERFORM call and forecasts. A refocus on the near-term strategy seeks to prioritise asset quality over growth. As the group also revisits its liability management to resolve its NIMs, we foresee pressures to profitability albeit with the benefit of strengthened sustainability to earnings.

We came away from a meeting with MBSB with the following key takeaways:

- Legacy accounts hopeful to be addressed. MBSB's GIF of 7.0% is attributed to several legacy accounts within the residential construction space, prompting the group to reduce its exposure to this segment going forward. Writing off these accounts could lower the group's GIF to 4%─5%. However, it could also entail impairments from loans of up to RM1.32b, being the widest possible impact per our calculation, although there should already be some provision coverage on these legacy credits (undisclosed). This leads us to believe that it would be performed gradually over several years so as not to overly stress its financials.

On the flipside, the abovementioned erasure also translates to a dilution of equity base from lower retained earnings. Hypothetically, this would then uplift MBSB's ROEs by up to 80 bps for subsequent financial periods.

- GIF curtailment at the forefront. The group looks to realign to a stronger need to contain its GIF (2QFY24: 7.0%). However, this would spell tightening its credit screening process which we believe can be at the expense of its FY24 financing growth of 8% (1HFY24 YTD: 3.8%). Plugging this could include an increase to its mortgage exposure (presently 24% of financing books vs. 40%─60% on retail focused peers) being largely collateralised, albeit at the expense of asset yields.

- Fixing funding is the task ahead. NIMs for MBSB remains pinched by a low CASA mix (c.7%) and also its dependence on higher cost wholesale treasury deposits. The group opines that a successful transition to a higher retail deposits base and lower proportion of wholesale treasury could reduce funding cost by up to 80 bps (with our current estimates indicating a sensitivity of RM10m per 5 bps).

Although we believe a piling-up of retail CASA requires more competitive deposit rates, the overall impact to NIMs should be balanced out by a lower dependence on wholesale treasuries.

- Tactical costs could loom. While the group maintains a CIR target of <55% for FY24, it is cognizant that certain efforts may prevent it from meeting this target. Should MBSB decide to compete via rates, the lower top line would cascade to a more inflated CIR.

Also, we do not discount more marketing and onboarding sales personnel to support CASA, retail and SME acquisitions, mitigated by savings from synergies with MIDF. On the flipside, we are wary of potential rightsizing on structural duplications here.

Forecasts. Unchanged. Post-meeting, we believe our model assumptions remain sufficient with conservatism stemming from the group's past earnings disappointment. We have several headline inputs for FY24F which are below the group's targets i.e. (i) loan growth at 4.2% vs. 8% target; (ii) NIM at 1.98% vs. 2% target; (iii) GIF ratio at 6.9% vs. 4%─5% target; and (iv) ROE at 2.9% vs. 4%─5% target.

Maintain UNDERPERFORM and TP of RM0.59. Our TP is based on an unchanged GGM-derived FY24F PBV of 0.42x (COE: 9.2%, TG: 2%, ROE: 5%). Although the merger with MIDF has been completed, 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. Furthermore, 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 loan growth, (iii) slower-than- expected deterioration in asset quality, (iv) further gains in capital market activities, (v) favourable currency fluctuations, and (vi) changes to the OPR.

Source: Kenanga Research - 24 Oct 2024