ROE of Malaysia Building Society (MBSB) continues to be seen as uninspiring at 4.3% in FY25F and 5.0% in FY26F. This is due to a high mix of wholesale deposits at 78% which results in a higher funding cost than peers and higher GIL ratio than the sector. This justifies a low P/BV of 0.6x for FY26F. We maintain HOLD on with an unchanged TP of RM0.75/share based on CY26 P/BV of 0.6x supported by ROE of 5.0%. Maintain our neutral 3-star ESG rating.

• Results above expectations due to lower than projected provisions. QoQ topline growth was flattish in 3QFY24. 9MFY24F earnings of RM255mil (+34% YoY) accounted for 91.3% of our estimate and 88% of consensus projection. The variance to our estimate was attributed to a lower-than-expected allowances for loan losses. Operating income grew 49% YoY in 9MFY24 after the completed acquisition of MIDF. On QoQ, earnings grew >100% to RM122mil in 3QFY24 underpinned by lower operating expenses and provisions from a decline in ECLs for stage 1 and 3 loans and higher recoveries. Revised our FY24F earnings by 25% to RM346mil to reflect lower credit cost of 40bps (previously: 60bps). Nevertheless, this does not impact our TP which is based on CY26 numbers.
• Loan growth moderated in 3QFY24. Gross loan growth fell to 6.4% YoY in 3QFY24 from 8.4% YoY in 2QFY24 contributed by a contraction in personal and auto financing. Meanwhile, mortgage and corporate financing grew at a slower pace. NIM stood at 2.55% in 3QFY24 compared to 2.6% in 2QFY24. CASA ratio continued to be low at 8.8% in 3QFY24 albeit a slight improvement vs. 7.3% in 2QFY24. We continue to see room to lift its ROE from a low of 3.4% as of 9M24 to 4-5% in the near term from optimization of: i) funding cost and ii) capital ratios by lowering its risk weighted assets (RWA). COF can be lowered through the release of expensive wholesale deposits while meeting the regulatory liquidity requirements as well as shortening its term structure of deposits from an average maturity of 6-9 months.
• Positive JAW leading to a slightly lower CI ratio for 9MFY24. Growth in operating income outpaced overhead expenses leading to a positive JAW of 6% YoY for 9MFY24. As a result, CI ratio improved slightly to 55.4% in 9MFY24 from 57.6% in 9MFY23.
• Asset quality improved marginally with a lower GIL ratio and credit cost. GIL ratio declined to 6.7% from 7.0%. Nevertheless, it remained elevated compared to the industry's 1.5% as of end Sept 2024. 3QFY24 saw lower impaired loans to the construction and manufacturing sector QoQ. The group's loan loss cover continued to stay low at 51.4% vs. the industry's 90.8%. Credit cost was 39bps in 3Q24 vs. 90bps in 2Q24.

Source: AmInvest Research - 27 Nov 2024