MBSB's 9MFY24 net profit (+34%) beat expectations on the back of strong NOII delivery, with an unexpected strength in FVOCI gains in 3QFY24. A readthrough of the results indicate significant efforts to reshape its financing and deposits portfolios for more stable NIMs in the future, of which we await further updates from the group for further assessment during briefing. We raise our FY24F/FY25F earnings by +23%/+7% to pen better NOII performance. Maintain UNDERPERFORM with a slightly higher GGM-derived PBV TP of RM0.60 (from RM0.59).

9MFY24 above expectations. MBSB's 9MFY24 net profit of RM255.3m came in at 89% of our full-year forecast and 88% of consensus full-year estimates. The positive deviation was due to stronger-than-expected performance in investments, namely from its debt instrument holdings/FVOCI books.

YoY, 9MFY24 net profit rose by 34%. Driving this was a 32% increase in net Islamic income with its financing books expanding by 6% thanks to higher mortgage and trade finance accounts alongside healthier NIMs (+38 bps). NOII nearly tripled following the injection of MIDF's investment and advisory fee income streams. While CIR has been reduced to 55.4% (-2.2 ppts) attributed by the stronger top line, we note that credit cost were stretched to 58 bps (+28 bps) due to the absence of write-backs reported in the prior year. This would be closely in line with the group's target of 50 bps for FY24.

QoQ, 3QFY24 net income grew more substantially by 123% led by significantly lower impairments by 55% (credit cost: -52 bps) due to lumpier staging performed in 2QFY24. Although net Islamic income declined by 2% following a slightly lower financing base, NOII made up with a 22% improvement following a turnaround in investment income.

Highlights. We await updates from the group in today's results briefing, seeking better clarity on its efforts to retain NIMs in which the group had previously struggled with. We observed that MBSB's initiative to convert a higher proportion of its financing portfolio into variable rates has translated to a lower fixed rate proportion of 31% in 2QFY24 to 19% recently. Together with a small albeit rising CASA mix of 8.1% (2QFY24: 6.7%), we look to build a better case for its long-term NIMs.

GIF remains lofty at 6.7%, to which the group had previously mentioned it would clean up on related legacy assets which would narrow its GIF to 4%-5%. However, we are wary on this as it entails write-offs of up to RM1.32b and therefore should be done in stages.

Forecasts. Post-results, we raised our FY24F earnings by 23% to incorporate the better-than-expected NOII performance driven by higher investment income. In spite of our revised projections, our FY24F ROE is still short of the group's 4%-5% target for the year.

Meanwhile, we also increase our FY25F earnings by 7% on tweaks to NOII and also on its fee-based streams which we have under-accounted for previously.

Maintain UNDERPERFORM with a slightly higher TP of RM0.60 (from RM0.59). Our TP is based on an unchanged GGM-derived PBV of 0.42x (COE: 9.2%, TG: 2%, ROE: 5%) against a slightly higher FY25F BVPS of RM1.39 (from RM1.38).

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 re-optimize 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.

Management Guidance FY24 Targets FY23 Performance Gross Financing Growth 8-9% 9.0% Net Interest margin 2.0% 1.79% Cost-to-income ratio <55% 51.2% Gross impaired financing 4-5% 7.3% ROE 4-5% 5.2% Souce: Company, Kenanga Research

Source: Kenanga Research - 27 Nov 2024