Malaysia Building Society- Positive Surprises in The Offering

At MBSB’s analyst briefing yesterday, we came to understand that the management will take priority in boosting its non-interest income, mainly through commissions from bancassurance agreements, and that several fund-raising exercises will likely happen as part of its capital management process. We have raised our forecast for FY12/13 by 2-3% to take into account a more aggressive loans growth. Maintain BUY, with FV revised to RM3.02 from RM2.70 previously, premised on 2.6x 12-month forward PBV.

Renewed focus on fee-based income. MBSB has stated that it will continue to focus on fee-based income to further enhance profitability. The growth drivers are expected to be sourced from the bancassurance tie-ups with several insurance players, as well as the kick-start of a foreign currency transfer business under Western Union, for which MBSB has recently received the approval from BNM. MBSB has also mentioned that it is in the midst of developing its own bancassurance product. We have forecasted a 15% growth in the other income segment.

Several initiatives down the funding pipeline. Management has reassured us that it will undertake several capital management initiatives to sustain the aggressive loans growth shown in the past two quarters. Though no clear details were given, we believe
MBSB will repeat the fund-raising exercises carried out in 2011. Last year, the company had a rights issue amounting to RM500m, a RM500m Bai-Inah Islamic financing from EPF, and RM800m of PFI securitization with Cagamas. It aims to bring down net loansto-
funding ratio (which includes customer deposits, recourse of obligations to Cagamas and other borrowings) to <100% level, from the 108.5% recorded in the current quarter. Our corresponding forecast for loans-to-funding ratio is at 96%, while net loans-todeposit
(LDR) ratio is forecasted at 115%.

Maintain BUY. We have revised our forecast for loans growth to 51%, lowered net interest margin (NIMs) target to 3.5% and changed our FV to take into account the more aggressive loans growth. Maintain BUY, with an FV changed to RM3.02 from RM2.70 previously, premised on a 2.6x 12-month forward PBV, assuming a 4% growth rate and COE of 11%. Our dividend per share estimate of 13.2 sen is based on a dividend payout forecasted at 35%, higher than the group’s minimum payout ratio of 30%.

Closing the gap. Management is working on bringing forth its asset quality and core banking operations close to a real banking landscape. The first phase of its Core Banking System (CBS) will officially commence in November 2012 and is expected to improve the group's operating efficiency via a centralized system. Recall that MBSB's cost to income (CIR) ratio improved to 20.3% recently. However we reiterate our view that the initial cost for the CBS system will be slightly on the high side, and maintain our CIR forecast at 25.0%.

Expecting NIMs compression. MBSB recorded NIMs of about 4.5% in this quarter. However, management is expecting some compression of NIMs mainly due to the drops in profit rate within some of the PFI assets. Despite the outlook, management is targeting to maintain NIMs at above 4% level. Our forecast is at a lower 3.5% combined for both conventional and Islamic banking operations, as we think that MBSB is likely to face an upside in its cost of funds if it were to undertake a securitization with Cagamas or borrow from its major shareholder, EPF.

Some details on loans portfolio. Management is firm to retain a conservative loans growth rate at between 15%-20%. Our forecast is revised to a 51% y-o-y loans growth in view of the sharp loans growth achieved in 1H12. MBSB continues to stay focus on mortgages with the hope of seeing this segment rising back to 30% of total loans portfolio. Regardless, the quality of the mortgages are assured as management has already been undertaking steps to shift to high-quality portfolios and eliminating low-end housing portfolios back in 2009. Elsewhere, the auto financing segment is doing well, with around RM100m loans application recorded but the growth is likely to remain capped at RM30m a month, due to the high risk nature of the business.

PFi financing growth to normalise. Though we do not foresee continued aggressive growth figures for MBSB’s Personal Financing-i (PFi) schemes moving forward, we believe personal loans will continue to be the largest revenue driver, being more than 60% of MBSB’s total loans portfolio. MBSB has a short campaign with Astro whereby the first 4,000 disbursed PFi applicants will receive Astro’s NJOI service, a satellite television prepaid service, for free. MBSB has taken initiative in launching the Tawarruq concept which is aimed at reducing operating cost and providing more efficient turnaround time in loans disbursement to customers. In 2Q12, MBSB recorded a 132% y-o-y increase in its personal loans as compared to 2Q11. We are forecasting a growth of 100% in personal loans for FY12.

Source: OSK