At MBSB's briefing yesterday, management said NIMs will largely be sustained at the current high levels while it seeks greater clarity on its use of the AG Code, which may potentially give rise to cost savings on loan transactions. MBSB said it will emphasize asset quality management, especially NPLs, and boost its capital ratios as a stepping stone toward matching industry levels and Basel III requirements. Maintain BUY, with our FV unchanged at RM3.15.
Cost savings from using AG Code. MBSB told the briefing that it has received approval from many states' Accountant-Generals (AG) to utilize the AG Code. From what we understand, access to the AG Code will allow MBSB to directly deduct salaries from MOF, which will potentially allow the group to cut its transaction costs to as low as RM1 per loan. Without the direct deduction, MBSB’s cost via the existing ANGKASA BPA code would have been about 1.5% per transaction.
Pre-emptive provisioning. We are of the view that MBSB will take pre-emptive provisioning and NPL management measures match the banking industry's asset quality indicators. The industry NPL ratios were last reported at 2% (gross) and 1.4% (net). We are raising our forecasts for provisions, and adjusting our loan loss coverage forecasts (LLC) higher to 97.6% for FY13 and 103.1% for FY14 respectively, while projecting for total credit costs of 1.1% and 1.2% for FY13 and FY14 respectively.
Raising capital. MBSB said it is considering boosting its capital via a combination of a dividend reinvestment plan and a rights issue in order to sustain its loans growth momentum and lay the groundwork to meet regulatory requirements. Based on our estimates, a RM500m boost in the group’s shareholder's equity will equates to a 1.5% to 2% boost in the company's capital ratios.
Keeping FV at RM3.15. Despite the upward 6.8%/2.4% revisions in our FY13/ FY14 profit forecasts, we are retaining our FV at RM3.15 as we adjust our equity estimate against our dividend payout forecast of 35%. Maintain BUY.
Cost savings from using AG Code. MBSB told the briefing that it has received approval from many states' Accountant-Generals (AG) to utilize the AG Code. From what we understand, access to the AG Code will allow MBSB to directly deduct salaries from MOF, which will potentially allow the group to cut its transaction costs to as low as RM1 per loan. Without the direct deduction, MBSB’s cost via the existing ANGKASA BPA code would have been about 1.5% per transaction.
Pre-emptive provisioning. We are of the view that MBSB will take pre-emptive provisioning and NPL management measures match the banking industry's asset quality indicators. The industry NPL ratios were last reported at 2% (gross) and 1.4% (net). We are raising our forecasts for provisions, and adjusting our loan loss coverage forecasts (LLC) higher to 97.6% for FY13 and 103.1% for FY14 respectively, while projecting for total credit costs of 1.1% and 1.2% for FY13 and FY14 respectively.
Raising capital. MBSB said it is considering boosting its capital via a combination of a dividend reinvestment plan and a rights issue in order to sustain its loans growth momentum and lay the groundwork to meet regulatory requirements. Based on our estimates, a RM500m boost in the group’s shareholder's equity will equates to a 1.5% to 2% boost in the company's capital ratios.
Keeping FV at RM3.15. Despite the upward 6.8%/2.4% revisions in our FY13/ FY14 profit forecasts, we are retaining our FV at RM3.15 as we adjust our equity estimate against our dividend payout forecast of 35%. Maintain BUY.
SNAPSHOTS FOR FY13-14
Maintaining loans growth target. As expected, MBSB kept FY13 20%-25% loans growth targets but remains cautious on possible downside risks. It expects personal loans to continue to be the main growth driver as about 70% of such loans are for refinancing purposes. One strategy moving forward is to allow branches and agents to encourage customers to refinance their existing loans via MBSB. Our loans growth target is unchanged at 21.8% for FY13 and 16.6% for FY14 respectively.
Incorporating NIMs upside. We are, however, lifting our net interest margins (NIMs) target to 4.4% for FY13 and 4.3% for FY14 respectively. MBSB’s NIMs came in at 4.9%, 26bps higher than FY11's 4.6%. Our corresponding estimate for FY12 is 4.6%. We believe the high NIMs will be sustained with help from MBSB's recognition of the higher effective interest rate corresponding to an average expected shorter tenure of five years for its PF-i schemes.
AG Code to create savings. MBSB said it has received approvals from many federal and various state accountant-generals (AGs) to utilize the AG's direct salary deduction Code for personal loans taken by civil servants (AG Code). As a simple comparison, it already had access to the direct salary deduction code via Angkatan Koperasi Kebangsaan Malaysia (ANGKASA), the country's centralized collection agency for participating cooperatives. We gather that access to the AG Code will allow MBSB to directly deduct the salaries of civil servants instead of having to go through ANGKASA. Another advantage is MBSB is not required to surrender the BPA ANGKASA code and hence is able to utilize both codes as it wishes. Management said the AG Code would most likely result in direct cost savings as the current ANGKASA scheme attracts a commission rate of 1.5% per transaction. The AG Code will allow MBSB to avoid such transaction costs as it charges only RM1 per transaction, which will ultimately boost margins from the civil servant loans segment. While we are heartened by the cost savings, we are cautious on the following
Incorporating NIMs upside. We are, however, lifting our net interest margins (NIMs) target to 4.4% for FY13 and 4.3% for FY14 respectively. MBSB’s NIMs came in at 4.9%, 26bps higher than FY11's 4.6%. Our corresponding estimate for FY12 is 4.6%. We believe the high NIMs will be sustained with help from MBSB's recognition of the higher effective interest rate corresponding to an average expected shorter tenure of five years for its PF-i schemes.
AG Code to create savings. MBSB said it has received approvals from many federal and various state accountant-generals (AGs) to utilize the AG's direct salary deduction Code for personal loans taken by civil servants (AG Code). As a simple comparison, it already had access to the direct salary deduction code via Angkatan Koperasi Kebangsaan Malaysia (ANGKASA), the country's centralized collection agency for participating cooperatives. We gather that access to the AG Code will allow MBSB to directly deduct the salaries of civil servants instead of having to go through ANGKASA. Another advantage is MBSB is not required to surrender the BPA ANGKASA code and hence is able to utilize both codes as it wishes. Management said the AG Code would most likely result in direct cost savings as the current ANGKASA scheme attracts a commission rate of 1.5% per transaction. The AG Code will allow MBSB to avoid such transaction costs as it charges only RM1 per transaction, which will ultimately boost margins from the civil servant loans segment. While we are heartened by the cost savings, we are cautious on the following
- We think it is unlikely that the AG code will open up a significant new market share asthe existing civil servant base is the same regardless of whether utilizing the AG Code or the BPA direct deduction scheme, based on our understanding.
- Also, we understand that the utilization of the AG Code will take time to materialize asthe processes are yet to be in place in some of the approved states. Moreover, certain states are still reluctant to cede use of the code to MBSB, but in this case the company can still use the ANGKASA's BPA scheme. Nevertheless, MBSB is targeting to secure approvals of two to three more states this year, while it is already using the AG Code in states like Penang and Selangor.
- We understand there are currently no firm data on whether MBSB's direct competitors in providing civil servant loans, namely BSN, Bank Rakyat and Agrobank, are also allowed use of the AG Code. We have also come to understand that commercial banks may have been barred from using the AG Code some time ago. Nevertheless, obtaining approval to use the rights to the AG Code from each of the respective states is itself extremely cumbersome. Hence, the barrier to entry is high even for commercial banks that are backed by the government.
Likely to maintain current loans portfolio. The company acknowledges the challenges in maintaining a balanced loans portfolio. We think MBSB will likely retain its current loans composition whereby personal financing (personal loans and auto loans) may contribute as high as 65%-70% of total loans. Its auto loans in particular will be provided to a wider reach of customers in the North/ South regions from the Klang Valley currently. MBSB has been attempting hard to shake off the previous perception of it being a 'lender of last resort' and is in the midst of rebranding its home loans packages as being affordable, but to customers of good credit quality. Likewise for corporate loans, MBSB intends to choose only project owners/ developers with quality, sustainable projects and has rejected corporate applicants in the past. MBSB's selective approach may be the reason why the proportion of mortgages and corporate loans in its total loans portfolio has been shrinking.
Expect pre-emptive provisioning as NPL management likely to be tightened. Impairment allowance was down by 80% q-o-q in 4Q12, which is in line with the historical quarterly trend as there was a slowdown in business for that quarter. But also recall that the 6% jump in gross NPLs to RM3bn was due to seasonality in some of the legacy loans portfolio. We also understand that the healthy downtrend of NPLs ratios is less likely to persist as tighter management is required to pull the ratios down in line with levels achieved by commercial banks. The industry NPLs ratio was last reported at 2% (gross) and 1.4% (net). Moving forward we are of the view that MBSB will take pre-emptive measures to tighten its NPLs management against potential seasonality in certain portfolios. We understand that as MBSB is not under the purview of BNM, the NPLs recognition may have not been consistent with the three-month arrear previously followed by the commercial banks. We raised our forecasts for provisions, bringing loan loss coverage forecasts (LLC) adjusted up to 97.6% for FY13 and 103.1% for FY14 respectively, while total credit costs forecasts at 1.1% and 1.2% for FY13 and FY14 respectively.
Capital management. MBSB's current Tier-1 Equity capital ratio is estimated at close to 7%, as opposed to 6.6% in 9MFY12. However, when converted into Basel III requirements management acknowledges that the Tier-1 ratio would be closer to 5%. Our estimates for FY12 is 5.7%, lower than the minimum requirements of 6% (by 2015) should MBSB be subject to BNM's purview. MBSB may consider boosting its capital with a combination of a dividend reinvestment plan and a rights issue in order to sustain its loans growth momentum. This exercise is likely to be carried out in tranches. Based on our estimates, a RM500m boost in its shareholder equity will equate to a 1.5% to 2% boost in the company's capital ratios.
Aiming for loans-to-funding ratio of 95%. Management retains its target for a loans-to-funding ratio of 95% vs 100.2% in FY12.While thist is possible as MBSB plans to carry out securitization, we are still keeping watch on its loans-to-deposit (LDR) ratio, depending on the success of its future retail campaigns.
Aiming for loans-to-funding ratio of 95%. Management retains its target for a loans-to-funding ratio of 95% vs 100.2% in FY12.While thist is possible as MBSB plans to carry out securitization, we are still keeping watch on its loans-to-deposit (LDR) ratio, depending on the success of its future retail campaigns.
Special dividend unlikely to repeat. Management said the special dividend of 18 sen (gross) is attributed to balances of Income Tax Section 108. Although no further details were disclosed, we believe that this generous special dividend is unlikely to be repeated. Excluding this dividend, the gross dividends per share based on the interim and final dividends (6 sen and 9 sen respectively) amounting to 17 sen will translate into a 35.7% payout, in line with our original 35% payout forecast for FY12. Hence, we retain our dividend payout forecasts at 35% for FY13 and FY14.
Tax rate to stay at 31%. We have also retained our effective tax rate of 31%, but this could adjusted if MBSB manages to secure approval from MOF to allow certain deductible items/ conditions that are applicable to financial institutions governed by BAFIA. We do not know for certain when the respective regulators will revert on this request.
Tax rate to stay at 31%. We have also retained our effective tax rate of 31%, but this could adjusted if MBSB manages to secure approval from MOF to allow certain deductible items/ conditions that are applicable to financial institutions governed by BAFIA. We do not know for certain when the respective regulators will revert on this request.
FORECAST CHANGES
Net profit rises. Due to our higher in NIMs forecasts, we are adjusting upward our net profit by 6.8% for FY13 and 2.4% for FY14 respectively, slightly offset by: i) higher cost-to-income (CIR) ratios at 23% and 24% for FY13 and FY14, and ii) higher provisioning.
FV retained at RM3.15. Despite the upward revision in profit forecasts, our FV is retained at RM3.15 as we adjust our equity to reflect our dividend payout forecast of 35%. Maintain BUY, with our FV pegged to 2.1x BV, assuming a 3% growth rate, COE of 12% and a slightly diluted ROE of 21.8% vs 22.7% previously. Note that our FV is based on a staggered dilution of the company’s warrants through five years from FY11.
Source: OSK
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