Kenanga slashes MBSB’s FY18 earnings forecast

February 4, 2018 | By | Reply More

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PETALING JAYA: Kenanga Research has slashed Malaysia Building Society Bhd (MBSB) FY18 by 17% to RM481million despite registering a strong growth in FY17.

It said in a research note last Friday that the cut earnings forecast is in anticipation of a slower loans growth of about 3%, higher credit charge of 1.3% and lower return on equity (ROE) of less than 6%.

Nonetheless, Kenanga Research is maintaining an “outperform” call on MBSB due to undemanding valuations with a higher price target of RM1.35 after its FY17 earnings exceeded expectations. Its core net profit surged 107% year-on-year to RM417 million, which accounted for 125% of the research house’s full-year estimates and 113% of market estimates.

This stellar performance is attributable to lower impairment allowances, which were lower by 8%, and lower cost of funds at 0.41%.

The research house noted that despite improved earnings and top line growth of 5% on the back of stronger fund based income, MBSB’s loans declined by 3.1%.

While the group’s new Islamic banking entity is set to begin operations on March 30, 2018, its loans are expected to see sombre growth at around 3%-4%, which will be mainly driven by corporates and mortgages.

“Personal financing will still be the core of its loans/financing but likely to be selective on asset risk concerns. Moderate loans, higher operational expenditure (due to the new merged entity and digitisation) and higher-than-expected credit costs, management guided for a moderate ROE of less than 6%,” Kenanga said.

However, the research house noted that MBSB’s net interest margin will still be strong at about 3.4% with no material impact from the Overnight Policy Rate (OPR) hike as 99% of its deposits are fixed deposit-based.

MBSB’s earnings are expected to edge higher moving into FY19 at RM514 million supported by higher loan growth (+4%), lower credit charge (1.2%) and higher ROE (6.7%).

It added that the potential risk that MBSB is facing include higher-than-expected margin squeeze, lower-than-expected loans and deposits, and worse-than-expected deterioration in asset quality.

Last month, MBSB received its shareholders’ approval for the acquisition of Asian Finance Bank Bhd (AFB). It is on track for its asset & liability conversion, which is expected to be completed by March 2018.

In improving its asset quality, RM1.5 billion worth of non-performing loans will be disposed of. Some RM104 million worth of non-core assets has been disposed of since 2017 with the balance of RM109 million within three years’ time.

As of December 2017, MBSB has met the regulatory requirements with leverage ratio, liquid asset ratio and loan/financing-to-deposit base ratio at 14%, 32% and 92% respectively (against Bank Negara requirements of 12.5%, 25% and 100% respectively).

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