MBSB ... Feb12

Mercury Securities Sdn Bhd research

“Q4 results within expectations”
MBSB recorded 4Q/FY11 results (quarter ended 31st December 2011) that were within our
expectations. Meanwhile, the group’s FY11 revenue and NPAT of RM1260.4 and RM325.4
million were higher by 64.9% and 122.9% y-oy, respectively.

“Personal Financing driving loans growth”
MBSB recorded 4Q/FY11 revenue and NPAT of RM347.1 million and RM83.8 million, which were higher by 66.2% and 554.2% y-o-y, respectively. The strong earnings performance was mainly due to the higher income from Islamic banking operations (particularly personal financing). The increase in PBT for its personal financial segment was mainly due to the higher loans releases and larger loan base. This was partially offset by the higher “other operating expenses” incurred due to the higher business volume During 4Q/FY11, the group’s mortgage loans and financing segment recorded a decrease in PBT. This was mainly due to the lower loan impairment recorded during 4Q/FY10. During the same quarter, the group’s corporate loans
and financing segment had recorded higher loss before tax (LBT). The LBT was mainly due to
the higher individual allowance charges made during the quarter.

The group’s 4Q/FY11 NPAT was lower by 11.8% q-o-q versus its preceding 3Q/FY11. The decrease in NPAT during the quarter was mainly due to the lower other operating income, lower net interest income and higher impairment allowances on loans.

OUTLOOK/CORP. UPDATES
In tandem with domestic GDP growth, we expect that MBSB’s revenues from financing activities would grow as well. It is commonplace for consumers to take up loans or financing, especially for housing, motor vehicles, credit cards or personal financing. In particular, MBSB’s management is relishing strong demand from the public sector, i.e. the more than 1 million civil servants.

“Domestic demand sustained”
Malaysia had reported a reasonable unemployment rate of 3.1% (November 2011) and CPI of 3.0% (December 2011). Bank Negara Malaysia (BNM) had maintained its overnight policy rate (OPR) at 3.0%. Meanwhile, Malaysia recorded a strong 3Q/2011 GDP growth of 5.8%, amidst weak economic growth in the developed regions (US, EU and Japan). Some export-focused sectors may face slower demand.

MBSB’s management is optimistic for strong growth for its personal financing to civil servants, given the strong demand and its attractive rates (as low as 3.99% for those that qualify). Back in 2Q/FY11, personal financing had overtaken mortgage as the main contributor to its gross loan portfolio. Nevertheless, MBSB
does face specific competitors for this niche market – with rivals such as Bank Rakyat, BSN, RCE Capital and AgroBank. MBSB is able to get payments from its civil-servant clients in a “fail-safe” way via its direct salary deduction code with ANGKASA. ANGKASA (Angkatan Koerasi Kebangsaan Malaysia or National Cooperative Organisation of Malaysia) is the apex cooperative overseeing all types of cooperatives
throughout Malaysia.

“Expanding range of financial products”
Continuous operational improvements targeted under MBSB’s transformation programme “Taking MBSB to the Next Level” have contributed to the group’s strong FY11 results. While the group’s loans growth is largely driven by personal financing, the group is continuing its strategy to diversify its product portfolio. Currently personal financing constitutes about 49% of the group’s financing portfolio with mortgage financing about 31% and corporate financing about 20%. The group’s Mortgate Ultimate and move into banccassurance products has been revealed to be relatively successful. The group is expecting to launch
several new products (e.g. credit card and hire purchase) this year, and also give more focus on fee-based income (e.g. EPF kiosk, Epay services, Western Union) and to improve customer service levels.

During the past year, the group had established a Customer Call Centre, appointed marketing agents and had joined BNM’s CCRIS database (w.e.f. January 2012). MBSB plans to establish additional Sales and Service Centres (SSCs) and Representative Offices (REP) to further extend its network. The group had opened a fullfledged branch in Shah Alam (Selangor) and a REP in Tanah Merah (Kelantan) during 4Q/2011.

“Supporting corporate sector”
For the corporate segment, besides its up-andcoming contract financing and SME Cash Express programme (launched early 2011), MBSB also offers project/bridging financing, vendor financing, floor stocking, industrial hire purchase and commercial financing. Its Contract Financing product is targeted at companies that
have been awarded government contracts (e.g. oil and gas). MBSB’s existing financing to the property development sector has also contributed to the company’s improved margins.

MBSB is also supporting the government's Economic Transformation Program (ETP), seeking to help finance Private Finance Initiative (PFI) projects (e.g. for education sector). The group’s wholesale financing business segment is related to PFIs and structured businesses. In mid-January 2012, MBSB had signed an agreement to provide banking facilities of up to RM51 million to Labuan Shipyard and Engineering SB (LSE). This involves Murabahah Tawarruq Financing Facility (trade facilities) of up to RM41 million and Kafalah Bank Guarantee of up to RM10 million for the purpose of the engineering, construction, testing and delivery of 77-meters Dynamic Positioning 2 (DP2) Diesel Electric Propulsion Platform Supply Vessel (PSV).

“Stunning loans growth”
As at 31st December 2011, MBSB’s net “loan, advances and financing” stood at RM15.2 billion, an increase of 42% y-o-y. This easily exceeded the local banking industry’s average growth rate of 13.6%. The group’s deposits which stood at RM13.5 billion as at 31 December 2011 had grown by 29% y-o-y. In FY11 the group had raised funds via the securitization of RM1.0 billion of personal financing assets with Cagamas (through Maybank Bhd, Affin Bank Bhd, RHB Bank Bhd and AmBank Bhd), an EPF Bai Al-Inah Islamic
Financing Facility of RM0.5 billion and a rights issuance of RM0.5 billion. The growth in its loan assets was supported by the effective management of its liability programme.

“KPIs easily surpassed”
As a GLC (government linked company), MBSB maintains a set of Target Headline Key Performance Indicators (KPIs). These KPIs have been set and agreed by MBSB’s Board of Directors and management as part of the broader KPI framework in place under the GLC Transformation programme and is disclosed on a voluntary basis.

The group’s FY11 net return on equity (ROE) and revenue growth had easily exceeded the targeted Headline KPIs. This was mainly due to the strong performance of its financing (especially personal financing) business segment and also higher “other operating income”. This gain was partly off-set by the higher operating
expenses and higher loan impairment.

VALUATION/CONCLUSION
At the next AGM, MBSB will propose a final FY11 cash dividend of 7 sen less 25% tax for shareholders’ approval. Based on MBSB’s issued and paid up share capital (as at 31st December 2011) of 1,215.5 million shares, the total dividend payable would amount to RM63.8 million. Earlier on in September 2011, MBSB’s had paid out an interim cash dividend of 5 sen less 25% tax amounting to RM45.6 million for its FY11. For FY12, we have assumed that MBSB will maintain a dividend payout policy of at least 30% of its annual net earnings.

“Stock price outperforms KLCI”
With a relatively high adjusted beta (correlation factor) of 1.48 to the KLCI, MBSB (+17.0% YTD) had managed to outperform the KLCI (+0.5%) this year. Market conditions have been volatile during the past year, impacted by the “Arab Spring” uprisings, major Tohoku natural disaster in Japan, “sovereign debt” issue in Europe and the “debt ceiling” issue in the US.

“Maintain Buy Call with new TP”
Based on our forecast of MBSB’s FY12 EPS and an estimated P/E of 8 times, we set a conservative FY12-end Target Price (TP) of RM2.71. This TP offers investors a 23.1% upside from MBSB’s current price. Our TP for MBSB reflects a P/BV of approximately 1.8 times over its FY12F BV/share. The group’s
FY12F P/E, P/BV, ROE and dividend yield are all at reasonable levels. The group has been in a
net cash position (excluding customer deposits as borrowings) since its FY09. MBSB’s net
earnings have more than doubled-up during its FY10 and FY11, and we foresee that its earnings
growth rate (in percentage terms) would start dropping from its peak during its FY12.

The group recorded a solid improvement in its total net NPL ratio from 15.7% for its FY10 to 8.8% for its FY11. This is principally due to the restructuring of major corporate legacy accounts achieved during the year and an expansion of financing and loan bases. The group’s previously “high” loan impairment ratio was due
to legacy accounts. Besides, most of the impaired property loans are backed by collateral.

Group management is still actively dealing in restructuring and recovering a few major legacy corporate accounts. MBSB’s business also faces possible routine risk factors such as a slower rate of economic growth, weak financing demand, rising loan impairments, rising cost of funds, new regulations, weak NIMs, high LD ratio and stiff competition from other existing banks/financial institutions. In addition, MBSB also faces routine challenges in improving its internal IT infrastructure, market share, skills of marketing staffs, facilities, deposit taking, customer service, branding / recognition and branch networking.