MBSB aiming for higher ROE in 2023 despite margin pressure

• MBSB is in the midst of acquiring MIDF via a RM1.01 billion share deal, which will dilute the stake the Employees Provident Fund holds in MBSB to 57.45% from 65.87%, while Permodalan Nasional Bhd will emerge as a substantial shareholder with a 12.78% stake.

KUALA LUMPUR (June 27): Malaysia Building Society Bhd (MBSB) is targeting to deliver a high return on equity (ROE) of 6.0%-6.5% this year, up from 5.2% in 2022, even as the Islamic commercial bank faces margin pressure arising from increasing cost of funds.

“After four rounds [of overnight policy rate hikes by Bank Negara Malaysia] last year, and one this year, profit margin has been very slim, not only [for] us, but [also for] most of the other FIs (financial institutions) as well,” said group chief executive officer Datuk Nor Azam M Taib after the group’s annual general meeting on Tuesday (June 27).

Apart from rolling out in-house initiatives to cushion the margin pressure, chief financial officer Ramanathan Rajoo told reporters MBSB will also try to focus on increasing its current account saving account (CASA), which typically carries minimal-to-zero cost of funds.

Ramanathan said the targeted 6.0%-6.5% ROE for this year does not include operations from Malaysian Industrial Development Finance (MIDF).

MBSB is in the midst of acquiring MIDF via a RM1.01 billion share deal, which will dilute the stake the Employees Provident Fund holds in MBSB to 57.45% from 65.87%, while Permodalan Nasional Bhd will emerge as a substantial shareholder with a 12.78% stake.

Chief strategy officer Datuk Azlan Shahrim described the corporate exercise as “a growth merger” with minimum overlap. Management is expected to call for an extraordinary general meeting in July or August to seek shareholders’ approval for the acquisition.

“The idea was to merge these two banks, which want to do more, and let them leverage each other’s strength in their products and market segments,” said Azlan, adding that the merger could also enhance both parties' ability in retaining customers with more offerings within the enlarged group.

On possible mergers after the one with MIDF, Nor Azam said his priority now is to focus on creating synergy between the two entities.

Commenting on MBSB’s operations this year, Nor Azam said management is projecting loan growth of 8%-10%, driven mainly by agro-based, corporate customers and affordable mortgages.

MBSB’s gross loans grew by 6.6% in 2022 to RM38.56 billion from RM36.18 billion in 2021.

“The business plan that we crafted was cautiously done to make sure that we don’t grow into possible vulnerable segments — [a] lesson learnt in the last three to four years, when we had lockdowns.

“The essentials are still [focusing on] the segments that can be sustainable even during turbulent times. Segments that we are moving into in 2023 to 2024 will be very much on the agro-based ecosystem, and then we touch base with corporate players, not only SMEs (small and medium enterprises),” he explained.

“We are looking into increasing our market share in corporate and property financing, and expanding our footing in agriculture and food manufacturing,” he added.

Nor Azam also said due to MBSB’s relatively higher exposure to the construction segment, the group's non-performing loan (NPL) ratio is about 6.7% currently, versus the industry average of about 2%.

“Our construction exposure is quite high, we are reaching out to them with [a] R&R (restructuring and rescheduling) scheme, but it is still manageable. We hope to bring it [NPL] down to below 4.0%, from 6.7% now,” he said.