MBSB's 1Q headline income indicators could be in for a rebound

Malaysia Building Society Bhd (Feb 9, RM2.13)
Maintain market perform with revised fair value of RM1.95 from RM1.88: Management attributed the 22% quarter-on-quarter (q-o-q) drop in 4QFY11 pre-tax profit to: (i) loan securitisation leading to higher funding cost; (ii) lower processing fee from slower personal financing (PF-i) disbursements; and (iii) higher loan impairment allowances due to higher collective allowances for PF-i.

Management said 4QFY11 gross loans were flattish q-o-q, mainly due to slower PF-i disbursements during the quarter as MBSB had already met its full-year disbursement target in early 4QFY11.

MBSB targets PF-i disbursements of RM8 billion (2011: RM6.6 billion). Disbursements for 1QFY12 PF-i  have been strong, partly reflecting the new products launched. Management's plans to diversify the loan book to roughly equal contributions from the personal finance, mortgage and corporate/wholesale segments remain unchanged, but we suspect this will take a while longer than the 12- to 18-month time frame mentioned earlier.

Management's guidance for net interest margin (NIM) of at least 4% and cost-to-income ratio to rise to 25% (2011: 21%) was unchanged. Management expects asset quality to improve further with the net impaired loan ratio declining to 5% as at end-2012, from 7.6% a year ago.

We think several 1QFY12 key income indicators could trend positively. First, q-o-q loan growth appears set to come in significantly better than 4QFY11's.

Second, we think NIM could see some q-o-q expansion (4Q11: -55 basis points [bps] q-o-q) from the stronger PF-i disbursements and as the impact from the negative carry due to the securitisation of receivables wears out.

Third, non-interest income (NII) could rebound q-o-q due to higher processing fee income. The impact on bottom line will depend on how rapidly overheads start to rise and whether any asset quality issues crop up.

Notwithstanding the above, NIMs may start to come under pressure again beyond 1QFY12.

PF-i rates appear to be under pressure. We estimate the yields on one of MBSB's new PF-i package are about 120 to 180 bps lower than last year's packages.

In response, we understand that Bank Rakyat has also cut rates accordingly. Further securitisation of receivables would put pressure on NIMs ahead and also lead to more volatile NIM trends, as seen in the recent 4QFY11 results.

We have raised our FY12/FY13 earnings per share (EPS) projections by 4% to 4.8% largely after we lowered our FY12/FY13 credit cost projections to 91 to 99 bps (104 to 116 bps).

We raise our fair value to RM1.95 from RM1.88, based on unchanged target price-earnings ratio of eight times ascribed to MBSB's fully-diluted 2012 EPS. We maintain our "market perform" call. — RHB Research Institute, Feb 9