MBSB's bank aspirations viewed positively

OVER the years, Malaysia Building Society Bhd (MBSB) has evolved from giving out just home loans to providing retail and corporate loans as well as civil servant personal financing.

Now, it has set its sights on a banking licence that will crystallise its status as a full-fledged financial institution.

CEO Datuk Ahmad Zaini Othman revealed this at a press conference to announce the group's third-quarter results last week, although he was quick to add that the group was in no rush to get a licence and had yet to apply for one.

The group is still in the process of closing the compliance gap towards becoming a bank, he said, adding that next year would be a good time to pursue a licence.

"A banking licence would be good for MBSB as it would formalise its best practices. MBSB is already in compliance or close to compliance with most of the requirements anyway, so it won't make much of a difference," says an analyst with a local bank-backed research house.

"A licence would lower financing costs for MBSB and allow it to tap the interbank market. At the same time, it would open up new types of securities that MBSB could offer."

The more stringent regulatory environment is not expected to burden MBSB much as it is already close to complying with capital and operational requirements that licensed institutions are subject to.

"It's true that MBSB will have to comply with stricter guidelines, but that will give shareholders more confidence in the company, knowing that it has regulatory oversight," points out the analyst.

The move to acquire a banking licence comes at a time when the industry is trying to consolidate the commercial banks, but analysts do not think this will become an issue for MBSB.

"I don't think it will try and become a full-blown commercial bank. MBSB is likely to continue to focus on its niche, which has been very lucrative," says the analyst.

The company, in which the Employees Provident Fund has a 64% stake, could always take the route of a development financial institution (DFI) and be governed by the Development of Financial Institutions Act 2002 (Dafia) instead of falling under the Banking and Financial Institutions Act 1989 (Bafia).

There are 13 institutions under Dafia, including Bank Kerjasama Rakyat Malaysia Bhd, which is MBSB's biggest competitor in the civil servant personal finance market.

Zaini said at the press conference that the group adheres to Bank Negara Malaysia's guidelines, although it does not have to.

MBSB is an exempt finance company that was given the green light by the Ministry of Finance in 1972 to undertake a financing business in the absence of a banking licence.

It is not subject to Bafia or Bank Negara's responsible lending guidelines, but is answerable to the MoF.

Unlike other financial institutions, MBSB may finance loans with a loan-to-value ratio exceeding 70% for a third mortgage and above, a ruling that was enforced last year. However, mortgages make up only 21.1% of its total loans. In fact, mortgage loans declined 2.5% year-on -year in the third quarter ended Sept 30.

Personal financing accounted for the bulk of MBSB's loans, amounting to RM16.78 billion or 65% of total loans as at Sept 30.

In the same quarter, earnings were below analyst expectations, falling 5.4% from the previous year to RM89.98 million.

The weaker performance was attributed to higher than expected tax expenses and a slower pick-up in non-fee income. If the group had not been subject to collective assessment allowance, net profit would have been 33% higher.

Be that as it may, MBSB's growth has been impressive. From 2008 to 2011, net profit grew from RM32.58 million to RM325.43 million. At the same time, total loans and assets more than tripled to RM25.8 billion and RM24.91 billion respectively.

As loans registered a compound annual growth rate of 51% in the past three years, MBSB's non-performing loan (NPL) ratio started shrinking.

As at Sept 30, the ratio had dropped to a record low of 4.33%, a far cry from the 11% seen a year ago and 16% in 2010. Resolved corporate legacy issues were cited for this improvement in loan quality.

A report by OSK Research highlights the fact that MBSB's deposits surged 48.5% in the quarter, outpacing loan growth of 45%. With that, the group's loan-to-deposit ratio narrowed to 115% as at Sept 30 from 122.4% in the preceding quarter.

"The company's strong deposit growth reassures us about its capital management," notes the report.

Year to date, MBSB's share price has risen 15.46% and closed at RM2.24 last Thursday.

Based on OSK Research's forecast dividend per share of 12.7 sen for the financial year ending Dec 31, 2012, MBSB offers a dividend yield of 5.6%.

The company became an investor favourite last year when its share price rose 64% while net profit more than doubled year-on -year to RM325.43 million from RM146.03 million.

There were even rumours of a takeover by RHB Capital Bhd, in which the EPF has a 44.84% stake. However, nothing has come of that and RHB Cap is in the midst of a merger with OSK Holdings Bhd.

After years of impressive growth and now with an impending move to become a bank, MBSB will likely continue to be in the news for some time to come.

This story first appeared in The Edge weekly edition of Nov 12-18, 2012.

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