Highlights:
- In 1HFY2024, MBSB Bank recorded higher distributable income of RM 1,545 million. However, net income declined by 4% YoY due to higher distributions to depositors and profit before taxation and zakat dropped by 33% YoY to RM 192 million due to a rise in operating expenses.
- MBSB Bank’s gross financing and advances grew by 3.97% to RM 41.2 billion as of 30 June 2024, mainly driven by its consumer and corporate banking segments.
- MBSB Bank remains well-capitalised with CET1 ratio of 16.75% and total capital ratio of 20.89%. Liquidity coverage ratio (LCR) remains robust, showing improvement compared to FY2023 and FY2022, reaching 219.70% as of 30 June 2024.
- Digitalisation in Malaysia’s banking industry serves as the biggest challenge to the traditional banks like MBSB.
- MBSB Bank's overall financials have shown signs of deteriorating, but we maintain an optimistic outlook for their future repayment ability. Owing to this, we recommend existing investors continue to hold.
Introduction
MBSB Bank Berhad (MBSB Bank) is a wholly owned subsidiary of Malaysia Building Society Berhad (MBSB). The bank offers a wide range of financing products, leveraging digital capabilities and product innovation to meet the needs of its customers.
As the banking arm of MBSB, the bank transitioned from a non-bank financial institution to a full-fledged Islamic bank following its acquisition of Asian Finance Bank (AFB) in 2018. Since it is an Islamic bank, MBSB Bank’s products and services comply with Shariah principles, meaning they are free from interest (riba), speculation (gharar), and gambling (maysir).
As of 3 October 2024, Employee Provident Fund (EPF) and Permodalan Nasional Berhad (PNB) are the bank’s largest shareholders, holding stakes of 57.09% and 12.78% respectively.
Weaker net income and profit before taxation and zakat despite higher income generated from financing activities.
In 1HFY2024, MBSB Bank recorded higher distributable income of RM 1,545 million compared to RM 1,464 million in 1HFY2023, primarily driven by increased income from financing and advances.
However, net income declined by 4% YoY due to higher distributions to depositors. Additionally, profit before taxation and zakat dropped by 33% YoY to RM 192 million, down from RM 285 million in 1HFY2023, largely due to a rise in operating expenses, which amounted to RM 367 million (1HFY2023: RM 299 million).
The higher operating expenses in 1HFY2024 were mainly attributed to personnel expenses of RM 194 million, general administrative expenses of RM 78.7 million, promotion and marketing related expenses of RM 9 million and establishment-related expenses of RM 89.4 million, which included costs for software and hardware maintenance, depreciation, and other related expenses.
Table 1: Profitability indicators (RM mil)
2021 | 2022 | 2023 | 1HFY2023 | 1HFY2024 | |
Total distributable income | 2,276 | 2,461 | 2,666 | 1,464 | 1,545 |
Income attributable to depositors and others | (1,074) | (1,229) | (1,770) | (881) | (986) |
Net income | 1,203 | 1,232 | 896 | 584 | 558 |
Operating expenses | (531) | (589) | (647) | (299) | (367) |
Profit before taxation and zakat | 672 | 643 | 249 | 285 | 192 |
Source: Company’s Reports, iFAST Compilations. Data as of 30 June 2024.
Despite facing some challenges to achieve higher ROE, the bank is in a good move
As of 30 June 2024, the ROE for both MBSB Bank and the MBSB Group stood at 1.9% and 3.1% respectively, the lowest among their peers. The management has introduced the 'Flight26' strategy, an enhancement plan aimed at achieving an 8% ROE by 2026. There are 4 key drivers to achieve this goal, including:
i) Increase CASA (current account saving account) to 20% (30 June 2024: 7.3%)
ii) Increase financing base to RM 50 billion (30 June 2024: RN 42 billion)
iii) Raise its non-funded income (income generated from non-lending activities) to 15% from 3%
iv) Reduce its cost-to-income ratio to 50% or less. (current: 56.9%)
We view that the bank will face some challenges in achieving this goal, considering the intense competition within the banking industry in Malaysia where other bigger size banks might be able to offer better financing rate. Additionally, it seems to be too aggressive to achieve this goal in 2 years as it is only achievable when the bank able to meet the 4 criteria. But at least the bank shows an initiation to improve their profitability, which is in a good move.
Growing financing base with manageable risk in personal financing
MBSB Bank’s gross financing and advances grew by 3.97% to RM 41.2 billion as of 30 June 2024, underpinned by its consumer banking segment, which accounts for 71.2% of total gross financing and advances, largely supported by property and personal financing. Meanwhile, the corporate banking segment contributed approximately 19.6% of total gross financing and advances.
Personal financing (PF) made up around 50% of the total gross financing and advances, amounting to RM 19.1 billion. While personal financing is often perceived as higher-risk, however, we consider the risk to be manageable in this case, as 90% of the PF portfolio was extended to government servants through automatic salary deductions.
Capital adequacy remain solid
MBSB Bank remains well-capitalised with CET1 ratio of 16.75% and total capital ratio of 20.89% as of 30 June 2024, both comfortably exceeding Bank Negara Malaysia’s (BNM) regulatory minimum requirements of 4.5% for the CET1 ratio and 8.0% for the total capital ratio.
In terms of liquidity, MBSB Bank's liquidity coverage ratio (LCR) remains robust, showing improvement compared to FY2023 and FY2022, reaching 219.70% as of 30 June 2024.
Table 2: Capital adequacy and liquidity ratios
2021 | 2022 | 2023 | 1HFY2024 | |
CET 1 | 17.16% | 19.19% | 17.43% | 16.75% |
Total Capital ratio | 21.79% | 23.74% | 21.62% | 20.89% |
LCR | 234.68% | 176.20% | 183.60% | 219.70% |
Source: Company’s Reports, iFAST Compilations. Data as of 30 June 2024.
Weak asset quality profile, but not a sign of red flag.
MBSB bank’s asset quality profile is deemed weak. Given that its GIL stood at 5.4% as of 30 June 2024, the highest compared with its similar market cap peers. Additionally, the bank's loan loss coverage ratio stood at 56.2%, suggesting that its provisions are insufficient to cover the non-performing loans adequately.
The reason why there was a surge in GIL in FY2022 was due to deterioration in the customers’ financial positions as a result of aggressive OPR rate hike in 2022, from 2% in Jan 2022 to 2.75% in Dec 2022, particularly in construction and household financing.
Investors should not be confused by the earlier mention that personal financing risk is manageable due to the automatic salary deduction scheme for public servants. The weak asset quality mentioned here refers to the overall high GIL, not the personal financing portfolio.
Overall, we anticipate the GIL will remain stable moving forward and will decline gradually as we are not expecting further rate hike in the short future. Hence, we view that although their asset quality profile is weak due to high GIL, but not a sign of red flag as their capital adequacy and liquidity profile as mentioned above remain robust.
Table 3: Loan loss coverage ratio and gross impaired loan ratio
FY21 | FY22 | FY23 | 1H24 | |
Gross Impaired Loan ratio (GIL) (%) | 2.70% | 5.50% | 5.70% | 5.40% |
Financing/Loan Loss Coverage Ratio (%) | 100.70% | 62.40% | 55.40% | 56.20% |
Source: Company’s Reports, iFAST Compilations. Data as of 30 June 2024.
Table 4: Peers comparison
| MBSB Bank | AFFIN Bank | BIMB |
Gross Impaired Loans/Financing (GIL) | 5.40% | 2.44% | 0.92% |
Loan loss coverage ratio | 56.2% | 100.06% | 158.00% |
Source: Company’s Reports, iFAST Compilations. Data as of 30 June 2024.
Related risk
MBSB Bank faces intense competition within Malaysia's banking industry, particularly with the introduction of several digital banks in 2024, including Boost, GX Bank, and Aeon Bank. These digital banks have intensified competition by offering above-market daily interest rates to attract depositors. As a result, traditional banks like MBSB are at a competitive disadvantage as their deposit interest rates are considerably lower compared to the newly launched digital banks.
Moreover, the bank faces concentration risk as a large portion of its financing portfolio consists of personal financing. While this risk is somewhat mitigated by the auto salary deduction scheme for public servants, the bank's significant exposure to this segment could pose significant risk if there are changes to government employment policies.
Our view and recommendation
Apart from its liquidity and capital adequacy profile, we observe that MBSB Bank's profitability is deteriorating, with net profit on a downward trend since FY2022. Although the bank’s GIL remains high compared to peers, we believe it is still manageable at this point, as the rise was mainly due to restructuring and rescheduling (R&R) activities in FY2022, and it has stabilised.
Recognising their vulnerabilities compared to other banks, the management has implemented 'FLIGHT26' strategy to strengthen their financials. Additionally, while EPF and PNB being the largest shareholders as the date of writing, we expect a strong likelihood of support from them if needed.
In conclusion, MBSB Bank's overall financials have shown signs of deteriorating, but we maintain an optimistic outlook for their near-term future. Based on their solid capital adequacy, the credit risk of its bonds (see Table 5) is under control. As we are still optimistic towards the company’s repayment ability, while the yield is too low for investors to further invest in the bonds, we recommend existing investors continue to hold.
Table 5: Bonds Table
Bonds | Years to Call / Years to Maturity | Yield to Maturity | Issuance Size |
NA / 2Y6M | 3.67% | RM 200 mil | |
NA / 4Y6M | 3.97% | RM 100 mil | |
2M / 5Y2M | 4.90% | RM 650 mil | |
2Y2M / 7Y2M | 4.72% | RM 650 mil |
Source: BSM, iFAST Compilations. Data as of 03 October 2024.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
