Here is one MYR banking bond yielding close to 5%

RESEARCH HIGHLIGHTS:

• Healthy capital position to cushion moderate stress in credit impairment. Its CET1 and total capital ratios have been consistently above the market since 2017.
  
• Liquidity coverage ratio of 284.6% remained well above the regulatory requirement and the Malaysian Islamic Banking Industry.
  
• Strong support from major shareholder, EPF, evidenced from the subscription of RM1.89 billion of MBSB’s rights issues and acceptance of dividend reinvestment plan.
  
• The upcoming ASIFIN Apr2027 Corp (MYR) and  ASIFIN Apr2029 Corp (MYR) bond issuance are trading close to 5.000% yield, among the highest compared to its peers.
  

COMPANY BACKGROUND

MBSB is a pioneer in Malaysia's financial services industry and has been at the forefront of the nation's economic development for more than 70 years. The establishment of MBSB Bank was through the acquisition and rebranding exercise of Asian Finance Bank in 2018. Following that, it became Malaysia’s largest standalone Islamic bank, supporting low and medium-income groups, mainly in the property financing.  

FINANCIAL PERFORMANCE

In 9M2021, MBSB Bank recorded RM35.1 billion in total financing (9M2020: RM34.7 billion). The steady growth was attributed to the residential property and working capital segments which recorded a double-digit jump from its full year 2020 figures. The asset portfolio composition is tabulated as below:

Exhibit 1: Financing book composition

Source: MARC

Its solid position in the property sector was through collaborations involving government-linked housing programmes with Cagamas Berhad and Lembaga Pembiayaan Perumahan Sektor Awam. 

With regards to the working capital segment, its 9M2021 figures grew by almost 20% to RM3.3 billion compared to full fiscal year in 2020. According to the MBSB, the expansion under the working capital segment is an effort to diversify its portfolio into trade financing activities. 

Personal financing facilities continued to make up the majority of its financing book at 56.2%, followed by residential property (18.4%) and construction (10.6%). Under personal financing facilities, repayments are assigned through salary deduction of which are offered to government servants. Thus, minimising non-repayment risk.

Exhibit 2: Financing book mix in 9M2021

Source: MARC, iFAST

The personal financing facility area is expected to be further strengthen given the employment stability in the government sector. Going forward, MBSB Bank has plan to expand this segment to government-linked companies and private entities.

Capital adequacy

CET1 and total capital ratios are parameters used to measure the health of capitalisation of a financial institution. These measurements are compared against the minimum regulatory requirement set by Bank Negara Malaysia with CET1 ratio, Tier 1 ratio and total capital ratio to be above 7.0%, 8.5% and 10.5% respectively.

For MBSB Bank, its capitalisation level remains healthy with CET1 and total capital ratios standing well above the regulatory requirement, at 16.7% and 21.4%. According to the rating agency’s report, this level has been persistently above the market average since 2017. 

In 9M2021, we note that the bank received capital injection of RM268.1 million which boosted its share capital. Overall, the bank’s strong capitalisation level will be able to provide some headroom against moderate increases in credit impairments.

Profitability and earnings

In the same period, 9M2021, MBSB Bank profit margin increased to 2.8% owing to multiple cuts in the overnight policy rate. This is supported largely by fixed-rate financing amounting to 50.5%  of gross financing. Assuming no changes in modification charges, the bank’s balance sheet is expected to be stronger for full year 2021. Moreover, its cost-to-income ratio stood lower than its peers, at 32.6%. 

Pertaining to the earnings, the bank’s return on assets and return on equity stood at 1.1% and 7.3% in 9M2021 (9M2020: 0.8% and 5.8%). The results are attributed to a spike of 54.4% y-o-y in net financing income in 9M2021 from the previous corresponding period, through the absence of modification loss. Also, MBSB Bank’s pre-tax profit was up to RM530.6 million, on the back of lower impairment charges. 

Liquidity and funding flexibility

Exhibit 3: Profitability indicator

The bulk of MBSB Bank’s top 5 depositors consist 33.5% of total deposits in 2020. Although concentrated, we understand that these depositors are state-owned institutions or government related entities which is deemed stable. In this regard, we view that MBSB Bank still has an ability to tap into the capital market if there is a need to upsize its funding source. 

In terms of CASA ratio, it is still far below from Malaysian Islamic banking industry of 26.6%. We understand that the bank has offered investment accounts and has plans to improve its CASA ratio in the near term. 

Also, we note that its financing-to-funds ratio has been on a downward trend since 2019. Nevertheless, this level is still manageable. As for liquidity coverage ratio (LCR), the bank had persistently maintained above the regulatory requirement of 100% for the past four years (2018-9M2021).

Strong support from major shareholder

Exhibit 4: Shareholding structure

MBSB Development Sdn Bhd’s involves in property development
MBSB Properties Sdn Bhd involves in property leasing
Sources: MBSB Bank, MARC

RECOMMENDATION:

Our assessment shows that MBSB Bank’s 5-year ASIFIN Apr2027 Corp (MYR) and 7-year ASIFIN Apr2029 Corp (MYR) bond offerings are relatively attractive compared to its A1-rated peers. The ASIFIN Apr2029 Corp (MYR) provides the highest indicative yield to maturity of MGS + 125 bps (around 4.8% area), within the 7-year horizon, among similar rated-peers. Overall, we think investors can benefit from MBSB Bank’s bond offerings available given its sound credit quality. 

Exhibit 5: Bond comparison

MBSB Bank's paper is a senior unsecured security, in which is without loss-absorption risk as opposed to other higher yielding subordinate financial papers. As such, we think default-risk is somewhat minimised, thus providing some protection for investors.

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