This article first appeared in The Edge Malaysia Weekly on March 18, 2024 - March 24, 2024

FRESH from its merger with Malaysian Industrial Development Finance Bhd (MIDF), Malaysia Building Society Bhd (MBSB) has come up with a three-year strategy for the enlarged banking group that is ultimately aimed at raising its return on equity (ROE) to 8% by the end of 2026. Last year, it was 5.23%.

Analysts and industry observers tell The Edge that it will be an uphill battle to achieve the goal considering the multiple challenges MBSB faces, including bringing down its relatively high funding cost. The latter led to its incurring the steepest decline in net profit margin (NPM) among the 10 public-listed banks last year.

The group provided a snapshot of its three-year strategy and goals in an investor presentation on its website late last month, following the release of its earnings for the financial year ended Dec 31, 2023 (FY2023).

Its other ambitions for FY2026 include raising its CASA (current account and savings account) ratio to 20% from 7.06% last year, lifting its gross financing to RM50 billion from RM42 billion, increasing its non-financing income over net revenue to 15% from 3% and bringing down its cost-to-income ratio to 50% from 51%.

“Frankly, I feel their 8% ROE target is a very big stretch,” Kenanga Research banking analyst Clement Chua says in response to questions from The Edge. “Just looking at their FY2023 numbers, they managed to do 5% [ROE], but only due to one-off gains from MIDF. Without these, they would have reported only 1.5%.”

Chua observes that ROE would have come in at under 5% last year even if one took into account MBSB’s claim that it had to make some “Rule of 78” adjustments — a change in method of calculating hire purchase margin of financing — which weighed on its earnings last year.

MBSB completed its acquisition of MIDF on Oct 2 last year, with the combined entity having total assets of RM66.66 billion at end-2023, making it the second-largest standalone Islamic bank after Bank Islam Malaysia Bhd (RM90.96 billion). MIDF is now a wholly-owned subsidiary of MBSB.

Its 4Q2023 results — the first quarter to reflect the combined entity’s performance — saw MBSB registering a 50% jump in net profit to RM301.15 million after recording a one-off gain of RM354 million from the MIDF acquisition. Putting aside the one-off gain, its income for the quarter remained predominantly from loans, financing and financial investments. Its revenue for the quarter rose 4.5% year on year (y-o-y) to RM698.05 million.

Its full-year net profit grew 6.9% to RM491.81 million on the back of a 4.7% improvement in revenue to RM2.82 billion, which fell below analysts’ expectations. It did not propose a dividend for the final quarter.

Buying MIDF gave MBSB, a predominantly consumer bank, new businesses of investment banking and asset management, as well as a larger small and medium enterprise (SME) portfolio. As a former development financial institution, MIDF was not able to collect retail deposits — one of the cheaper sources of funding for regular banks — hence, there is no boost to MBSB on that front.

While MBSB has yet to go into the details of how it plans to achieve its FY2026 goals — it is understood to be meeting with the investment community soon — its key growth pillars include a focus on the more profitable SME accounts and driving more CASA deposits, which most banks are already doing.

“Their growth pillars are supposed to be more profitable SME accounts — with [client] stickiness from new on-app solutions to lift asset yield — and more CASA to dilute cost of funds,” Chua observes.

These could prove tough considering that MBSB’s CASA strategy involves targeting the top 20% income group (T20), which “could pose challenges as to how to win them over”, he says. He notes that MBSB’s financing growth of 9% to RM42.04 billion in FY2023 came mainly from the injection of MIDF’s lending book. Without that, MBSB’s financing growth was just 4%.

“The way I see it, there are definitely going to be implications on their NPM in the near term to make this work. So, my gut feel is that 2024 will not be much easier for them either,” says Chua.

An upside for the group, however, is that it is likely to be able to improve its gross impaired financing (GIF) ratio and credit cost. “The only achievable upside they have, I believe, is probably better GIF and credit cost, but this is pretty much expected from all banks,” he says.

In summary, Chua says: “I think [MBSB] still has a lot to show for and it will be a big uphill challenge for them [to achieve the FY2026 goals]. In spite of rising interest in their share price, I feel that fundamentally they need to do a lot of convincing.”

MBSB’s stock, which has generated higher-than-usual retail interest since mid-February, rose to a 52-week closing high of 81 sen last Wednesday, before ending the week at 79 sen, giving the banking group a market value of RM6.5 billion. YTD, it has gained 11.3%. MBSB is one of only two shariah-compliant banking stocks in Malaysia, the other being Bank Islam.  

Bloomberg data shows that Kenanga Research is the only research house that actively covers the stock. It has an “underperform” call and target price of 59 sen. “Although the merger with MIDF is complete, the synergies between the two may only be extracted in the longer term. Additionally, the group may also require greater efforts to reoptimise its funding mix, especially given its low CASA levels, which may make it less attractive than its peers,” it says in a Feb 28 report. It sees the group’s core net profit improving to about RM246 million in FY2024 from RM137 million last year.

In 4QFY2023, MBSB’s GIF ratio deteriorated to 7.27% from 6.71% a quarter earlier and 6.76% a year earlier. The bulk of the RM3.05 billion GIF that year was from the corporate book (RM1.89 billion). Meanwhile, its NPM in the final quarter fell 17 basis points (bps) quarter on quarter and a sharp 108bps y-o-y to 1.82%.

This year, the group has guided for an NPM of 2%, ROE of 5% to 6% and GIF ratio of 4% to 5%. It will be interesting to see how it plans to achieve these goals. 

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