This article first appeared in The Edge Malaysia Weekly on August 19, 2024 - August 25, 2024

MBSB Bhd’s (KL:MBSB) merger with Malaysian Industrial Development Finance Bhd (MIDF) just over 10 months ago helped solidify its position as the country’s second-largest standalone Islamic bank by assets after Bank Islam Malaysia Bhd (KL:BIMB).

Yet, it remains a relatively small player in a highly competitive and crowded market where net profit margins (NPM) have been on the decline — a fact that is not lost on its key shareholders. MBSB is 57.45% owned by the Employees Provident Fund (EPF) and 12.78% owned by Permodalan Nasional Bhd (PNB).

In an exclusive interview, MBSB chairman Datuk Wan Kamaruzaman Wan Ahmad reveals that the shareholders aim to have the group undertake further M&A down the road. He does not discount the possibility of it happening within the three-year time frame (2024 to 2026) of MBSB’s strategic business plan.

The plan, code-named Flight26, is ultimately aimed at having the group reach a return on equity (ROE) of 8% by end-2026, from 2.9% last year on a business-as-usual basis.

“The shareholders are ambitious. I think they still want us to grow,” Wan Kamaruzaman says during The Edge’s interview with him and the bank’s top management — group CEO Rafe Haneef and group chief financial officer Shahnaz Farouque Jammal Ahmad — at its headquarters in Menara MBSB Bank at PJ Sentral recently.

“The merger with MIDF is the first stage. There is probably one additional stage where they (EPF) will take their shareholding down to below 50%,” he says, when asked if MBSB’s shareholders still had the appetite for M&A to grow and compete more effectively with rivals.

“I won’t be surprised if it happens within these three years. Ultimately, once we are able to execute our [Flight26] plans well and we have stability in the team, there will be a potential acquisition or M&A,” he adds.

Formerly the CEO of Kumpulan Wang Persaraan (Diperbadankan) (KWAP), Wan Kamaruzaman was appointed as the non-independent non-executive chairman of MBSB and its banking unit, MBSB Bank Bhd, on Jan 24. He is a nominee of the EPF board.

EPF is a substantial shareholder of several local banks. Notably, it is the biggest shareholder of RHB Bank Bhd (39.95%) and AMMB Holdings Bhd (15.33%).

Wan Kamaruzaman is of the view that MBSB is more likely to be interested in acquiring smaller financial institutions.

“I wouldn’t commit to anything at this point in time, but I think it would be more of a much smaller institution than us, because otherwise it would be too big for us to swallow. Obviously, there are still some smaller Islamic banks, in particular, that we can look at,” he says.

Analysts that The Edge spoke to see smaller Islamic lenders such as Al Rajhi Banking & Investment Corp (Malaysia) Bhd (asset size as at end-March: RM16.73 billion) and Bank Muamalat Malaysia Bhd (RM39.4 billion) as potential M&A targets for MBSB.

MBSB’s total assets stood at RM65.61 billion at end-March compared with Bank Islam’s RM90.98 billion. For perspective, the country’s largest Islamic bank, Maybank Islamic Bhd, had an asset size of RM302.29 billion.

There are currently 17 Islamic lenders (including MBSB) in the country on top of the 25 conventional commercial banks. Earlier this month, Islamic bank Kuwait Finance House Malaysia Bhd (KFHM) announced plans to exit the country.

MBSB has no immediate interest in acquiring KFHM’s retail portfolio that will be put up for sale. Nevertheless, it is open to taking a closer look at it, says Wan Kamaruzaman.

Interestingly, MBSB is the only lender in Malaysia to have undertaken M&A in the last decade. In February 2018, it acquired Asian Finance Bank Bhd in a RM644.95 million cash-and-shares deal, enabling it to transform from a non-bank entity into a full-fledged Islamic bank. This meant it was able to start collecting retail deposits for the first time.

Its subsequent acquisition of MIDF last year — via a RM1.01 billion deal effected through a share swap — helped it gain businesses that it did not already have, such as investment banking and asset management, as well as a larger small and medium enterprise (SME) portfolio. Incorporated in 1960, MIDF was a pioneer in development finance and had supported SMEs and corporates as part of the country’s industrialisation efforts. The merger was completed on Oct 2 last year, with MIDF now a wholly-owned subsidiary of MBSB.

While the shareholders may be contemplating M&A, MBSB’s unwavering focus is now on executing the Flight26 strategy.

Rafe, who joined the group in July last year from CIMB Group Holdings Bhd where he was CEO of group transaction banking, says there are four key drivers to reaching the 8% ROE goal.

One — and the most important — is for MBSB to increase its CASA (current account and savings account) deposits, a relatively cheaper source of funds for banks, to help bring down its high cost of funds (COF). The bank’s target is to raise its CASA ratio to 20% by end-2026 from 7% last year, in a bid to bring down its COF to below 3% from around 3.8% currently.

Two, is to increase its financing base to RM50 billion from RM42 billion. Three, is to raise its non-funded income to 15% of total net revenue from 3% and four, is to optimise cost. It aims to reduce its cost-to-income ratio to 50% or less, from 51.2% last year.

All four drivers are interlinked and have to come together for MBSB to achieve the 8% ROE target, says Rafe. The target is “not unachievable”, he adds.

While acknowledging that growing its CASA deposits will be challenging considering that all lenders are also on such a drive, Rafe points out that MBSB is off to a good start. The bank is focused on reaching the country’s top 40% income group (T40).

“Green shoots are emerging. We can see the CASA business is growing. In the consumer segment, the T40 is where the maximum CASA potential is. If you are in the T40 segment, why would you bank with MBSB? Well, we have done focus group studies and interviewed our clients, and realised that there are certain gaps in the industry that we can address,” he says.

“For example, most banks are focusing on giving you a good cash management app, where you can check your accounts, pay your bills and so on. But the wealth management part is still missing, the protection part is also absent. So, we want to be able to provide all of these on a digital platform. Instead of building the platform ourselves, we enable other platforms to link to us,” he adds, providing a glimpse of some of the bank’s upcoming initiatives.

Shahnaz notes that lifting the CASA ratio to 20% involves amassing RM8 billion to RM9 billion of deposits. “In terms of absolute size, this is completely manageable. We’re not in the business of looking for RM50 billion,” he remarks.

Analysts note that it is critical for MBSB to bring down its funding cost. Last year, the group suffered the steepest decline in NPM among the 10 public-listed banks because of its high funding cost, falling to 1.8% from 2.9%. Rafe is optimistic that it will stabilise at around 2% this year.

Meanwhile, MBSB is counting mainly on its consumer and SME business to drive the group forward. It will selectively grow its corporate business, which historically suffered from high non-performing loans.

At end-March, the group had a gross financing portfolio of RM42.94 billion, of which the bulk (45%) was in personal financing, followed by home financing (23%). Asked if personal financing would remain the biggest financing component going forward, Rafe says: “We want to grow in other parts of the consumer business where margins may be thinner but the quality is better. For example, we want to grow mortgages of better quality.”

There will be strong interest in MBSB’s 2Q2024 earnings, which will be released later this month. The investment community is looking to gauge the impact of the recent fraudulent deposit withdrawals in Kota Kinabalu on the group. Some RM24.2 million had disappeared from several fixed deposit accounts there and the bank had to refund the money to the affected customers.

According to Shahnaz, the financial impact on MBSB will be immaterial (see accompanying story).

Last year, MBSB reported a 6.9% increase in net profit to RM491.81 million on the back of a 4.7% improvement in revenue to RM2.82 billion. Its 4Q2023 earnings — the first quarter to reflect the merged entity’s performance — had jumped 50% to RM301.15 million as a result of a one-off gain of RM354 million from the MIDF acquisition. This helped lift its reported ROE for the year to 5.2%. In 1Q2024, its net profit rose 5.7% to RM78.34 million.

Since the completion of its merger with MIDF last October, MBSB’s share price had gained 28.8% to peak at 90 sen on May 20, before moving lower. It closed at 80 sen on Aug 16, giving the group a market capitalisation of RM6.62 billion.

Bloomberg data show that Kenanga Research is the only research house with coverage on MBSB. It has an “underperform” call on the stock and a target price of 59 sen, mainly because it is not entirely convinced the bank can hit its 8% ROE target.

“Our ‘underperform’ call is premised on conservative ROE formation for MBSB,” its banking analyst Clement Chua tells The Edge. “While its 1QFY2024 earnings was relatively healthy, it only amounted to an indicative annualised ROE of 3%. An 8% target in FY2026 indicates a CAGR (compound annual growth rate) of more than 60% over the next two years.”

He notes that the group is banking on strategies to improve its funding cost with a stronger CASA mix and more value propositions to SME accounts, coupled with synergistic gains from MIDF. “Though we applaud these initiatives, the group may require more substantial gains in market share for such ROEs to materialise. As such, we prefer to see a longer track record in sequential earnings growth before we are convinced that its 8% target is viable in the medium term.”

The onus is certainly on MBSB’s new team to successfully deliver on Flight26 and surprise investors on the upside. 

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