This article first appeared in The Edge Malaysia Weekly on September 16, 2024 - September 22, 2024

MBSB Bhd (KL:MBSB) has had to battle margin squeeze, a common theme within the banking industry in recent years as the cost of deposits rises, triggered by tightening monetary policy around the globe. Its net profit margin fell in 2023 on account of higher funding costs, as Bank Negara Malaysia had normalised its overnight policy rate (OPR) from late 2022 to the first half of 2023.

Despite these challenges, MBSB has done well for itself, as evidenced by the steady rise in its net profit over the last three years.

The country’s second-largest standalone Islamic bank saw its net profit increase from RM269.3 million in its financial year ended Dec 31, 2020 (FY2020) to RM491.8 million in FY2023.

This translates into a three-year compound annual growth rate of 30%, bagging MBSB The Edge Billion Ringgit Club (BRC) award for the Highest Growth in Profit After Tax Over Three Years among financial services companies with a market capitalisation of below RM10 billion this year. MBSB won the same award in 2020.

MBSB’s FY2023 net profit, which grew 6.9% to RM491.8 million from RM460.2 million in the previous year, was largely attributed to the one-time gain from the acquisition of Malaysian Industrial Development Finance Bhd (MIDF).

In October 2023, MBSB completed the acquisition of 100% of MIDF from Permodalan Nasional Bhd (PNB) for RM1.01 billion worth of new share issuance at 96.52 sen per share. This saw the emergence of PNB as a substantial shareholder of MBSB with a 12.78% stake while the Employees Provident Fund (EPF) saw its shareholding in MBSB reduce to 57.45% from 65.78%.

MBSB’s revenue for FY2023 grew marginally by 4.7% to RM2.8 billion, attributed to an expansion of financing by 9.6%, says the bank in its 2023 annual report — way higher than the industry average of 4% to 5%.

For the second quarter ended June 30, 2024 (2QFY2024), MBSB’s net profit fell 34.4% to RM54.82 million from RM83.69 million in the previous corresponding period, on the back of higher operating expenses and a bigger allowance for impairment. Higher impairment allowances were reported in 2QFY2024 mainly due to higher write-backs in 1Q2024, the banking group explains in its quarterly announcement.

However, revenue was higher by 35% at RM960.85 million from RM711.53 million a year earlier, which the banking group attributes to increased financing income and contributions from the integration with MIDF.

Net profit margin increased by 42 basis points (bps) to 2.6% in 2QFY2024, as the banking group says it continues to focus on improving its financing assets and funding cost.

Meanwhile, the cost-to-income ratio saw an improvement, as it had slipped to 56.9% in 2QFY2024 compared to 58.7% in 1QFY2024, thanks to revenue growth outpacing operating expenses.

MBSB also reported a 4% growth for its gross financing year to date, driven by corporate banking and commercial banking. At the same time, its gross impaired financing (GIF) ratio improved, narrowing by 10bps to 7% from 7.1% in 1QFY2024.

Kenanga Research describes MBSB’s GIF as a “thorny issue”, as a result of EPF’s Ihsan-i scheme.

“Still, the group looks towards some resolution of its legacy assets which may lower its BAU (business as usual) impaired financing to a more palatable 4% to 5% in the near term, albeit still a great gap from the industry’s gross impaired loan ratio of 1.6%,” it says in an Aug 28 research report.

That said, the research house highlights that there has been a strong uptick in the net interest margin (NIM) of the banking group, which it says is likely from the increased gross financing of 4%, although it is still far behind the bank’s target of 8% to 9%.

“However, the group’s NIM is typically quite volatile, owing to its shallow CASA (current account and savings account) of 7% and high fixed rate financing. For now, optics indicate that the group has been able to increase its variable rate financing to 69% and a slightly higher SME (small and medium enterprise) mix of 26% as the group had intended,” it adds.

Kenanga Research has an “underperform” call on MBSB and a target price of 59 sen as it opines that the synergies between the two entities may take some time before they can be realised. It adds that the group may require greater effort to optimise its funding mix, especially given its low CASA levels, which may make it less attractive than its peers.

Going forward, an area of improvement is MBSB’s return on equity (ROE), which was 5.2% in 2023 and had averaged 5.2% a year over three years between 2021 and 2023. The industry average is over 10%. MBSB last won a BRC sectoral award for ROE a decade ago in 2014.

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