We remain positive on Malaysia Building Society Bhd (“MBSB”) even for its weaker Q1 2019 results attributed to higher provisions mainly due to timing factor but is likely to see improvements in the following quarters. The valuation gap between P/B of 0.8x vs 1.5x of its closest listed Islamic bank makes MBSB a compelling BUY with target price of RM1.31 as per 1.2x P/B average of banking stocks translating to 12.8x FY19 PER.

MBSB which is in transition to a full-fledged bank after the completion of its acquisition of Asian Finance Bank last year. MBSB is 2nd largest stand-alone Islamic bank with assets of RM45bn with retail to corporate loans at 74:26 as at 1Q19.

1Q19 income continue to be robust with 5% growth and asset quality improved with net impaired ratio at 2.1% while loan loss provision strengthened to 114.5%. Management remains optimistic of 6% target loan growth amidst the competitive banking landscape and moderating growth of the economy. The rollout of its full banking suite of products such as trade financing, treasury operations saw noninterest income doubled as banking platform and its transition to full fledge Islamic bank. MBSB is still a work in progress and is putting in place capabilities expanding delivery channel with digital footprint in investments in technology.

Key beneficiary of the recent OPR cut of 25 basis points would be MBSB as they have highest percentage of fixed loans approx. 60%. Deposits growth in current account/saving accounts (CASA) is expected to accelerate with slew of products such cash management system, debit cards and internet banking. This was evident in CASA growth to RM250m (+15%) from last year. Corporate loan growth continues to grow (25.9% of total loans against 74.1% in retail) as they continue to reduce its exposure of personal financing. MBSB net interest margins of above 3% remain the highest among the banks while their cost-to-income ratio of 26.34% is the lowest. Furthermore, they been paying 5sen dividend for the past 3 years and this translates dividend yield of 5.3% which also amongst the highest in banking stocks.

Source: Rakuten Research - 21 May 2019