MBSB — Second-largest standalone Islamic bank in the making

The takeover of AFB is priced at about RM650m and will be paid in cash and equity


Ahmad Zaini says the 1H17 results showed an improvement from last year’s performance and also indicated the company’s continued ability to sustain revenue growth. (TMRpic)

MALAYSIA Building Society Bhd (MBSB) is on its way to becoming a full-fledged Islamic banking institution with its proposed takeover of Asian Finance Bank Bhd (AFB).

The financing company’s bid for AFB is its third attempt at getting a banking licence, following the aborted proposed three-way merger with CIMB Group Holdings Bhd and RHB Capital Bhd and last year’s scrapped proposed merger plan with Bank Muamalat Malaysia Bhd.

Market analysts believe the proposed deal is MBSB’s move to buy a Islamic banking licence that will allow it to improve its business model and allow it to collect deposits and lower its financing costs.

The takeover of AFB is priced at about RM650 million, informed sources told The Malaysian Reserve, and will be paid in cash and equity.

If the takeover culminates with MBSB becoming a full-fledged Islamic financial institution, it could attract the attention of Shariah-compliant funds as it would become only the third listed entity after BIMB Holdings Bhd and Syarikat Takaful Malaysia Bhd.

Standalone Islamic Bank Status

In a stock exchange filing on June 20, 2017, MBSB noted it is now seeking the approvals of Bank Negara Malaysian (BNM) and/or the Ministry of Finance (MoF) for its corporate exercise with AFB.

The MoF has given its consent for the exercise and MBSB now awaits BNM’s decision.

BNM had on Dec 21 last year given the green light for MBSB, which is 60%owned by the Employees Provident Fund, and AFB to hold merger talks.

It gave them six months, up to June 21 this year, to complete negotiations on the proposed acquisition of a 100% stake in AFB.

AFB’s existing shareholders are Qatar Islamic Bank (66.67% stake), RUSD Investment Bank Inc (16.67%), Tadhamon International Islamic Bank (10%) and Financial Assets Bahrain WLL (6.67%).

A merger of the two will create the country’s second-largest standalone Islamic bank with total assets of RM47.81 billion, after Bank Islam Malaysia Bhd.

Strong Performance in 1H17

For the first six months ended June 30, 2017 (1H17), MBSB’s net profit almost doubled to RM192.41 million from RM97.84 million in the corresponding period last year, despite revenue being flat at RM1.62 billion versus RM1.63 billion previously.

MBSB president and CEO Datuk Seri Ahmad Zaini Othman said in a statement, the 1H17 results showed an improvement from last year’s performance and also indicated the company’s continued ability to sustain revenue growth.

“It shows that business strategies are in line with our efforts to expand the corporate segment. We shall develop special programmes for equipment financing, seek more effective approaches to increase the generation of fee income via wealth management, as well as corporate advisory services,” he added.

MBSB intends to focus on continued expansion of its corporate business as it has shown positive contribution in the second-quarter (2Q) flowing from 2016, in terms of growth in corporate portfolio assets and earnings.

On a quarterly basis, the company reported a 44.6% year-on-year (YoY) jump in 2Q net profit to RM91.08 million due to higher operating profit and lower allowances for impairment losses on loans, advances and financing, the non-bank lender told Bursa Malaysia Bhd in a recent filing. Its gross income from corporate loans and financing showed YoY growth. Revenue for 2Q was flat at RM813.42 million.

MBSB’s net profit in the 1Q ended March 31 nearly tripled to RM101.32 million from RM34.84 million a year ago, thanks to higher gross loans and lower cost of funds.

The higher first three months of 2Q of 2017’s (2Q17) earnings was due to lower allowances for impairment losses on loans, advances and financing, as it continued its asset impairment programme initiated since 4Q14.

Back in 2015, the group suffered losses for the financial year ended Dec 31, 2015 (FY15), net profit plunged to RM257.59 million from RM1.02 billion in the previous corresponding period.

One year later, MBSB returned to the black after recording a net profit of RM45.64 million ended 4Q16, from a net loss of RM15.8 million in 4Q15.

Positive Consensus

MBSB’s financial recovery has been welcomed by banking analysts. The strong financial performance for the first six months has seen analysts having a positive sentiment towards the institution.

Three research firms covering the counter, MIDF Research, Kenanga Research and Affin Hwang Capital noted in their respective research reports MBSB’s financial performance was above expectations and anticipated further improvement in earnings for the rest of the year.

“The group’s net impaired financing/loans ratio continued to strengthen at 2.8% as at 2Q. This was mainly driven by its recovery strategies and strengthened collection and notably, the cost-to-income ratio showed further improvement YoY from 23.5% in 2Q16, well below the industry average of 44.8%,” MIDF’s report noted.

It is optimistic MBSB’s earnings will stabilise by FY19 and maintained a ‘Buy’ call on the stock with a target price of RM1.50.

“We remain optimistic on the group’s performance moving forward, supported by current and future initiatives being planned and executed,” it added.

Kenanga Research revised upwards the FY17 earnings by 22% to RM345 million on lower credit costs, with FY18 earnings tweaked slightly by 1% to RM615 million on the prospects of better operating income due to better economic conditions.

MBSB’s now trades at 23.9 times, trailing 12-month earnings per share and 22 times its estimates for the coming year.

MBSB share price soared 44.5% on news of its proposed merger with AFB and reached a 52-week high of RM1.37 on June 20, 2017.

MBSB’s shares closed at RM1.25 last Friday, down by three sen for the day which gave it a market capitalisation of RM7.4 billion.