MBSB to see growth through banking-level products

An analyst says MBSB’s forward strategy now will be to upgrade its digital capacity


Malaysia Building Society Bhd (MBSB) will continue its focus on digitising its services and offering banking-level products, following its acquisition of Asian Finance Bank Bhd (AFB).

The acquisition of AFB for RM644.95 million announced on Monday, fulfilled MBSB’s long-standing aim to become a full-fledged bank.

MIDF Amanah Investment Bank Bhd analyst Danial Razak said MBSB’s forward strategy now will be to upgrade its digital capacity to improve existing business and operations.

“The new banking platform will leverage on digitalisation to capture fee-based income from both consumer and corporate segments. MBSB is also expected to solidify its presence in niche segments — namely property, housing and infrastructure,” he said.

He said MBSB will use its new status as a bank to increase the number of products it can offer to its current customers, who are mainly civil servants.

“This will be done by tapping into the existing customer base, with certain products configuration at the banking level,” he said.

Danial said MBSB had indicated its future products will be digital-based, which would both appeal to current customers as well as those who prefer the convenience of digitalised products.

“(Digitalisation) will lay a solid foundation for MBSB to cater to long-term structural demand,” he said.

MBSB’s acquisition of AFB would create Malaysia’s second-largest standalone Islamic bank, with total assets estimated at RM47.81 billion.

The deal announced this week will consist of a cash payment of RM396.89 million and issuance of 225.51 million new MBSB shares at RM1.10 each.

“The merged entity is expected to leverage on the strength of MBSB’s business, while the banking licence held by AFB is anticipated to provide a unique opportunity for the merged entity to emerge as a full-fledged Islamic banking franchise in Malaysia,” MBSB said.

The merger is expected to be completed by the first quarter (1Q) of 2018. MBSB is not looking to expand branch operations just yet, which Danial said was strategic as further branch expansion might put them at a disadvantage to other existing banks that already have an established brand name in the market.

He said the future appeared rosy for MBSB, given the continuing rise of Islamic finance business in the region — Shariah-compliant finance is expected to account for 40% of total financing in Malaysia by 2020.

“MBSB is poised to benefit in the long run, taking into account favourable consumer demographics and the growing demand for Islamic financial products in Malaysia,” he said.

MBSB intends to raise the cash portion of the acquisition internally. Its cash position stood at RM6.64 billion as at end-2016.

AFB’s shareholders are Qatar Islamic Bank with a 66.66% stake, RUSD Investment Bank Inc (16.67%), Tadhamon International Islamic Bank (10%) and Financial Assets Bahrain WLL (6.67%).

Qatar Islamic has opted for both the cash and shares options, while RUSD and Tadhamon International choosing the shares option. Financial Assets Bahrain has opted for the cash option.

The cash option signifies a valuation of 1.2 times of AFB’s net assets of RM496.12 million, while the shares option represents a valuation of 1.5 times.

MBSB’s largest shareholder, the Employees Provident Fund, will see its stake reduced to 63.16% from 65.56% following the proposed share issuance, while Tan Sri Chua Ma Yu’s stake in the merged entity will be diluted to 8.45% from 8.78% presently.

MBSB’s net profit jumped 44.6% to RM91.08 million in the 2Q ended June 30, 2017 from RM63.01 million the year earlier. AFB recorded a net loss of RM20.38 million in 2Q compared to a net profit of RM1.54 million registered last year.

MIDF noted the AFB valuation seems fair, premised on valuation of previous financial sector mergers of approximately 1.4 times price-to-book (PB) value. The blended PB value of the acquisition stands at 1.3 times.

The research firm is keeping a ‘Buy’ call on MBSB with a target price of RM1.50 — with the proposed merger allowing MBSB to tap into financial services it is currently unable to offer such as trade facilities, current account and savings account deposits, and interbank instruments.

Kenanga Investment Bank Bhd is, however, less positive on the deal. It noted the proposed merger could result in lower return on equity (ROE), thus lowering valuations for MBSB.

Its report yesterday said the valuation of 1.3 times appears costly for a small banking entity, in relation to the industry’s average trading of 1.4 times.

As MBSB’s forward shareholders’ funds are expected to be RM197 million higher at RM6.92 billion from RM6.72 billion previously based on the proforma accounts, its ROE for the financial year 2018 is projected to be 21 basis points lower at 8.26%.

Kenanga views the proposed acquisition as ‘Neutral’, on the basis that MBSB’s earnings are unlikely to be significantly accretive in the short to medium term.

Pending final approval, the investment bank is maintaining its ‘Outperform’ recommendation on MBSB, with a target price of RM1.45.

MBSB shares fell two sen, or 1.71%, to RM1.15 — giving it a market capitalisation of RM6.81 billion.