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RM1b Pre-Tax Target; MBS Open To Become A Full-Fledged Bank
By: Brian Brinker
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Malaysia Building Society (MBS) provides a variety of financial services and is in a good position to take advantage of Malaysia’s growing finance sector. Due to government support and market driven demand, Malaysia is emerging as one of South East Asia’s leading centers of finance.

So long as the global financial system remains strong, Malaysia’s financial sector should continue to expand in 2014. Numerous global challenges, however, such as rising property prices across Asia, the US’ plans to roll back fiscal stimulus measures, and slowing growth in China, could threaten the global financial system.

As a diversified lender, MBS’ performance is closely linked to the overall condition of the economy. While Malaysia’s economy remains strong, demand for financing services from private individuals, corporations, and other organisations should remain high. Currently, Malaysia’s economy is projected to increase by a solid 5.4 percent in 2014, after enjoying a 4.7 percent growth in 2013.

Personal consumption grew by 7.3 percent in the fourth quarter of 2013, supported by stable employment conditions. Meanwhile, private investment grew by 16.5 percent in 4Q13, accelerating from 15.2 percent in 3Q13. As long as the economy continues to expand, these key indicators should continue to trend upwards heading into 2014.

Mortgages account for a major portion of MBS’ income.  In 2012, the Malaysian government instituted stricter lending guidelines to curb the accrual of household debt. These guidelines may restrain mortgage growth in the future, which could adversely affect MBS’ balance sheet. On the other hand, the new guidelines could increase the stability of Malaysia’s financial services sector.

MBS is a major player in the Islamic banking sector. According to AT Kearney, Islamic banking has been growing rapidly in recent years, however, the market may be nearing the end of its rapid expansion stage and in the near future, growth rates may align with the general growth rates of the financial services sector. Malaysia accounts for 8 percent of the world’s Islamic financial services industry’s assets.

It should be noted that uncertainty in global markets, such as the US, China, and European Union, could create headwinds for the financial services sector as a whole in 2014. Also, the wind-down of the US’ quantitative easing program could have dramatic impacts on emerging market financial industries, including Malaysia’s.

Company Profile
MBS offers a wide variety of financial services to individuals and organisations. While the company was founded primarily to provide financing for private and commercial property development, it has since evolved into a diversified financial services provider in the retail, corporate business, treasury and wholesale banking segments.

MBS has a network of 43 branches and 12 representative offices nationwide. The company generates nearly half of its income from Islamic banking services and is one of Malaysia’s premier Islamic banking institutions. The company provides services to Muslims across South East Asia and the world.

Financial Highlights
MBS has been enjoying strong revenue growth. In 2012, the company pulled in RM1.8 billion worth of revenue. By 2013, the company’s revenue had grown to RM2.5 billion.  Islamic banking services have proven to be a particularly strong point for MBS, growing from RM746 million in 2012 to RM1.2 billion in 2013.

The company reports that gross income from personal financing has been growing.  At the same time, lower disbursements of mortgage loans and financing resulted in slightly lower revenue from said services. Corporate accounts and financing, however, grew as disbursements increased due to higher demand.

Key Developments

  • MBS plans to open more revenue streams such as commercial and development financing of small and mid-sized Bumiputera companies (<RM20 million), palm oil field financing scheme and wholesale banking opportunities for sectors in infrastructure, healthcare and oil and gas.
  • The company is looking to aggressively expand its services in Sarawak and Sabah. For its sales channels, it plans to open 13 new branches and a kids’ fun branch in 2014.
  • The company is confident that it will reach its goal of achieving a RM1 billion pre-tax profit in 2014.
  • The company will be on the lookout for merger and acquisition opportunities throughout 2014.

Brokers’ Recommendations & Catalysts
Most brokers are placing a “Buy” on MBS, though a few recommend “Hold”.  Target prices are only slightly higher than the current list price for MBS’ stocks, so profit potential may be restrained in the near term unless conditions change.

The current list price has been hovering between RM2.10 and RM2.20. AmResearch has set its target price at RM2.40 and has recommended customer to buy the stock. RHB Research is more optimistic, setting its target price at RM2.60.

MIDF Research, however, has a negative outlook on the company. MIDF has placed a “Hold” on the company and has set its target price at RM1.88. In general, MBS’ stocks have been trending downwards in recent months in line with MIDF’s previous predictions. MBS may have bottomed out, however, which could present a strong growth opportunity.

Source: FactSet

In The Spotlight

Steadily climbing higher, shares of MBS have already more than tripled over the period from 2009 to 2013. MBS’ president and chief executive officer, Datuk Ahmad Zaini Othman shares with Shares Investment what are his views on the challenging environment the group is operating in in 2014 during the “Spotlight On Malaysia” event.

MBS' President and Chief Executive Officer, Datuk Ahmad Zaini Othman

Shares Investment: MBS has recorded commendable profit growth for consecutive years. How will the company mitigate the fallout from the impending rise in interest rate?

Datuk Ahmad Zaini Othman: We have a significant market share of the personal financing (PF) segment, which has helped us to maintain an average net interest margin of above 4 percent. In light of the impending rise in interest rate and accompanying growth moderation in the retail segment, we are aiming for a ratio of 60:20:20 for our PF:mortgage:corporate portfolio (versus the current 72:16:12).

While the corporate segment offers lower yields than the retail segment, it provides more avenues to boost fee income. For corporate business, we see opportunities from the oil and gas sector as well as the palm oil plantation sector. For wholesale banking, we see opportunities in the healthcare and infrastructure sector.

SI: The company performance is closely tied to that of the property sector. Do you think that the property sector is experiencing a bubble? Could a rise in interest rate trigger a spike in non-performing loans hence affecting your profitability?

AZ: In my opinion, the rise in property prices has largely been supported by genuine demand. Even for those that are purchased for investment purposes, we should note that they are still relatively cheap compared to those in other countries such as Singapore thus their prices are unlikely to see a sharp fall.

Talks of spike in non-performing loans and lower profitability are overly-gloomy. Malaysian financing institutions have been conservative, maintaining margin of financing at 70 percent. Furthermore, as shown in the announced Budget 2014, the government is exercising prudence through introducing macroeconomics stabilisation measures.

For the retail segment, we expect the number of qualified applications to come down in light of the government measures. For the corporate segment, there is so far little impact as property developers continue to roll out new launches, thus we expect loans for property development projects to stay strong.

SI: Where do you see the company in the next five years?

AZ: I foresee MBS to be at a commanding leadership position in the Malaysian banking sector. We are open to the idea of becoming a full-fledged bank – the merger and acquisition route is preferred as it enables us tap on the existing branches network and system (of our potential partner), I am hopeful this would materialise sometime this year.

 

This article is brought to you by Bursa Malaysia Berhad. The research in this article was conducted independently by Pioneers & Leaders (Publishers) Pte Ltd (“Pioneers & Leaders”) and the views and opinions expressed in this article are Pioneers & Leaders’ own and do not represent the views and opinions of Bursa Malaysia. Bursa Malaysia does not warrant or represent, expressly or impliedly as to the accuracy, completeness and currency of the information in this article. In no event shall Bursa Malaysia be liable to the reader or any other third party for any claim howsoever arising out of or in relation to this article.
This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.


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