Highlight Tough days ahead for MBSB

by **Cals** Fri 16 Aug 2013, 19:19

Highlight Tough days ahead for MBSB
Business & Markets 2013
Written by Esther Lee of theedgemalaysia.com
Friday, 16 August 2013 17:04

RECENTLY, MALAYSIA BUILDING SOCIETY BHD [] (MBSB) sprang a surprise, announcing that its half-year profit had jumped 91.4% to RM331.2 million from a year ago. The non-banking financial institution (NBFI) attributed its better than expected performance to higher net income generated from its Islamic banking operations.

MBSB has also exceeded its key performance indicators. Annualised group net return on equity came in at 38%, surpassing the 15% target set for the year, while annualised group revenue growth hit 28.5%, above the 25% target.

However, there are concerns that the company may not be able to sustain its impressive earnings growth.

Some analysts reckon that the company, in which the Employees Provident Fund holds a 69.87% stake, will face an uphill battle when the effects of Bank Negara Malaysia's recent personal loan policies kick in in the next quarter. The new rules, which take effect immediately, could potentially curb loan growth and compress net interest margins.

"More than 60% of MBSB's total loan portfolio is made up of personal financing loans. It will definitely feel the heat from Bank Negara's tightening policies. As for its recently announced results, the potential impact of the regulations had not been priced in," says an analyst with a local brokerage firm.

Be that as it may, top officials at MBSB have been quoted as saying personal loans account for only a small portion of the total personal finance segment that includes housing and car loans and credit cards.

MBSB declined to comment when contacted by The Edge.

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MBSB’s gradual shift to other segments may not be enough to negate the impact of a decline in personal finance growth

The central bank's tightening measures introduced in early July include prohibiting pre-approved personal financial products and reducing personal loan tenures to 10 years from 25 previously. These measures were put in place to curb excessive household debt, which has risen to an astounding 83% of gross domestic product.

Not surprisingly, these prudent lending guidelines have raised concerns over MBSB's loan growth.

In a report, Affin Investment Bank sees lacklustre profits for the NBFI as it anticipates slower growth in the personal finance segment due to the newly implemented measures.

"MBSB's loan growth had in the past relied on the robust refinancing activity in civil servant personal loans. This segment in particular grew at a strong CAGR of 135.4% from FY2009 to FY2012.

"The growth was partly driven by the flexibility in financing, whereby 100% of MBSB's Islamic personal financing (PF-i) book had long tenures of between 10 and 25 years."

The research house does not believe PF-i will be the key growth driver it was in the past for MBSB. The new lending rules, it says, will cut customer affordability by half where repayments and borrowings are concerned, given the shortened tenure for personal loans.

MBSB's earnings have been climbing since 2004. Net profit ballooned to RM656 million in 2012 from RM24.6 million in 2004.

Alliance Research agrees that the NBFI will feel the pinch from the shortening of the personal loan tenure to 10 years.

"MBSB has about RM20 billion of outstanding personal loans, constituting 69% of its total loan portfolio as at March 2013. We also gather that the group has offered personal financing with tenures of up to 25 years. Thus, the 10-year cap on personal financing could have an adverse effect on the group's earnings prospects going forward."

Some quarters, however, do not think the lender will be significantly impacted by Bank Negara's new regulations because of the automatic salary deduction scheme for civil servant personal loans.

As one of the four approved credit providers to this segment, the loan default risk for MBSB is low.

"MBSB's management is optimistic about strong growth in personal financing to civil servants, given the strong demand and its attractive rates - as low as 3.5% to 4% for those who qualify.

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"Back in 2QFY2011, personal financing overtook mortgages as the main contributor to its gross loan portfolio," says Mercury Securities in a report.

Meantime, it appears that MBSB is aware of the looming risk, given that it is in the midst of rolling out several new strategies such as venturing into the non-civil servant market. It is offering floating rate loans for the mortgage and PF-i segments and stepping up efforts to secure more mandates in corporate financing.

Still, Affin Research believes that a slowdown in loan growth is inevitable and opines that MBSB's gradual shift to other segments may not be enough to negate the impact of a decline in personal finance growth going forward.

The private sector personal finance market is much larger than that of civil servants and could prove tough for MBSB to break into.

"We believe the new competitive landscape may prove difficult for MBSB as many of the existing major players are among the top non-bank financial institutions and commercial banks," says RHB Research.

Besides stiff competition, RHB Research also highlights that MBSB will be dealing with a very different market segment where defaults and jobless rates as well as lending habits vary from the more conservative civil servant market.

Interestingly, MSBS' share price did not soar following the release of its stellar results. The stock has been hovering at RM3 to RM3.20 in the past two months. It closed at RM3.06 on Thursday (Aug 15).

This article first appeared in The Edge Malaysia Weekly, on August 12, 2013.