Malaysia Building Society reinvents itself

Better Q2 financial results put company back in the spotlight

FROM a traditional mortgage lender with legacy loan issues, Malaysia Building Society Bhd (MBSB) has managed to reinvent itself into a more dynamic and relevant financial institution catering to the retail and corporate sector with more to come.

Its improved second quarter financial results and interim dividend have steered the exempt finance company back in the radar of investors.

Last week, MBSB reported a 58% increase in net profit to RM78.2mil for its second quarter ended June 30 from a year ago. Revenue for the quarter under review jumped to RM318.6mil from RM176.1mil last year. It announced an interim cash dividend of 5% less 25% income tax.

For the first half year, MBSB's net profit reached RM146.5mil from RM92.7mil while revenue climbed to RM630.2mil from RM345.2mil a year ago.

In terms of asset quality that was once plagued with legacy loans, OSK Research said MBSB's high impaired loans ratio due to legacy accounts originated from bridging and revolving loans extended to property development projects during the 1997 Asian financial crisis. It has been trending lower in the past few years.

A legacy loan is a general name for a poorly performing mortgage or other troubled assets owned by a bank.

MBSB's transformation programme started in 2009 under the leadership of its then new chief executive officer, Datuk Ahmad Zaini Othman.

As an exempt finance company, MBSB is allowed to undertake the financing business in the absence of a banking licence.

According to OSK Research, the company has in the past two years pursued its mission of “taking MBSB to the next level.”

In 2009, which was the year the transformation was initiated, it streamlined its operations and reintroduced personal financing-i and new corporate business products.

It recruited experienced personnel to support its business plan from 2009 to 2010.

In 2010, the year of strategic growth, the company evolved from a traditional mortgage lender to a provider of a wide range of services to corporate and retail customers.

Turnaround time, service quality and cost control improvements and several key outsourcing exercises were undertaken.

By setting up representative offices instead of traditional branches, it widened its customer reach but at much lower capital expenditure.

“As a result of these efforts, MBSB's cost-to-income ratio (CIR) eased significantly from 70% in the 2005 financial year ended Dec 31 to 27.6% in 2010,” the research house said in a recent report. Going forward, while maintaining its strength in mortgage and personal financing, MBSB is expected to introduce Islamic credit card and hire purchase financing by year-end.

“Credit card is essentially a product borne from a strategic collaboration with another finance company. While MBSB will evaluate the applicants and take the credit risk, the finance company with its ready IT and operational capabilities will be undertaking the support function,” Ahmad Zaini said.

Operationally, he targets total loan disbursements of RM8bil this year against RM3.9bil last year.

“To achieve this target, MBSB will continue to enhance its customer service level by providing a fast turnaround time for both its retail and corporate customers, establish strategic tie-ups with agents, provide attractive product packages to government servants and secure financing of more government contracts,” he said,

And in a year's time, Ahmad Zaini believes that both personal financing and corporate business would increase their portion of the loan portfolio which would result in lower mortgages.

“We're still aiming to increase our customer base in the home mortgage segment but it won't be done overnight due to lower rates being offered by the banks,” he said, adding that presently, 40% of MBSB's loan portfolio comprised personal loans, 34% housing loans and 25% corporate loans.

This is in line with AmResearch's re-rating catalysts for MBSB that included higher-than expected loans growth, better-than-expected net interest margin, continuing improvement in impaired loans, sustainably high return on equity of close to 20% and confirmation of dividend payout ratio of at least 30%.

“On a brighter note, these loans are collateralised by properties with an estimated market value of RM8.2bil, which is adequate to cover the RM4.9bil in gross impaired loans in FY10.

“Furthermore, MBSB has fulfilled the minimum risk-weighted capital ratio of 7% and achieved the internal target of 7% for core capital ratio, which is the minimum required under Basel III. Thus, the company's improved asset quality and capital buffer will firmly anchor its future growth,” said OSK Research.

Meanwhile, on the Employees Provident Fund's (EPF) 65.5% stake in the company, market talk has indicated that the EPF may divest wholly or partially its stake in MBSB. At the seventh Economic Transformation Programme update in early July, the Government had identified 33 companies under its divestment plan to pare down its stake in five companies, list seven companies and an outright sale of 21 companies.

MBSB, Malaysia Airlines and Malaysia Airports Holdings Bhd are the usual suspects identified by analysts and market observers for a lower Government stake in them.

But, the EPF had said it had made no decision on the divestment of its stake in MBSB and was looking forward to continued improvement in MBSB's financial results.