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Saturday, 14 January 2017

(The Star) Merger optimism, valuations spark MBSB rally

The new year has seen a resurgence in financial stocks with Malaysia Building Society Bhd (MBSB) a clear leader among its peers.
This is because apart from a considerable improvement in sentiment towards the sector, the financial house represents one of the cheapest entry points from both valuation as well as price perspectives, say analysts.
After a series of false starts with potential suitors, shareholders may be hoping that the third time’s the charm for MBSB with the emergence of Asian Finance Bank (AFB) as a merger prospect.
“The difference between then and now is that MBSB is in a much better position to present itself as a viable merger candidate.
“The impairments are coming to an end this year and beneath the provisions, you can clearly see a profitable and competitive financial entity,” says one banking sector analyst.
The recent rally reflects the perception of bullish investors who believe the worst is over for MBSB and the finance sector which had underperformed the market over the past two years.
The Bursa Malaysia Financial Index, a benchmark for the sector, has advanced by about 3% since Nov 9 as Donald Trump’s victory in the US presidential elections buoyed finance stocks globally amid an optimistic outlook towards more fiscal stimulus in boosting growth.
More impressively, MBSB has led the benchmark with a 15% gain between Nov 9 and Jan 13.
Since hitting a five-year low of 68.5 sen in August last year, the stock has staged an even bigger 53% rise. Its shares closed at RM1.05 on Jan 13.
In comparison, the FBM KLCI has declined by 0.8% during the same period.
A proposed three-way merger between CIMB Group Holdings Bhd, RHB Capital Bhd and MBSB was scrapped in January 2015 while in February last year, a plan to merge with Bank Muamalat also fell by the wayside.
A merger with AFB would enable MBSB to obtain its banking license, which will open new business avenues such as collecting current account and savings account (CASA) deposits as well as interbank instruments.
Based on a price-to-book multiple of 1.5 times, the acquisition price for AFB would be around RM750mil, according to Affin Hwang Capital Research in a recent note.
“Note that this time the proposal is far less complicated and less pricey than the CIMB-RHB-MBSB tie-up.
“There is also none of the potential shareholder squabbles that occurred with the Bank Muamalat merger as AFB’s shareholding is concentrated to the four Middle Eastern entities.
“MBSB wants the commercial banking license and AFB wants access to the group’s strong retail base. It’s a win-win,” said an investment banker.
AFB’s shareholders are the Qatar Islamic Bank (66.67%), RUSD Investment Bank (16.67%), Tadhamon International Islamic Bank (10%) and Financial Assets Bahrain W.L.L (6.67%).
A multitude of factors contributed to MBSB’s steep share price decline aside from the impairments affecting its net income. Its valuation on a per share basis became less attractive due to the dilution arising from a one-for-one rights issue exercise last year involving 2.89 billion shares.
On the other hand, the exercise raised gross proceeds of RM1.71bil and was primarily used for the purchase of liquid securities as well as business expansion needs, serving as a buffer for its balance sheet and mitigating the need for further cash calls in the future.
Another main reason was the expectation that MBSB would cease to pay dividends during the two-year impairment efforts.
This eliminated the valuation premium that is usually reserved for high dividend-yielding financial counters.
One clue of the improved sentiment is signified by the group’s recent stock price. Having hovered close to the theoretical ex-rights price of 88 sen from September to January, MBSB’s shares rose swiftly to break the RM1 mark on Jan 11, or the highest in ten months.
End of impairments
MBSB remains confident of concluding its two-year impairment program by this year which is estimated to total some RM1.9bil.
On average, this involved making provisions for bad loands of about RM200mil or so per quarter, which in turn has impacted MBSB’s overall income since the program began in late 2014.
Last month, MBSB’s group chief executive officer Datuk Ahmad Zaini Othman remarked that without the impairment exercise, the group would have recorded an extra RM1.2bil in pretax profits.
The impairments were necessary to account for MBSB’s bad loans as well as stricter financial reporting standards under Bank Negara Malaysia’s new guidelines.
On the other hand, over the past year the deterioration of MBSB’s asset quality seems to be under control. For its latest quarter ended Sept 30, 2016 (Q3FY16), its gross impaired loans (GIL) ratio was at 7.5%, down 50 basis points from 8% in Q2FY16. For Q3FY15, the GIL ratio was at 7%.
Ahmad Zaini has previously made the distinction that the provisions were to not just to cover bad loans but also to reflect its underlying portfolio of assets worth more than RM40bil.
This implies the possibility of write-backs should the actual non-performing loan (NPL) figures be lower than expected.
While the impairments have negatively impacted MBSB’s financial performance in terms of its net income and return on equity (ROE), its underlying financing business has remained robust.
Among others, MBSB is succeeding with its pivot towards the corporate financing segment.

Amid a challenging backdrop in retail financing, the corporate segment played an important part in boosting its deposits by 10% by RM2.87bil to RM31.46bil in Q3FY16 compared to RM28.59bil a year ago. The segment now accounts for 19% of its gross financing asset composition from 14% a year ago. For Q3FY16, its revenue grew to RM830.25mil, or an 8% increase from RM768.03mil a year ago. Its net profit for the quarter was RM57.93mil compared to RM63.53mil in Q3FY15.