THIS is turning out to be generally an interesting time for Malaysia Building Society Bhd (MBSB) following the enforcement of Financial Services Act 2013 (FSA). The non-bank financial provider next course of action will be closely-watched by investors and the industry.
Under the previous Banking and Financial Institution Act 1989 (Bafia), MBSB is defined as a scheduled institution. The status of an exempt finance company was granted to MBSB on March 1, 1972 by the Finance Ministry and the status has remained since and is thus not bounded by any financial regulators in Malaysia. The status allows MBSB to undertake a financing business in the absence of a banking license.
Analysts say under the new legislation, the Finance Ministry could designate financial intermediaries not under the supervision of central bank as a prescribed financial institution, if such intermediaries are deemed to pose a risk to financial stability, thus it will be interesting to see what will this mean for MBSB.
Alliance Research analyst Cheah King Yoong says under Section 212 of the FSA, Bank Negara is authorised to supervise entities previously not under its charge.
“Bank Negara is authorised to supervise financial entities previously not under the supervision of the central bank but are now deemed to pose a systemic risk to the overall financial stability by the Finance Ministry. This could impact the relatively large non-banking entities currently not under supervision of Bank Negara such as MBSB,” he says.
In addition, Maybank Investment Bank Research analyst Desmond Ch’ng says technically, this could bring MBSB and the development financial institutions (DFIs) under BNM’s purview, but only if they pose a risk to financial stability.
“Assuming MBSB is designated as a prescribed financial institution, the near-term impact could be negative from a reclassification of its non-performing loan (NPL) on a 3-month rather than 6-month basis which could raise NPL levels and the need to shore up capital,
“Secondly, MBSB would likely have to raise equity capital much sooner than expected to bolster its capital base (its Tier 1 capital ratio was 6.6% end-Sep 2012),” Ch’ng says.
Reclassifying MBSB’s NPLs from six months to a three-month basis is necessary to enable MBSB to evaluate the progress of its transformation vis-à-vis the commercial banks under Bank Negara’s purview.
A local bank-backed analyst says that presently, it remains “status quo” for MBSB unless it is deemed as posing a systemic risk to the financial stability. “MBSB is not governed under the now repealed BAFIA and its books are not audited. The caveat for MBSB to come under the central bank’s charge is if it is deemed risky.”
He adds that the FSA opens up an opportunity for Bank Negara to look at its books as they don’t have any restriction from doing that for now.
Analysts say the concern on MBSB is its burgeoning portfolio of personal loans to civil servants.
Started in 1950 as the Federal and Colonial Building Society Ltd, the loan portfolio for MBSB has grown significantly from just providing mortgages. Its biggest earnings contributor now is made up of personal loans to civil servants and it has since expanded into financing retail businesses, corporate outfits, wholesale banking and treasury products.
As at Dec 31, 2012 (FY12), MBSB’s total loans rose to RM24.3bil with the bulk of it coming from personal loans.
MBSB’s Personal Financing-i (PF-i) has grown tremendously in the past five years. In 2009, its PF-i accounted for just about 11.6% of its gross loans and this has swelled to 66.3% in 2012. Concurrently, its mortgage which formed the bulk of its gross loans in 2009 accounting for 47.9% has reduced to 18.5% in the first quarter. Its auto loans are gaining traction, especially since the company tied up with the Naza Group.
In addition, MBSB has also been reducing its total net NPL ratios over the years to 4.5% in FY12 from a high of 19.54% in 2009. MBSB’s deposit growth has also registered a significant growth in FY12. Its deposit rose to RM21.5bil in FY12 from RM7.6bil in FY09.
In the first quarter ended March 31, 2013, MBSB saw its net loans and financing grew more than 50% to RM26.6bil from RM17.6bil in the first quarter in 2012. It reported a net profit of RM166.14mil or 13.08 sen per share in the first quarter ended March 31 compared with RM79.41mil or 6.53 sen per share a year ago, underpinned by its Islamic banking operations and lower impairment losses.
MBSB’s pre-tax profit surged 114.6% to RM237.11mil from RM110.47mil while revenue rose 48.4% to RM562.47mil from RM378.88mil.
For 2013, MBSB aims to bring its loan-to-deposit ratio down to 95%, while a 20% target has been set for loan and deposit growth.
Nevertheless, MBSB is already working towards complying with Bank Negara guidelines but is not in a hurry to get a banking licence from Bank Negara. In March, MBSB chief operating officer Clifford Anthony Clement reportedly said MBSB is already revamping its internal structure to prepare to comply with the FSA.
President and chief executive officer Datuk Ahmad Zaini Othman says MBSB must first practise and perform like a bank before its application can be approved by the central bank. “Licence is something that can come later but we must get ready to operate and move into the banking environment first to train ourselves to be ready.”
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