MBSB’s future path

PETALING JAYA: A corporate exercise is inevitable for non-bank lender MALAYSIA BUILDING SOCIETY BHD (MBSB) as it maps out its next five-year growth phase on the back of an increasing competitive landscape.

According to president and chief executive officer Datuk Ahmad Zaini Othman (pic), MBSB has to get out of its “no-man’s land” position where there are some drawbacks such as being unable to tap into low-cost deposits.

Dispelling the notion that MBSB is a beneficiary of cheap funds from its major shareholder, the Employees Provident Fund (EPF), Zaini said the current status did not allow it to have products such as current account.

Zaini said some were of the view that MBSB’s higher than industry’s return on equity (ROE) over the past few years was because of it having EPF as a shareholder.

“Actually the regulations do not allow EPF to put money in MBSB. We are not able to tap into low-cost deposits which is why we need to evolve,” he said.

MBSB is not a commercial bank. It is an exempt finance company that is 64.5% owned by the EPF that ended up with the large stake due to legacy issues from the 1998 financial crisis.

Its focus so far has been more on personal loans, unlike commercial banks that are allowed to provide a wide range of products such as money markets, Treasury and current account.

“For us to get out of this ‘no man’s land’ and to be on firmer growth towards a financial institution platform, we need to seriously look into a corporate exercise in the very near future. But any merger has to be good for the company and our stakeholders,” said Zaini.

“We are quite attractive as a company,” he said, referring to the company’s ongoing plans to close all gaps in preparation for MBSB to eventually become a full-fledged Islamic financial lender.

“In the last five years, we have build up our risk management framework to be on par with the banking industry.”

Zaini said a banking platform would allow it to offer products unconventional banks are unable to.

On the synergies it is seeking from a merger and acquisition, Zaini said “it would have to be a marriage between retail and corporate. It has to be good for stakeholders and the company as well.”

“There are certain strengths we are gunning for... an entity with a strong retail network as we feel that MBSB can contribute a lot more on the corporate business side. It also has to be an entity with low-cost deposits.”

MBSB was part of the three-way mega merger involving CIMB GROUP HOLDINGS BHD and RHB Capital Bhd that was aborted last month. Had the merger materialised, it would have seen MBSB being acquired by CIMB-RHB’s Islamic banking operations to form a “mega” Islamic bank, as per the aspiration of Malaysia’s central bank.

At RM2.82, MBSB was valued at a price to book value of 1.91 times which was higher than the valuation attached to both CIMB and RHB Cap then.

On concerns whether MBSB would not be able to sustain its impressive earnings growth in view of a lower loan growth target of 8%-9% this year as compared to 12% in 2014, Zaini said there might be a temporary dip in the first and second quarters of financial year 2015.

However, to cushion a fall in income, he said the company had adopted a three-pronged strategy – to ensure a strong collection model, keep costs low and grow the business on the corporate side.

“The next quarterly result is important for us as it would set the base for our growth curve. I don’t think we can sustain the 29.6% return on equity (ROE), but as long as we can sustain a reasonable rate of above 15%, it is good as this is the standard of the banking industry.”

To maintain ROE at a decent level, MBSB is planning to increase its fee-based activities to 10% from 4% of total income currently. Among other strategies it is undertaking this year is pricing its products based on a risk-based approach that should commensurate with better margins.

Personal loans used to command nearly 90% of MBSB’s total loan book. But Zaini is looking at reducing this to between 70% and 75% and increasing corporate loans.

He said MBSB has a team of 25-technical people who not only look at financing aspects of the project but also the engineering and implementation strategies.

“We not only go into costing. We have a team including engineers and valuers to sift out the starters from non-starters,” he said.

In the 1990s, MBSB got into trouble because it went into joint ventures with developers where it provided financing, taking up a minority equity stake and even providing financing to buyers. It ended up with MBSB taking up most of the financing risk to the advantage of developers.

“There are no more JVs. The risk management framework is on par wth the commercial banks and we have a technical team to evaluate all corporate loans,” he said.

On whether a possible interest rate hike would crimp margins, Zaini said the bank had safeguarded itself by securitising its personal financing loans for tenures of between five and seven years.

He said the provisioning would not be as much as the RM177.26mil provided for in the fourth quarter of FY2014 as it could stretch the programme over the next two years. And depending on how active it is in terms of recovery of non-performing loans (NPLs), provisioning might not reach that level going forward, he added. MBSB used to come under a more relaxed set of provisioning rules until the Financial Services Act came into effect in July 2013. Since last year, it began assessing the company’s NPLs based on the banking industry standards of three months in arrears.

Under a new business plan to run from 2015 to 2019, the company is seeking to diversify further from its traditional personal financing business, where growth has been dampened by regulatory curbs. It targets a 70:30 exposure ratio between the retail and corporate sectors, from the 85:15 it has currently.

For FY14, MBSB announced an exceptional profit after tax of RM1.01bil, mainly on deferred taxes amounting to RM366.06mil recognised in the fourth quarter.


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