MBSB’s future back in focus after latest setback

  • Business
  • Saturday, 06 Feb 2016

THE future of MALAYSIA BUILDING SOCIETY BHD (MBSB) has again come into focus following two aborted merger attempts in a short span of time.

But MBSB president and chief executive officer Datuk Ahmad Zaini Othman says that it would not have been a sweetheart deal for it had the merger with Bank Muamalat Malaysia Bhd gone through.

“It’s a bit of a setback, but a far greater setback would have been going through the merger and not getting the expected value for our shareholders,” he tells StarBizWeek.

Picking itself up after the latest episode, Ahmad Zaini says that the non-bank financial provider will continue with ongoing efforts to build up value for all stakeholders.

“We will carry on strengthening our balance sheet and operations,” he says.

On whether the company is still open to mergers and acquisitions, he says “not in the immediate future”.

As to the option of applying for a fresh banking licence, he declines to comment as this is a policy issue and rests with Bank Negara.

He says in the meantime, MBSB will continue with its cost-reduction programme.

“Our cost-to-income ratio (at 23%) is one of the lowest if not the lowest in the industry ... and we will continue to adopt a rightsizing strategy of our HR requirements.

“Employee performance is measured via a performance improvement programme and those who do not meet the (performance) targets will be displaced or terminated after certain months of observation.”

On Tuesday, MBSB announced that the proposed merger with Bank Muamalat, first announced last October, had been aborted.

The merger would have expedited MBSB’s ambition to become a full-fledged Islamic bank and paved the way for the creation of the biggest standalone Islamic bank with combined assets of RM63.5bil and a deposit base of about RM49bil.

MBSB said that the parties involved in the merger, namely, itself, DRB-HICOM BHD and Khazanah Nasional Bhd were not able to reach an agreement on the terms and conditions of the merger and had mutually agreed to end discussions.

MBSB is majority-owned by the Employees Provident Fund (EPF) with a 65% stake. It does appear that the EPF was not playing a big part in the discussions of this merger.

DRB-HICOM controls 70% of Bank Muamalat with Khazanah Nasional holding the remainder 30%.

While no specific reason was mentioned for the termination of the merger negotiations, banking sources say that it could be over the disagreement of the controlling shareholder structure in the proposed merged entity and valuation issues.

According to sources, the price expectations for Bank Muamalat was on the high side and DRB-Hicom seemed unwilling to cede control.

The banking sector is currently trading at an average of 1.2 times book value.

MBSB, meanwhile, is trading at a price-to-book of 0.83 times - a discount analysts say is justifiably below the industry average given its non-bank status.

DRB-Hicom, which has to pare down its shareholding in Bank Muamalat to at least 40%, had also previously failed to close deals with potential suitors like AFFIN HOLDINGS BHD and Bank Islam Malaysia Bhd because of the high pricetag sought.

On the other hand, MBSB which is twice the size of Bank Muamalat in terms of assets, had expected to be in the driver’s seat.

Amid a challenging operating environment, including slower credit growth and potentially deteriorating asset quality for the banking sector as a whole, it would have been a challenge for the merged entity to increase retail deposits to meet liquidity requirements. This is because the retail deposit base of both entities is low at around 7%-8% of total deposits, while CASA or the current account and savings account ratio for the merged entity is estimated at 9%.

Remember that the three-way merger involving MBSB, CIMB GROUP HOLDINGS BHD and RHB Capital Bhd was called off early last year because of difficulties in deriving merger synergies.

The question is where does MBSB go from here?

Analysts liken MBSB’s current position to it being in a catch 22 situation.

Notes Pong Teng Siew, the head of research at Inter-Pacific Securities, “MBSB has been trying to transform into a bank in one way or another. It can still grow on its own, albeit at a slower pace.

“On the other hand, it will be difficult for MBSB to obtain a banking licence as the central bank’s stance is wanting more consolidation in the sector. A merger is also not conducive in the current environment and the pool (of suitors) is getting smaller.”

As a standalone entity, MBSB has to now rely on internal finance or borrowings as a way of expanding lending activities. So, there is pressure on MBSB to find a merger partner at some point, as it cannot rely on shareholder funds for lending activities and it needs to grow, says Pong.

The EPF, which ended up with the large stake in the stock due to legacy issues from the 1998 financial crisis, had previously indicated that it wants to partially divest its stake in the company.

MBSB has a plan to turn into a fully-compliant Islamic financial institution within five years and to fast-track this it has said that it would consider inorganic means. With a bank status, MBSB can tap into new segments and provide financial services which it cannot or does not offer at the moment. This includes collecting CASA deposits and offering other interbank instruments. The company is seeking to raise corporate loan exposure to 30% from about 14% now under the five-year plan to run until 2019. Personal financing made the bulk of total loans at 69% as at end-September. To “close the gap” to become a bank, MBSB has initiated a two-year impairment programme that began in the final quarter of 2014.This involves assessing its non-performing loans based on the banking industry standards of three months in arrears.

Since then, it has been making heavy provisions, which has weighed on the bottom line.

The positive side to this is that it will come out leaner and cleaner by 2017. Kenanga Research in a recent report says it “understands there will be another two quarters of elevated credit cost and lower loan growth to accommodate the company’s impairment programme”.

As a result, Kenanga has slashed by 26%-28% its financial year (FY) 2015 results and estimated earnings for FY16. For the nine-month period ended Sept 30, MBSB’s net profit fell by 56% to RM273.4mil, dragged by higher allowances for impairment losses of RM431mil versus RM26mil in the same period previously. MBSB shares closed one sen down to RM1.41 yesterday for a market capitalisation of RM4.02bil. Its total assets stood at RM41.1bil.

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