Walking a fine line

MBSB Bhd has spent the last couple of years transforming itself from a niche Islamic lender into a broader banking group, following the acquisition of Malaysian Industrial Development Finance Bhd.

Analysts note that while the rationale behind the acquisition remains intact, investors are becoming increasingly concerned over one key issue – credit costs and impairment provisions.

The group recently reported results that came in below market expectations, and analysts attribute this mostly to lower-than-expected net income and higher-than-expected credit costs.

MBSB’s recent financial performance highlights the fine line between pursuing growth and maintaining asset quality.

Although management continues to focus on executing its transformation programme – dubbed FLIGHT26 – and diversifying its income streams, elevated provisions have emerged as a drag on its overall profitability.

The group received a slew of downgrades following the release of its most recent results, suggesting that the market is concerned about its future financial performance.

Kenanga Research analyst Clement Chua says MBSB’s first quarter ended March 31, 2026 (1Q26) net profit (minus 64% year-on-year) missed expectations, which he anticipates could spill over to the upcoming quarters.

Chua downgrades the stock in his report, indicating that MBSB’s 1Q26 net profit of RM30.1mil came in at only 7% of both his full-year forecast and consensus’ full-year estimate.

“The negative deviation is attributed to lower-than-expected net Islamic income, as interest margins continued to soften in addition to higher-than-expected credit costs,” he says.

BIMB Research analyst Kelvin Ong also notes in a report that MBSB’s 1Q26 net profit missed expectations, making up 6.4% of BIMB’s projection and 6.7% of consensus’ estimates.

The earnings shortfall stemmed from lower net income before expected credit loss (ECL) and higher impairment charges due to the non-repeat of an ECL writeback on financing of RM31.9mil for the corporate/commercial banking segment in 1Q25, Ong points out.

RHB Research analyst David Chong says the key downside risks for MBSB moving forward, include weaker-than-expected net interest margin, weaker-

than-expected non-interest income and higher-than-expected credit costs.

Notably, in the financial year ended Dec 31, 2024 (FY24), MBSB reported a gross impaired financing ratio of 5.3%, which was significantly higher than many of its peers, suggesting that the management’s efforts to recover errant accounts were gaining traction.

Impact of provisions

Nevertheless, the impact of provisions on the group’s profitability became quite visible in the subsequent reporting quarters.

In 4Q25, MBSB booked ECL provisions and other impairment charges totalling RM135.8mil, causing it to report a 97.6% drop in net profit to RM3.64mil – one of the group’s weakest ever quarterly performances.

For FY25, net profit declined 31.3% to RM279.5mil from RM406.8mil previously, suggesting how elevated credit costs can affect any improvements in operating performance.

MBSB did not reply to StarBiz 7 queries on its financial performance at press time.

Kenanga Research’s Chua adds that MBSB has retained most of its FY26 guidance for now, preferring to monitor developments surrounding ongoing geopolitical tensions.

That said, he notes the lender has revised its credit cost guidance to 40 basis points (bps) to 50 bps, from 30 bps to 40 bps, reflecting rising repayment concerns amid elevated fuel prices and inflationary pressures.

He also says the group continues to believe its 7% to 8% financing growth target remains achievable, supported primarily by its corporate financing pipeline, although with a lower preference on trade-related exposures.

Meanwhile, its 2% net interest margin target remains challenged by elevated funding costs, particularly from expensive wholesale deposits, Chua says.

However, the group expects sequential improvement from its current account savings account (Casa) growth initiatives and the eventual maturity of said deposits. Collectively, these could move the group closer to its cost income ratio target of below 53% and return on equity (ROE) target of 5% to 6%, he says.

BIMB Research’s Ong reckons that the group’s strong Common Equity Tier 1 ratio of nearly 18% should support dividend payouts of at least 90%, providing share price support.

Upcoming corporate financing disbursements, improving Casa mix and continued funding-cost optimisation are expected to lift its fund-based income, Ong says.

With its robust capital position, any capital management initiative could further enhance ROE, he says.

MBSB has recently inked a 10-year bancassurance (banca) takaful partnership with FWD Takaful Bhd. Ong says this is envisaged to see the banca fees recognised as part of the non-fund-based income of the group, moving forward.

Meanwhile, RHB Research’s Chong notes that in terms of asset quality, MBSB has not seen any “major signs” of stress among its borrowers – although it may take time for the impact from the Middle East situation to work its way through supply chains.

He says the banking group remains “watchful” on the situation, but has yet to add any overlays in 1Q26.

He believes MBSB’s guidance for a FY26 credit cost of 40 bps to 50 bps could potentially end up at the higher end of the range amid the current backdrop.

While some recoveries that were delayed from last year should flow in, the impact is not expected to be too meaningful, says Chong.

Nevertheless, he downgrades the stock to a “neutral” from “buy”, with a target price of 70 sen from 79 sen previously.

He trims FY26 to FY28 profit after tax and minority interests by 28%, 14%, and 11%, adding that the larger changes made to FY26 is due to a combination of lower net interest margin and higher credit cost – the key variances to the 1Q26 results miss.

At last look, MBSB was trading at 65.5 sen apiece, valuing the entire group at about RM5.34bil.