CREDIT ANALYSIS REPORT

MBSB BANK BERHAD - 2022

Report ID 60538900468 Popularity 304 views 57 downloads 
Report Date Jan 2022 Product  
Company / Issuer MBSB Bank Bhd Sector Finance - Financial Institution
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Rationale
Rating action     
MARC Ratings has assigned its financial institution (FI) rating of A+ to MBSB Bank Berhad and a preliminary rating of A+IS to the bank’s Sukuk Wakalah programme with a limit of RM5.0 billion. The ratings outlook is stable.

Rationale     
The assigned FI rating reflects MBSB Bank’s long track record in banking and financing, particularly in personal financing, its healthy capitalisation levels and strong shareholder support from its ultimate shareholder, Employees’ Provident Fund (EPF). The rating is moderated by its relatively moderate asset base and weaker-than-industry average asset quality metrics.

MBSB Bank is a wholly-owned subsidiary of Malaysia Building Society Berhad (MBSB) which began as a mortgage financial institution in 1950. As a building society at that time, MBSB was able to cultivate a steady position in the housing loans sector through different economic cycles. MBSB shifted its focus to become a full-fledged Islamic FI in February 2018 through the acquisition of Asian Finance Bank Berhad (AFB) which held an Islamic banking licence. Upon completion of the acquisition, AFB was rebranded as MBSB Bank which then took over the Shariah-compliant assets amounting to RM41.2 billion from its parent.

As at end-9M2021, MBSB Bank’s total financing stood at RM35.1 billion (9M2020: RM34.7 billion), with the slight growth stemming from the residential property and working capital segments. The bank has a strong position in government-related housing programmes in which it collaborates with Cagamas Berhad (Cagamas) and Lembaga Pembiayaan Perumahan Sektor Awam (LPPSA). In addition to the residential property segment, the bank also recorded growth in the working capital segment which was also in line with the group’s expansion of its trade financing activities. Going forward, it aims to extend working capital financing to the halal industry as well as sustainability-related financing activities to target a corporate-retail mix of 60:40 under its corporate strategy, Journey 2025.

As at end-9M2021, we note that MBSB Bank’s financing book remains concentrated in personal financing facilities (56.2%) followed by residential property (18.4%) and construction (10.6%). We draw some comfort that the majority of the bank’s personal financing is provided to government servants and therefore, non-repayment risk is mitigated by salary deduction at source. Its gross impaired financing (GIF) ratio rose to 3.47% (Islamic banking industry average: 1.34%), largely due to the downturn in the construction sector in 2020, compounded by the impact of the pandemic-induced slowdown. In 1H2021, about 24% of total financing  were under relief  programmes that  include an  extended moratorium, a 50% cut  in instalment payments as well as restructuring and refinancing (R&R) efforts. Given the bank’s asset quality could come under renewed pressure when the relief packages end, MBSB Bank is enhancing its monitoring and recollection efforts. We also draw comfort from its healthy financing loss coverage which remained healthy at 122.3%, in line with the industry average.

Owing to provisions of RM353.2 million and modification loss of RM504.7 million, the bank incurred lower pre-tax profit of RM379.1 million in 2020. For 9M2021, profitability improved significantly with pre-tax profit of RM530.6 million (9M2020: RM340.3 million), supported by the absence of modification loss. Accordingly, its return on assets (ROA) and return on equity (ROE) were higher at 1.05% and 7.28% during the period (9M2020: 0.80%, 5.78%). MBSB Bank’s capitalisation remains healthy with Common Equity Tier 1 (CET1) and total capital ratios standing at 16.7% and 21.4% as at end-9M2021. These levels have been consistently above that of the domestic Islamic banking sector since 2017. We note an improvement in its share capital after the bank received a RM268.1 million capital injection in 9M2021. The bank’s capital level will provide a buffer against moderate increases in credit impairments.

MBSB Bank’s top five depositors accounted for 33.5% of total deposits as at end-2020. The concentration risk is mitigated by the fact that these depositors are largely state-owned institutions or government-related entities which we consider to be stable. The bank also has a modest retail depositor composition of 19.4% in 2020. With this new rated programme, MBSB Bank would be able to tap the capital market to further diversify its funding sources. EPF is the major shareholder of MBSB with a 65.4% stake, and is expected to continue to support the bank. This has been evident in the dividend reinvestment scheme that bolstered MBSB Bank’s capital base.

Rating outlook     
The stable outlook assumes that MBSB Bank’s performance will remain broadly in line with the current profile with strong capitalisation levels and a GIF ratio that is within expectations. The stable outlook also assumes that EPF will remain the major shareholder of the group.

Rating trajectory

Upside scenario     
Any upward revision to its rating would be mainly guided by a sustained growth in profitability and a decline in GIF ratio towards the industry level while other parameters, particularly capitalisation levels, remain strong.

Downside scenario     
The rating and/or outlook would come under pressure if the bank’s asset quality metrics worsen significantly without remedial measures being put in place and/or there being a weakening in shareholder support from EPF.

Key strengths
Healthy capitalisation levels
Strong shareholder support from EPF

Key risks
Weakening asset quality metrics
Segment concentration in personal financing


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