RAM Ratings has reaffirmed Malaysia Building Society Berhad's (MBSB or the Company) A2/Stable/P1 financial institution

Published on 18 August 2016

RAM Ratings has reaffirmed Malaysia Building Society Berhad's (MBSB or the Company) A2/Stable/P1 financial institution ratings. The ratings incorporate our expectation of ready support from the Employees Provident Fund (EPF), MBSB's largest shareholder with a 65% stake. The Company's asset quality, which remains encumbered by legacy financing, is still weak while its profitability is envisaged to stay subdued on account of its more stringent impairment provisioning policy. On the other hand, its capitalisation has strengthened following the completion of its rights issue in July 2016.

As personal financing facilities still constitute a sizeable 66% of its financing base, MBSB's financing growth has slowed substantially following the introduction of Bank Negara Malaysia's stricter guidelines on personal and residential property financing in 2013. Nevertheless, the Company's financing base expanded 4.4% in fiscal 2015 (fiscal 2014: 2.4%), driven by the shift in its strategy to diversify its financing portfolio to the corporate sector, by focusing on government-initiated housing contracts and equipment hire-purchase financing. That said, financing growth is expected to remain low in 2016 amid the more challenging environment; MBSB’s financing base expanded by 2.0% in 1H fiscal 2016.

Meanwhile, MBSB's financing portfolio remains weighed down by its exposure to legacy mortgage financing, which accounted for 39% of its total gross impaired-financing (GIF) as at end-June 2016. While the Company's asset quality remained weak with an elevated GIF ratio of 8.0% as at end-June 2016 (end-December 2015: 7.4%, end-December 2014: 6.6%), this ratio had been exacerbated by the absence of a write-off policy. Excluding legacy exposures, MBSB's GIF ratio would have come in at 5.4% as at end-June 2016 (end-December 2015: 4.8%, end-December 2014: 3.8%). In the meantime, the Company had incurred hefty provisions amid efforts to bring its impairment provisioning policy in line with banking industry standards. As a result, MBSB's credit-cost ratio escalated to 2.1% in fiscal 2015 (fiscal 2014: 0.4%), and is expected to stay elevated through the next 2 years. The Company's GIF coverage ratio had also increased to 97.9% as at end-June 2016 (end-December 2015: 92.2%, end-December 2014: 76.7%) due to the tightened policy; this ratio was higher than the banking system's 89.5% as at the same date.

Following the implementation of its stricter provisioning policy, MBSB's pre-tax profit plunged to RM355 million in fiscal 2015 (fiscal 2014: RM933 million), leading to a substantially lower ROA of 0.9% (fiscal 2014: 2.6%). Nonetheless, its capitalisation remained sound as at end-June 2016; its common-equity tier-1 and total capital ratios stood at a respective 11.2% and 12.4% as at the same date, and would advance to respective pro-forma ratios of about 15.6% and 16.7% following its rights issue in July 2016.

Media contact
Choong Andrea
(603) 7628 1115
andrea@ram.com.my