KUALA LUMPUR: Malaysia Building Society Bhd (MBSB) is charting a new course to diversify into financing of small and medium enterprises (SMEs) to ride on government contracts under the Economic Transformation Programme (ETP).

Established as a building society to provide mortgage loans, MBSB has since moved away from its traditional base of providing mortgages, to becoming a major non-bank provider of consumer financing, especially to civil servants. 

MBSB has filled a void left by the mandatory banking consolidation exercise following the 1997/98 Asian financial crisis, which saw the creation of large banks that many felt did not cater to the average Joe. 

Consumer financing loans have overtaken that of mortgages, accounting for 40% and 34% of MBSB’s gross loans, respectively.

The company is moving to the next phase — introducing credit cards and other products to target its existing customer base. At the same time, it plans to expand its SME business, which will focus on an area not served by conventional banks — providing bridging finance for contractors and suppliers of government awards, which it sees as relatively risk-free.    

“Last year we were focused on strengthening our business programmes and the next four years will be dedicated to introducing new products, diversifying and continuing our recovery efforts,” said CEO Datuk Ahmad Zaini Othman at an analyst briefing yesterday.

To expand its market, MBSB will open more branches and establish partnerships with its agents. 

The SME business, under the “SME Cash Express” label, is something Zaini is particularly excited about.

Civil servants now form the pillar of MBSB's business especially with consumer financing having overtaken mortgages as the company's biggest revenue earner in recent years.

“The SMEs that we serve are contractors, suppliers and parties working on a particular government-related contract. They apply for loans on a transactional basis and not just for the purpose of working capital (to fund old or existing projects),” he said. 

MBSB anticipates higher earnings from this segment, as the government engages in more infrastructure projects during the year. “With the government’s ETP, a lot of subcontractors will be looking for support and the size of the market is expected to grow,” Zaini said.

Unlike commercial banks, MBSB is unconstrained by capital requirements imposed by Bank Negara Malaysia (BNM) on financial institutions. As such, it does not need to meet the minimum risk-weighted capital adequacy ratio (CAR) requirement of 8%, or BNM’s more stringent curbs on mortgages. 

This has allowed MBSB to expand substantially its loan book, constrained only by the ability to fund them. Its latest loan-to-deposit ratio stood at 100% while return on equity for the latest quarter was a staggering 42.6%.

MBSB had a loan-to-shareholders’ funds ratio of 28 times in December 2010, although this halved to 13.3 times in June 2011, as its shareholders’ funds expanded after a recent rights issue. 

As at June 30, it held RM13.22 billion in loans, advances and financing with RM994.81 million in shareholders’ funds. At the end of 2010, loans totalled RM10.7 billion while shareholders’ funds stood at just RM381.12 million. 

It’s worth noting that MBSB has trimmed down its ratio of gross non-performing loans (NPLs) to 26.3% in 2Q11, compared to 30.5% in 1Q11 and 48.3% three years ago, most of which Zaini attributes to legacy loans inherited from the 1990s. He says efforts are being made to hive them off to a special purpose vehicle, which will will see a decline in its NPL ratio. 

These NPLs caused the company to post large losses between 1998 and 2003. The company started to turn around in 2004 and has not looked back since. 

Net profit for FY Dec 2010 surged 155% from RM57.2 million to RM146.03 million. 

On Tuesday, the company reported a 58% rise in net profit for 2Q11 to RM78.25 million, from RM49.51 million the year before. This brings its six-month net profit to RM146.53 million — already surpassing the full year total for 2010.  

MBSB said the increase in profit was mainly due to higher income from Islamic banking operations and conventional business net interest income,  and lower impairment allowances on loans. Earnings per share for the six-month period totalled 19.7 sen while net assets per share stood at 81.85 sen, placing the stock at 2.05 times book. 

The strong financial performance lifted MBSB by 12 sen or 7.7% to RM1.68 with 17.52 million shares traded yesterday. The stock has gained 18% over the past week.  

“The major surprises in the strong earnings are the continuous high loan growth especially in the government servants segment that continues to benefit from very affordable financing and attractive packages offered,” said Kenanga Research. 

Kenanga expects MBSB to earn 25.2 sen and 36.2 sen for 2011 and 2012 respectively, placing the stock’s price-to-earnings multiple at just 6.7 and 4.6 times for the two years. 

However, an analyst cautioned that MBSB’s earnings could be vulnerable during economic downturns due to its high level of loans relative to capital, and the fact that most personal financing loans are unsecured. 

A major mitigating factor, he said is that its mainly civil servant client base face minimal retrenchment risks, although they are not immune to rising inflationary pressures which will affect their disposable income.  

The Employees Provident Fund and Permodalan Nasional Bhd hold stakes of 65.5% and 11.9% respectively in MBSB. 

While it is increasingly targeting the SME segment, MBSB will continue to focus on growing its core consumer financing segment. 

Through Angkatan Koperasi Kebangsaan Malaysia, MBSB extends personal loans to civil servants, which are deducted from their salaries. 

“This is an important direction for MBSB to undertake, the programmes are tailor-made for civil servants,” said Zaini.

The company plans to capitalise on its existing base of 80,000 to 90,000 civil servants to grow its retail segment.