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Quarterly Report For The Financial Period Ended 30 June 2020

Financials Archive

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Interim Financial Statements
Unaudited Statements Of Financial Position As At 30 June 2020

Balance Sheets

The interim financial statements should be read in conjunction with the audited financial statements for the year ended 31 December 2019.

Interim Financial Statements
Unaudited Statements Of Profit Or Loss And Other Comprehensive Income
For The Second Quarter Ended 30 June 2020

Income Statement

The interim financial statements should be read in conjunction with the audited financial statements for the year ended 31 December 2019.

Performance review of the Group

  1. Balance Sheet
    1. Financing
      Variation of Results against Preceding Year Corresponding Quarter
      Income Statement
      Variation of Results against Preceding Quarter
      Income Statement

      The Group gross loans, financing and advances decreased by 1.8% and 0.4% for 2Q20 compared to 2Q19 and 1Q20 respectively. The performance of respective portfolio is as follows:

      1. Personal financing – Gross balance of the portfolio in the current quarter was lower due to lower disbursements and decreasing portfolio base. The portfolio was also mainly affected by modification loss due to high exposure to fixed rate financing. This portfolio remains the biggest portfolio in the Group.
      2. Corporate loans and financing – the gross balance decreased as repayment outpaced disbursement in the current quarter as compared to 2Q19. However as compared to 1Q20, gross balance increased as trade finance were active.
      3. Property financing and mortgage loans – The Group is actively converting conventional mortgage to Islamic property financing during the quarter. In aggregate, the asset base has grown over the year and over the quarter.
      4. Auto financing – The gross balance continued to decrease as the Group focuses to grow asset base of other portfolios.

    2. Financial investments
      Variation of results against preceding year corresponding quarter
      Income Statement
      Variation of Results against Preceding Quarter
      Income Statement

      The Group financial investments increased by 20.0 % and decreased by 14.5% for 2Q20 compared to 2Q19 and 1Q20 respectively.The sale of financial investments at FVOCI during the quarter resulted in realised gain and contributed to higher revenue for 2Q20.

  2. Income statement
    Current Year Quarter vs Preceding Year Corresponding Quarter
    Income Statement
    Current Year Quarter vs Immediate Preceding Quarter
    Income Statement

    The Group recorded higher revenue during the quarter mainly contributed by gain from sale of financial investments at FVOCI. However, modification loss which was recognised following moratorium granted to eligible customers resulted in loss before tax of RM33.51 million.

    The Group recorded net writeback from impairment for 2Q20 due to improvement on delinquency of accounts and improvement of the forward looking factor to the ECL. In relation to the forward-looking adjustments for the ECL assessment, MBSB Group and the Company adopted latest available forecast data as at the reporting date to reflect the economic condition and prevailing circumstances.

    The Group cost to income ratio for 2Q20 of 19.7% decreased compared to 31.3% for 2Q19 and 30.3% for 1Q20 respectively. Current quarter ratio is lower as the Group recorded higher revenue base, while operating expenses dropped during movement control order period.

    Contribution of major subsidiary of the Group
    Income Statement

    MBSB Bank Berhad ("MBSB Bank") is the biggest subsidiary in the Group. As at 2Q20 total assets of MBSB Bank of RM48.12bil account for 99.0% of total assets of the Group while the equity accounts for 68.2% of total Group equity.

Prospects

Brief overview and outlook of the Malaysian economy - lower growth for first quarter of 2020

At 0.7%, this was the lowest growth since 3Q 2009 (-1.1%), reflecting the early impact of measures taken both globally and domestically to contain the spread of the COVID-19 pandemic, including the introduction of the Movement Control Order (MCO) in Malaysia. On the supply side, the services and manufacturing sectors moderated, while the other sectors contracted. From the expenditure side, domestic demand moderated, while exports of goods and services recorded a sharper decline. On a quarter-on-quarter seasonally-adjusted basis, the economy declined by 2.0% (4Q 2019: 0.6%).

Following two months of steady expansion, economic activity experienced a sharp downshift in March as a result of MCO (18 – 31 March). This was evidenced by the decline in the Industrial Production Index and Index of Wholesale and Retail Trade which recorded an average growth of 3.4% and 5.5%, respectively, in January-February before contracting to -4.9% and -6.1% in March (1Q 2020: 0.4% and 1.5% respectively). The MCO comprised government closure of schools, universities and nonessential services, border closures and restrictions on public movement, work and operating hours, as well as mandatory social distancing and personal protection measures. Essential services include telecommunications, finance, production and the provision of food supplies, healthcare, utilities, E&E, as well as selected industries in the primary and consumer clusters in the manufacturing sector.

Sectors which were more labour intensive and require face-to-face interaction were more impacted by the MCO. In particular, construction activity was completely prohibited during the MCO phase. In contrast, the production capacity in industries which were more capital intensive, such as mining and the E&E manufacturing sub-sector, were affected to a lesser extent. The MCO also led to weaker private sector activity given mobility restrictions, closures of non-essential services, such as retail subsectors, and a temporary halt in ongoing investments.

(Source: Extracted from BNM Quarterly Bulletin - Developments in the Malaysian Economy, First Quarter 2020)

Overnight Policy Rate ("OPR") reduced to 1.75 percent

The Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 25 basis points to 1.75 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 2.00 percent and 1.50 percent, respectively

The impact of COVID-19 on the global economy is severe. Global economic conditions remain weak with global growth projected to be negative for the year. Although a trough is expected in the second quarter, broad-based weakness in labour markets and precautionary behaviour by households and businesses could affect the recovery going forward. Several major economies have begun relaxing measures to contain the COVID-19 pandemic, leading to the gradual resumption of economic activity. Financial conditions have improved, although risk aversion remains elevated. Downside risks to the global outlook remain, especially if a resurgence of the pandemic necessitates the reintroduction of containment measures.

For Malaysia, economic activity contracted sharply in the second quarter of the year, due to measures introduced to contain the pandemic globally and domestically. Following the gradual and progressive re-opening of the economy since early May, economic activities have begun to recover from the trough in the second quarter. The fiscal stimulus packages, alongside monetary and financial measures, will continue to underpin the improving economic outlook. The projected improvement in the domestic economy is expected to be further supported by a gradual recovery in global growth conditions. The pace and strength of the recovery, however, remain subject to downside risks emanating from both domestic and external factors. These include the prospect of further outbreaks of the pandemic leading to re-impositions of containment measures, more persistent weakness in labour market conditions, and a weaker-than-expected recovery in global growth.

Inflationary pressures are expected to be muted in 2020. Average headline inflation is likely to be negative this year, primarily reflecting the substantially lower global oil prices. The risks of a broadbased and persistent decline in prices are assessed to be limited as economic activity resumes and demand conditions improve. Nevertheless, the outlook remains significantly affected by global oil and commodity prices. Underlying inflation is expected to be subdued and within expectations.

The reduction in the OPR provides additional policy stimulus to accelerate the pace of economic recovery. The MPC will continue to assess evolving conditions and their implications on the overall outlook for inflation and domestic growth. The Bank will continue to utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery.

(Source: Extracted from BNM 'Monetary Policy Statement' press release, 7 July 2020)

Monetary and financial developments

Performance of domestic financial markets

The domestic financial markets recorded a mixed performance in May as external factors continued to affect investor sentiments. Total non-resident portfolio outflows amounted to USD0.3 billion, mainly from the equity market, and led to the marginal depreciation of the ringgit by 0.5% against the US dollar.

However, the FBM KLCI increased by 4.7% amid continued support from domestic investors, particularly institutional investors. Sentiments of domestic investors were partly lifted following the release of better-than-expected 1Q GDP growth, which provided the catalyst for higher demand for domestic equities.

The 10-year MGS yield declined by 5.8 basis points, driven in part by the OPR cut in early May amid a resumption in non-resident inflows.

Banking system liquidity

Banking system liquidity coverage ratio (LCR) stood at 140.2%1 in May 2020 (Apr-20: 143.9%)

Deposit growth remained stable at 2.8%, supported by the steady growth of deposits from individuals. The loan to fund ratio and the loan to fund and equity ratio stood at 82.3% and 71.7%, respectively.

Banking system asset quality

Overall gross and net impaired loans ratio was sustained at 1.6% and 1.0%, respectively.

Banks continue to set aside ample provisions to buffer against potential losses based on forward looking assessments.

(Source: Extracted from BNM ' Monetary and Financial Developments' press release, May 2020)

Development of the Islamic finance industry

Global financial vulnerabilities remained elevated in the second half of 2019 amid heightened uncertainties from trade and geopolitical tensions. During this period, prospects of weaker growth prompted several economies including those in Asia to reduce policy rates.

Towards the end of 2019 and heading into 2020, improvements in the outlook for global growth which followed the Phase 1 trade deal between the United States and the People’s Republic of China have since given way to widespread concerns over public health and the economic impact of the COVID-19 pandemic. The global economy is now projected to register negative growth in 2020. A reassessment of risk factors by investors and global policy responses to contain the pandemic and the consequent economic impact have renewed volatility in the financial markets. Since early March 2020, prospects of lower oil prices have also risen sharply after the collapse of an expected agreement on oil production cuts, further adding to market volatility. These headwinds are expected to weigh on the domestic economy and financial markets in 2020.

Amid these developments, domestic financial stability in Malaysia continues to be preserved. Financial market conditions have remained orderly despite portfolio outflows from both the bond and equity markets, supported by the presence of strong domestic institutional investors. The Financial Stability Committee of the Bank remains vigilant over elevated levels of private sector debt and imbalances in the property market which have continued to persist. While recent developments surrounding COVID19 have increased risks to financial stability, the financial system is also more resilient to these risks. Crucially, financial institutions in Malaysia are well-positioned to support households and businesses through these exceptional circumstances. This will enhance prospects for a stronger recovery when the virus is contained and reduce longer-term risks to financial stability.

Banks, insurers and takaful operators remained profitable in 2019 despite the more challenging operating environment. Prudent risk-taking has cushioned the impact of cuts in the overnight policy rate since May 2019 on bank margins, with higher non-interest income, sustained lending activity and lower debt-servicing burdens of borrowers continuing to lend support to profitability. In the insurance and takaful sectors, overall performance has been supported by sustained business growth as ongoing reforms continued to contribute to improvements in pricing and persistency. Sustaining the momentum of insurance reforms, including in the motor insurance sector, will remain critical to preserve affordable access to insurance and takaful protection.

Looking ahead, a prolonged and severe impact from the COVID-19 pandemic remains a key downside risk to the economy and financial stability. A significant weakening of economic conditions could increase household, business and financial market stress, and test the resilience of the financial system. As noted earlier, the financial system is on a strong footing to withstand such stress. Nevertheless, the Financial Stability Committee will continue to closely monitor developments to ensure continued support for the credit intermediation and risk protection needs of households and businesses.

(Source: Financial Stability Review - Second Half 2019, BNM)

The Group's prospects

Outlook for 2020

The Group registered loss before taxation and zakat of RM33.51 million for 2Q20 mainly due to recognition of RM512.61 million modification loss arising from moratorium granted. The Group's modification loss amount is material following high exposure to fixed rate personal financing at the banking subsidiary, MBSB Bank Berhad.

As at 30 June 2020, gross financing and advances for the Group stood at RM35.57 billion, a slight reduction by 0.8% from 31 December 2019, due to lower disbursements. Financial investments, however, reduced by RM0.726 million or 6.5% to RM10.46 billion. Both gross financing and advances, and financial instruments are supported by total deposits of RM33.99 billion and Sukuk and securitisation of RM5.24 billion.

For the year 2020, the Group's performance would be affected by the COVID-19 outbreak in the country.