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Quarterly Report For The Financial Period Ended 30 September 2020

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Interim Financial Statements
Unaudited Statements Of Financial Position As At 30 September 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 September 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. Loans, financing and advances
      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 0.3% and increased by 2.3% for 3Q20 compared to 3Q19 and 2Q20 respectively. The performance of respective portfolio is as follows:

      1. Personal financing – The gross amount for personal financing decreased as compared to 3Q19 due to lower disbursements and decreasing portfolio base, however increased as compared to 2Q20 following the financing Program M-Prihatin.
      2. Corporate loans and financing – the gross balance decreased as repayment outpaced disbursement in the current quarter as compared to 3Q19. However as compared to 2Q20, gross balance increased mainly contributed by higher disbursement in trade finance.
      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 9.4 % and 7.1% for 3Q20 compared to 3Q19 and 2Q20 respectively.The Group purchased more financial investments for the quarter as compared to sale in the previous quarter, resulting in higher financial investments as compared to previous quarter.

  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 slightly higher revenue for current quarter compared to 3Q19 but lower revenue compared to 2Q20. Revenue for previous quarter was higher because the Group realised higher gains from financial investments in FVOCI.

    The Group recorded allowance for impairment during the quarter mainly from Corporate portfolio. The impairment was at write back for 2Q20 due to improvement on delinquency of accounts following collection received even during moratorium period. The allowance for impairment increased by RM105.95 million mainly on forward looking assumptions following macroeconomic uncertainities posed by the Covid-19 pandemic.

    The Group cost to income ratio for 3Q20 of 25.0% increased compared to 22.6% for 3Q19 and 19.7% for 2Q20 respectively, contributed by higher personnel and establishment expenses.

    Contribution of major subsidiary of the Group
    Income Statement

    MBSB Bank Berhad ("MBSB Bank") is the biggest subsidiary in the Group. As at 3Q20 total assets of MBSB Bank of RM49.93bil account for 99.2% of total assets of the Group while the equity accounts for 69.9% of total Group equity.


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

The Malaysian economy was confronted by concurrent supply and demand shocks arising from weak external demand conditions and strict containment measures in 2Q 2020. As a result, the economy registered its first contraction since the Global Financial Crisis (2Q 2020: -17.1%; 1Q 2020: -1.1%). On the supply side, this was reflected in negative growth across most sectors. From the expenditure side, domestic demand declined, while exports of goods and services registered a sharper contraction. On a quarter-on-quarter seasonally-adjusted basis, the economy declined by16.5% (1Q 2020: -2.0%).

Weak growth was recorded across most economic sectors amid the imposition of the Movement Control Order (MCO), followed by the Conditional and Recovery MCO, during 2Q 2020.

The services sector contracted by 16.2% (1Q 2020:3.1%). The sector was affected by the implementationof a nationwide restrictive MCO, with only essential services such as food-related retail, utilities, banking, transportation as well as information and communication entities allowed to operate with very limited capacity. The subsequent transition to Conditional MCO (CMCO) in May and Recovery MCO (RMCO) in June provided some relief to businesses in the sector. The lockdown had substantially affected consumer spending and tourism activity, as shown by the significant declines in the wholesale and retail trade, as well as food and beverages and accommodation sub-sectors. The transport and storage sub-sector was impacted by a sudden stop in tourist arrivals due to travel restrictions imposed domestically as well as the international border closures. Growth in the finance and insurance sub-sector was weighed down by lower net interest income, and lower fee-based income amid subdued capital market activity. Meanwhile, growth in the information and communication sub-sector was relatively sustained by the continued high demand for data communication services especially during this period of remote working arrangements.

Domestic demand declined by 18.7% in 2Q 2020 (1Q 2020: 3.7%), due mainly to weaker private sector expenditure. Spending by the private sector was impacted by lower income, movement restrictions and subdued consumer and business sentiments. While net exports continued to decline, the contribution of the external sector to the economy improved due mainly to the larger contraction in imports vis-a-vis the previous quarter.

Private consumption growth declined by 18.5% in 2Q 2020 (1Q 2020: 6.7%). Household spending was particularly impacted by the strict movement restrictions in the early part of the quarter and income losses amid weak economic conditions. As movement restrictions were gradually relaxed towards the end of the quarter, retail and financing data indicated some improvement in spending, albeit remaining subdued. During this challenging period, stimulus measures such as the disbursement of Bantuan Prihatin Nasional cash transfers, EPF i-Lestari withdrawals and the implementation of the loan moratorium helped to cushion consumption spending.

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

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

The Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 1.75 percent.

The global economy continues to recover, led by improvements in manufacturing and export activity. Latest indicators show that economic activity picked up in most advanced and regional economies, with a more pronounced recovery momentum in PR China. However, recent resurgences in COVID-19 cases have caused some major economies to reintroduce containment measures, although generally less restrictive than earlier measures. This suggests that the global economic recovery will likely remain uneven in the near-term. Financial conditions have improved, although risk aversion remains elevated. The overall outlook remains subject to downside risks, primarily due to the risk of further resurgence of COVID-19 infections which could lead to weaker business, employment and income conditions.

For Malaysia, the latest indicators point towards significant improvement in economic activity in the third quarter. The introduction of targeted measures to contain COVID-19 in several states could affect the momentum of the recovery in the fourth quarter. Nonetheless, growth for the year 2020 is expected to be within the earlier forecasted range. For 2021, economic activity is projected to improve further. This will be underpinned by the recovery in global demand, turnaround in public and private sector expenditure amid continued support from policy measures, and higher production from existing and new facilities. Nevertheless, the pace of recovery will be uneven across sectors, with economic activity in some industries remaining below pre-pandemic levels, and a slower improvement in the labour market. Downside risks to the outlook remain, stemming mainly from ongoing uncertainties surrounding the pandemic globally and domestically.

In line with earlier assessments, headline inflation is likely to average negative this year given the substantially lower global oil prices. For 2021, headline inflation is projected to average higher. The outlook, however, will continue to be significantly affected by global oil and commodity prices. Underlying inflation is expected to remain subdued in 2021 amid continued spare capacity in the economy.

The MPC considers the stance of monetary policy to be appropriate and accommodative. The cumulative 125 basis points reduction in the OPR this year will continue to provide stimulus to the economy. The MPC will continue to assess evolving conditions and their implications on the overall outlook for inflation and domestic growth. The Bank remains committed to utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery.

The meeting also approved the schedule of MPC meetings for 2021. In accordance with the Central Bank of Malaysia Act 2009, the MPC will convene six times during the year. The meetings will be held over two days, with the Monetary Policy Statement released at 3 p.m. on the second day of the MPC meeting.

(Source: Extracted from BNM 'Monetary Policy Statement' press release, 3 November 2020)

Monetary and financial developments

Improved domestic financial market conditions as global risk aversion eased

The performance of domestic financial markets improved during 2Q 2020, driven by a rebound in investor risk appetite following the quick implementation of large scale liquidity injections and policy responses by central banks and governments around the world, particularly in advanced economies, to cushion the impact of the COVID-19 pandemic. The unprecedented magnitude of the policy actions by major central banks was sufficient to stabilise market sentiments. Additionally, as countries looked to restart their economies by gradually easing movement restrictions, this also provided further support to investor sentiments.

Nominal interest rates declined further following the reduction in the OPR

Interest rates in the wholesale and retail markets declined following the reduction in the OPR by 50bps in May 2020. There was strong and immediate passthrough of the OPR reduction to interbank rates across all tenures, with the KLIBOR declining by 49 to 50 bps across tenures within one day of the OPR adjustment. The 3-month KLIBOR ended the quarter at 2.28% (1Q 2020: 2.80%). The transmission of the OPR reduction to retail lending rates was also strong, with continued pass-through from the previous OPR reduction in March 2020. This was reflected in the lower weighted average lending rate (ALR) on outstanding loans, which declined by 52 basis points to 4.25% in June (1Q 2020: 4.77%).

Similarly, nominal fixed deposit (FD) rates also decreased during the quarter, across tenures of 1 to 12months, in line with the quantum of the OPR reduction. Real FD rates increased despite the decline in nominal rates given the lower inflation in June.

Banking system liquidity remained sufficient to facilitate financial intermediation

The level of surplus liquidity placed with the Bank declined, due mainly to the higher currency in circulation, reflecting the increased demand for cash during the quarter. Nevertheless, banking system liquidity remained sufficient to facilitate financial intermediation. At the institutional level, most banks continued to maintain surplus liquidity positions with the Bank.

Continued expansion of financing supporting business needs

In 2Q 2020, net financing expanded by 3.7% on an annual basis (1Q 2020: 4.7%). Outstanding loan growth increased during the quarter (4.1%; 1Q 2020:3.8%), while the growth in outstanding corporate bonds declined to 2.5% (1Q 2020: 7.6%) due mainly to a high base effect from a one-off large issuance in2Q 2019.

(Source: Extracted from BNM Quarterly Bulletin 'Monetary and Financial Developments' Second Quarter 2020)

The Group's prospects

Outlook for 2020

The Group registered a quarter profit before taxation and zakat of RM293.96 million for 3Q20 as opposed to loss before taxation and zakat of RM33.51 million for 2Q20 mainly due to modification loss impact in 2Q20 arising from moratorium granted which significantly reduced 2Q20 profits. The Group's modification loss amount recorded in 2Q20 was material due to exposure to longer tenure fixed-rate personal financing at the banking subsidiary, MBSB Bank Berhad.

As at 30 September 2020, gross loans, financing and advances for the Group stood at RM36.39 billion, an increase of 1.5% from 31 December 2019 while financial investments increased by RM0.19 million or 0.2% to RM11.21 billion. Both portfolios are supported by total deposits of RM35.04 billion and Sukuk and securitisation of RM5.23 billion.

For the year 2020, the Group's performance is affected by the COVID-19 outbreak in the country and impact of moratorium granted to eligible customers.