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Quarterly Report For The Financial Period Ended 30 September 2018

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Unaudited Consolidated Statements Of Comprehensive Income

Income Statement

The interim financial statements should be read in conjunction with the audited financial statements for the financial year ended 31 December 2017.

Unaudited Consolidated Statement Of Financial Position

Balance Sheets

The interim financial statements should be read in conjunction with the audited financial statements for the financial year ended 31 December 2017.

Performance Review

Variation of Results against Preceding Year Corresponding Quarter
Income Statement
Variation of Results against Preceding Quarter
Income Statement

The Group gross loans and financing for the 3rd quarter 2018 ("3Q18") declined by 0.6% as compared to 3rd quarter 2017 ("3Q17") mainly due to the proposed sale of personal financing, property financing and mortgage in 4th quarter 2017 amounted to RM1.513 billion. While the gross loans and financing for 3Q18 increased by 0.7% as compared to 2Q18. The increase was mainly due to increase in corporate loans and financing portfolio.

The performance of the respective operating business segments for the current period under review as compared to the previous year corresponding period is analysed as follows:

  • Personal financing - The gross income from personal financing in the current period was lower compared to the previous year corresponding period due to lower disbursements and decreasing portfolio base.
  • Corporate loans and financing - The gross income from corporate loans and financing in the current period was higher compared to the previous year corresponding period due to the continued growth of corporate loans and financing assets base. Corporate disbursements amounted to RM2.4 billion in 3Q18 representing 49.43% of the total quarter disbursement of RM4.9 billion.
  • Property financing and mortgage loans - Property financing and mortgage loans – The gross income from property financing was higher in the current period compared to the previous corresponding period due to growth in its financing assets base. This was partly set off by lower income from mortgage loans as its assets base decreases following conversion efforts from conventional mortgage to Islamic property financing.
  • Auto financing - The gross income from auto financing was lower compared to the previous year corresponding period due to decreasing portfolio base.
Current Year-to-Date vs Previous Year-to-Date
Income Statement
Variation of Results against Preceding Quarter
Income Statement

The Group profit before tax for 3Q18 increased by 23.7% compared to 3Q17 respectively. The increase was mainly due to lower charge of impairment allowances on loans and financing compared to 3Q17. The lower charge was mainly due to improvement of staging from both Stage 1 and Stage 2 under MFRS 9 and higher 2017 impairment following the impairment programme. The higher operating expenses was due to integration costs.

The Group profit before tax for 3Q18 increased by 28.8% as compared to 2Q18. The increase was mainly due to higher operating expenses as stated in the preceding paragraph. Impairment allowances for 3Q18 decreased by RM65.4mil compared to 2Q18 due to favourable forward looking macroeconomic variables forecasted by external agency applied to Retail portfolio.

The Group cost to income ratio for 3Q18 of 35.7% increased from 3Q17 and 2Q18. The increase was mainly due to higher costs relating to banking operations.

Income Statement

Subsequest to the vesting of Shariah compliant net assets as disclosed in Note A4, total assets of MBSB Bank of RM45.75 billion accounts for 98.6% of the total assets of the Group. While the Bank's equity represents 63.1% of the Group's total equity.

Contribution of profit before tax of MBSB Bank increased in current quarter post the vesting of net assets on 2 April 2018 for the Company. Profit before tax and profit after tax in Q1 2018 prior to the vesting remains in Financial Holding Company.


Brief Overview and Outlook of the Malaysian Economy

The Malaysian economy expanded at a slower pace of 4.5% in the second quarter of 2018 (1Q 2018: 5.4%). Growth was slower on account of supply disruptions in the mining sector and lower agriculture production. The latter is due to supply constraints and adverse weather conditions. On the demand side, growth was dampened by lower public investment and net export growth. Private sector spending remained resilient, expanding further by 7.5% (1Q 2018: 5.2%). In particular, private consumption increased strongly by 8.0% (1Q 2018: 6.9%). On a quarter-on-quarter seasonally-adjusted basis, the economy grew by 0.3% (1Q 2018: 1.4%).

Domestic demand recorded a stronger growth of 5.6% (1Q 2018: 4.1%), as the higher private sector activity (7.5%; 1Q 2018: 5.2%) more than offset the decline in public sector spending (-1.4%; 1Q 2018:-0.1%). Private consumption expanded at a stronger pace of 8.0% (1Q 2018: 6.9%), the highest since the first quarter of 2015. This was driven by continued strength in income and employment. Consumer spending was also boosted by the lower inflation during the quarter following the zerorisation of the Goods and Services Tax (GST) rate1 and stronger consumer sentiments. Private investment growth was higher at 6.1% (1Q 2018: 0.5%), driven mainly by capital spending in the manufacturing and services sectors. The better performance was supported by positive business sentiments, favourable demand conditions and continued high capacity utilisation during the quarter. Public consumption registered a higher growth of 3.1% (1Q 2018: 0.4%), supported by improvement in supplies and services and sustained growth in emoluments.

Public consumption registered a higher growth of 3.1% (1Q 2018: 0.4%), supported by improvement in supplies and services and sustained growth in emoluments. Public investment continued to contract during the quarter (-9.8%; 1Q 2018: -1.0%). This was in part due to the near completion of ongoing projects and lower Federal Government development expenditure. Growth in gross fixed capital formation (GFCF) improved to 2.2% (1Q 2018: 0.1%), attributed to higher private sector investment activity. By type of assets, capital spending on machinery and equipment rebounded to 3.6% (1Q 2018: -3.6%). Investment in structures expanded at a slower pace of 2.1% (1Q 2018: 2.8%), due mainly to a slower expansion in investments in non-residential property such as office and retail space. Investment in other types of assets contracted by 2.9% (1Q 2018: -0.2%).

(Source: Extracted from the latest BNM Quarterly Bulletin - Developments in the Malaysian Economy, Second Quarter 2018)

OPR remained accommodative

In May and July 2018, the Monetary Policy Committee (MPC) maintained the Overnight Policy Rate (OPR) at 3.25%.

The Malaysian economy continued to expand in the first half of 2018, supported by private sector activity. In terms of growth prospects, the MPC assessed that growth of the domestic economy is expected to remain firm. Private consumption will be underpinned by continued wage and employment growth, with an additional lift from higher household spending due to the zerorisation of the GST. Investment activity is projected to be supported by capacity expansion mainly in the export-oriented industries and ongoing infrastructure projects. The external sector will continue to benefit from the continued expansion in global growth, despite emerging risks amid escalation of trade tensions.

Headline inflation in 2018 is projected to be lower compared to the forecast earlier in the year. This revised forecast has taken into account the anticipated impact of recent policy measures,including the zerorisation of the GST and the fixing of retail fuel prices, on domestic cost factors. However, the low inflation environment is expected to be transitory, reflecting the one-off impact of the policy measures that would lapse from the second half of 2019. Core inflation is nevertheless expected to remain relatively stable in line with sustained private sector spending. The MPC will continue to monitor key risks from any material shifts in the prospects for domestic growth and inflation. Risks to the global outlook have tilted to the downside from more balanced prospects earlier in the year, reflecting the escalating trade tensions, and spillover effects from global liquidity shifts in an environment of monetary policy normalisation. Domestically, the growth outlook will be further supported with greater certainty in policy in the coming months. The inflation outlook is subject to uncertainties from the extent of pass-through from the policies on consumption tax to prices.

The positive domestic demand outlook, sound financial sector and improving current account surplus of the balance of payments will continue to support Malaysia’s fundamentals. Domestic financial markets have remained resilient through heightened volatility caused by non-resident portfolio outflows. The ringgit exchange rate would be more reflective of the underlying fundamentals of the economy when the external and domestic uncertainties recede. The domestic monetary and financial conditions remain supportive of economic growth. Monetary operations will continue to ensure sufficient liquidity to support the orderly functioning of money and foreign exchange markets and intermediation activity.

(Source: Extracted from the latest BNM, Quarterly Bulletin - The Bank Policy Consideration, Second Quarter 2018)

Overall liquidity conditions remained sufficient for financial intermediation

In the banking system, liquidity conditions remained sufficient at both the institutional and system-wide levels. Reflecting the overall non-resident portfolio outflows during the quarter, the level of surplus liquidity placed with the Bank was lower. Nevertheless, interbank lending and borrowing activities remained orderly. At the institutional level, most banks continued to maintain surplus liquidity positions.

The annual growth of net financing was sustained at 6.3% in the second quarter (1Q 2018: 6.3%). The growth in outstanding loans6 increased to 4.4% during the quarter (1Q 2018: 3.9%), while the growth of net outstanding issuances of corporate bonds7 continued to expand at a double-digit rate of 12.4% (1Q 2018: 14.1%). During the quarter, corporate bonds were mainly issued for infrastructure project financing and working capital. Total outstanding business loans increased by 2.2% (1Q 2018: 1.3%), driven mainly by the manufacturing; electricity, gas and water supply; and wholesale and retail trade, restaurants and hotels sectors. Loan growth to SMEs was steady at 4.6% (1Q 2018: 4.8%) and the amount of loans disbursed sustained during the quarter (RM73.4 billion; 1Q 2018: RM75.9 billion). The growth of outstanding household loans remained stable at 5.3% during the period (1Q 2018: 5.2%). Of note, the growth of household loan applications and approvals for the purchase of passenger cars increased significantly in the second quarter to 14.2% and 21.0%, respectively, due mainly to the higher demand for financing amid stronger car sales following the zerorisation of the GST rate (1Q 2018: -6.2% and 0.2%, respectively).

(Source: Extracted from the latest BNM, Quarterly Bulletin - Monetary and Financial Developments in the Malaysian Economy, Second Quarter 2018)

Development of the Islamic finance industry

The Islamic banking industry in Malaysia has advanced significantly over the years. From a market share of 5.3% in 2000, Islamic financing now accounts for 34.9% of total loans and financing. Islamic banks also offer a wide range of competitive and innovative products, complementing solutions offered by conventional banks.

While the growing depth and breadth of Islamic finance is an important barometer of progress, equally important is ensuring that Islamic finance delivers a positive and sustainable impact on the community, economy and environment. This vision is being realised through the adoption of value-based intermediation (VBI) by Islamic banks, which reinforces the intent of Shariah to promote good and prevent harm. VBI is being advanced to bring about a transformation in the business models and day-to-day conduct of Islamic banks. This was captured in a strategy paper that was developed in collaboration with the industry and issued by the Bank in July 2017.

industryAs the VBI initiative progresses to its implementation phase, the immediate focus in 2018 will be on developing tools for operationalisation and performance measurement. Guidance on applications and approaches to VBI will be developed to help Islamic banks navigate implementation challenges associated with different business models and maturity of individual Islamic bank’s operations. In addition, a scorecard will be introduced to measure both financial and non-financial progress of Islamic banks towards VBI adoption. This is expected to yield changes in the financing portfolios of Islamic banks, with at least half of new business and personal financing channelled to purposes that are consistent with VBI by 2020. Going forward, further targets will be set upon implementation of the scorecard.

(Source: Chapter 4: Islamic Finance Development, Financial Stability and Payment Systems Report 2017, BNM)

Group Prospect

The Group’s business, policies and operations have been realigned following the acquisition of MBSB Bank (formerly known as Asian Finance Bank Berhad) on 7 February 2018. Investments are being made to upgrade and improve the delivery of products and services at various channels including internet and mobile banking. These investments include upgrade and enhancement of information technology infrastructure and services, people resources and upgrading of branches.

The Group focus to expand the corporate business prior to the bank acquisition will continue, to reach the desire corporate retail portfolio mix. As a new Islamic banking group in the banking sector, the Group is looking forward to expand its products and services which include trade finance, wealth management and internet and mobile banking to cater various segments of our customers and depositors.

Barring any unforeseen circumstances, the Group’s prospects for the year are expected to be satisfactory.