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Quarterly Report For The Financial Period Ended 31 March 2020

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Interim Financial Statements
Unaudited Statements Of Financial Position As At 31 March 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 First Quarter Ended 31 March 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 0.1% and 1.2% for 1Q20 compared to 1Q19 and 4Q19 respectively. The performance of the respective portfolio for current year quarter as compared to the previous year corresponding quarter, 1Q19 and previous quarter, 4Q19 are as follows:

      1. Personal financing – Gross balance of the portfolio in the current quarter was lower due to lower disbursements and decreasing portfolio base. This portfolio remains the biggest portfolio in the Group.
      2. Corporate loans and financing – the portfolio grew as compared to 1Q19 as the Group put more focus on Corporate portfolio. However as compared to 4Q19, gross balance decreased as repayment outpaced disbursement in the current quarter.
      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 more than 100% and 9.4% for 1Q20 compared to 1Q19 and 4Q19 respectively.The significant increase is in line with the Group's strategy to grow treasury portfolios.

  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 a loss before tax for 1Q20 of RM38.98 million mainly due to the increase in delinquent accounts comprising financing under Stages 2 and 3, which resulted in a higher ECL.

    The Group cost to income ratio for 1Q20 of 30.3% increased compared to 26.3% for 1Q19 and decreased compared to 33.1% for 4Q19 respectively. Current quarter ratio is higher compared to 1Q19 as the Group recorded higher personnel costs in line with increase number of staff. On the other hand, current quarter ratio is lower compared to 4Q19 due to lower staff expenses.

    Contribution of major subsidiary of the Group
    Income Statement

    MBSB Bank Berhad ("MBSB Bank") is the biggest subsidiary in the Group. As at 1Q20 total assets of MBSB Bank of RM50.37bil account for 99.1% of total assets of the Group while the equity accounts for 69.8% 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 2.00 percent

At its meeting today, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 50 basis points to 2.00 percent. The ceiling and floor rates of the corridor of the OPR are correspondingly reduced to 2.25 percent and 1.75 percent, respectively.

Global economic conditions have weakened significantly. Measures to contain the COVID-19 pandemic have disrupted economic activity across most economies. Recent indicators show that the global economy is already contracting, with global growth projected to be negative for the year. Financial conditions have also tightened amid elevated risk aversion and uncertainty. Substantial policy stimuli introduced by many economies, coupled with the gradual easing of containment measures globally, would partially mitigate the economic impact of COVID-19. Growth prospects should improve in 2021 with the expected containment of the pandemic.

For Malaysia, domestic economic conditions have similarly been affected by the pandemic. Widespread containment measures globally, international border closures and the consequent weak external demand environment will exert a larger drag on domestic economic activity. The Movement Control Order, while necessary to contain the spread of the virus, has also constrained production capacity and spending. Labour market conditions are also expected to weaken considerably. Economic conditions would be particularly challenging in the first half of the year. The fiscal stimulus measures, alongside monetary and financial measures will, however, offer some support to the economy. With more businesses allowed to operate under the Conditional Movement Control Order, economic activity is projected to gradually improve. The outlook for growth continues to be subject to a high degree of uncertainty, particularly with respect to developments surrounding the pandemic.

Inflationary pressures are expected to be muted in 2020, with average headline inflation likely to be negative this year, due mainly to projections for substantially lower global oil prices. Nevertheless, the outlook remains significantly affected by global oil and commodity prices, as well as evolving demand conditions. Underlying inflation is expected to be subdued given the projections of weaker domestic growth prospects and labour market conditions.

The financial sector is sound, with financial institutions operating with strong capital and liquidity buffers. Liquidity remains ample, augmented by liquidity injections by Bank Negara Malaysia. Since March 2020, Bank Negara Malaysia has provided additional liquidity of approximately RM42 billion into the domestic financial markets, via various tools including outright purchase of government securities, reverse repos and the reduction in Statutory Reserve Requirement. Bank Negara Malaysia stands ready to provide liquidity in the interbank market to ensure orderly market conditions, conducive to support financial intermediation activity.

With the decision today, the OPR has been reduced by a total of 100 basis points, complementing other monetary and financial measures by Bank Negara Malaysia as well as fiscal measures this year. Together, these measures will cushion the economic impact on businesses and households and support the improvement in economic activity. The MPC will continue to monitor the outlook for domestic growth and inflation. The Bank will utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery.

(Source: Extracted from BNM 'Monetary Policy Statement' press release, 5 May 2020)

Monetary and financial developments

Performance of domestic financial markets

Performance of domestic financial markets trended downwards during the quarter following substantial non-resident portfolio outflows amid heightened global risk aversion. The global risk aversion was driven mainly by uncertainties surrounding the duration and severity of COVID-19 pandemic, and its impact on the global economy.

While investor sentiments were supported by the Phase One trade deal between the US and PR China in early January, it deteriorated rapidly as concerns over the potential economic impact of COVID-19 pandemic intensified, particularly towards the end of January. Additionally, the substantial decline in global oil prices also exacerbated the already weak investor sentiment.

These factors amplified risk aversion in global financial markets, leading to increased demand for highly liquid assets such as cash, and safe haven assets such as US Treasury securities.

As a result, the domestic equity and bond market registered non-resident outflows for the quarter, in line with regional economies. The FBM KLCI declined by 15% to close at 1,350.9 points as at endMarch (end-December: 1,588.8 points). While domestic bond yields at the longer-end of the yield curve increased marginally, shorter-term bond yields declined amid sustained demand from domestic institutional investors and expectations for a reduction in the overnight policy rate. During the quarter, the 3-year and 5-year MGS yields declined by 25.2 and 7.8 basis points respectively, while the 10-year MGS yield increased marginally by 4.4 basis points.

Consequently, the ringgit depreciated by 4.9% against the US dollar during the quarter, in line with regional currencies. The depreciation of ringgit against the US dollar was also driven by the strengthening US dollar amid increased demand for US dollar-denominated assets.

Banking system liquidity

The level of surplus liquidity placed with the Bank declined, reflecting the net outflows during the quarter. Nevertheless, banking system liquidity remained sufficient to facilitate financial intermediation and this would continue to be supported by the Bank’s liquidity-injecting operations. At the institutional level, most banks continued to maintain surplus liquidity positions with the Bank.

The Statutory Reserve Requirement (SRR) ratio was reduced from 3.00% to 2.00% in March, with additional flexibility provided to Principal Dealers (PDs) to recognise MGS and MGII as part of the SRR compliance. These combined SRR measures have released approximately RM30 billion worth of liquidity into the banking system. The higher liquidity available to banks has provided greater flexibility for banks in their liquidity management, and was reflected in the higher level of money market placements with the Bank by the end of the first quarter. In addition, the flexibility provided to the PDs has also supported the continued smooth functioning of the domestic bond market.

(Source: Extracted from BNM Quarterly Bulletin - Monetary and Financial Developments, First Quarter 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 RM38.98 million for 1Q20 mainly due to higher impairment charges. The higher impairment charges were caused by the increase in delinquent accounts comprising financing under Stages 2 and 3, which resulted in a higher ECL. In relation to the FLA, the Company and MBSB Bank decided to adopt the 4th quarter 2019 FLA in the ECL assessment for 1Q20 instead of FLA as at 31 March 2020 as the 4th 2019 quarter FLA better reflects the improving conditions as of the date of our announcement. For future quarters, further enhancements will be made to the existing FLA model to reflect the prevailing circumstances.

As at 31 March 2020, gross financing and advances for the Group stood at RM35.42 billion, a slight reduction by 1.2% from 31 December 2019, due to lower disbursements. Financial investments, however, grew by RM1.05 billion or 9.4% to RM12.24 billion. Both gross financing and advances, and financial instruments are supported by our total deposits of RM36.23 billion and Sukuk and securitisation of RM5.43 billion.

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