MBSB- How to Run a Financial Institutions Prepared ONLY for Good Times -Part 2

This is a continuation of my previous post on MBSB that can be found here and here. Since I am going to go a bit into the detail of MBSB, a disclaimer is warranted here. I have never own any bank stocks in my life. I found banks very hard to analyze and generally stay away from them. This is my first half-arsed attempt to take a look into a "bank" (ok, MBSB technically is not a bank, but, it takes deposit and makes loan, so, it is similar to a bank). So, read critically but do judge it based on what I wrote rather than what is my experience with banks.

I read in some forums that said that bloggers who wrote bad stuff about companies have a hidden evil agenda. I am not sure what "hidden evil agenda" that dickhead is talking about as Malaysia allowed no short selling. The market do not function like an ostrich, just because you bury your head in the sand, it does not mean people can't see you. Just because some bloggers do not write about a problem, the problem won't disappear. In general, it is easier to write about the good things rather than the bad things. Just reproduce what the management tell you, then, you can have material to write. Bad things involve digging, involve finding out stuff that people do not tell you. So, this post is about the bad stuff in MBSB because you can easily find the good stuff in analysts report. It add no value if I repeat the good stuff.

There is certainly good things going on at MBSB. The recent rights issue is a positive exercise. It would be better if they don't use the proceeds to extend fixed-rate personal loans. The potential divestment by EPF is a good news as the free float currently is around RM360mil. It is too small and there are not much institution holding that stock. Divestment may allow interest in the stock to pick up. If the world are headed for good times, they should do okay.

Has the growth rate fizzle?

This is one key question. Since the entire MBSB story is about their growth in personal loan extended to civil servant via salary deduction scheme, the answer to this question involve whether the market has already saturated. According to AMResearch analyst, the market still have a lot of legs to go. But, to achieve her market size, it involve ALL the civil servant holding personal loan worth RM106k each. Do you have 5% of your friends that have more than RM100k of PERSONAL loan? Probably not. Now, the analyst is saying that's the potential size of the market involve ALL civil servant having RM106k of personal loan. Is the number logical? Imagine, you go to office, every single person around you have a personal loan debt of RM106k, does it sound logical to you? So, the AMResearch market size is probably overstated.

Najib states that their decision not to give out 1-month bonus to civil servants have saved the government RM3.1b. So, with a loan book of RM3.9b, MBSB basically has given out personal loan to every civil servant worth 1-month of salary plus some in the short span of three years. The scary part is, MBSB is the smallest player in the block. Including the loans extended by the big players, EVERY single civil servants in Malaysia owe 10-plus month worth of their pay in personal loan. Do you have more than 5% of your colleague owing that much money in personal loan? Now, imagine every single of your colleague owe that much money. That's the scale of the market. With civil servants owing so much money, we should see signs of stress in their finances, right? Yes, we do have signs, bankruptcy among civil servants increase by 176% last year (To be fair, it increase from a very low base). CUEPACS president has this to say on the issue, "Most of them were due to default in car loans, maybe it is because their salary is low but already have other commitments and loans. So, when they buy cars, they face problems in paying". Is the other commitment and loans refer to the sort of loans that MBSB is extending? 

If one were to google in Malay the term "Penjawat Awam Muflis", you would find more stories. Now, BNM also said that they are going to monitor the personal loans given out by entities like MBSB. So, with this sort of leverage appear within the civil servants and signs of stress in their finances, do you think the sort of growth in personal loan has chance to be extended or do you think we are probably in the final furlong in terms of growth? Analysts says that the loan growth rate is churning along nicely. That is the CURRENT rate, I think loan growth will slow drastically next year. 


Will the Loan Goes Bad?

Then, there is the question of will the loan extended to these civil servants goes bad? It is probably very hard for it to go bad as they have first cut over the civil servant salary. But, BNM says the danger is that it will cause other loans extended by other institution to go bad. Now, this is a question of fairness, should the banks like CIMB, Maybank and Public Bank who are prudent with their lending be punished for some idiotic lending binge done by other institutions? By reducing the amount of disposable income, these sort of personal loan basically reduces the debt servicing capacity of other people. If the bankruptcy issue get worse, I think discussion is needed to ensure that the burden of the bankruptcy is shared among the institutions rather than having institutions like MBSB getting a cut of the civil servant salary even in the event of bankruptcy.

I am curious about the question on whether the loan can go bad? I am wondering whether the civil servant can direct ANGKASA to stop making salary deduction to MBSB? If that's the case, then, the loan can go bad and MBSB might be in deep shit in the future. If one look at the aging, under the personal financing section, there are some loans that are being impaired.  Here's the section:

If those loan were to come from salary deduction scheme, which is quite likely as all the loans they make come from that scheme.  Based on the amount impaired, unless their legacy loans have some shocking amount of bad loans to the tune of 30%, it is quite likely that some of the impaired loans is from the current scheme, which also means that, the loan has chance to go bad. All this, however, is based on the conclusion I made based on the data available. It could very well be that those impaired loan indeed is the legacy loans. Since the credit risks aging reporting is actually a new reporting standards, there are no comparable figure in the previous AR. 

Another note I would like to make is that, if one were to look at the impairment, at first glance, it seems that the size of the impairment is manageable at RM45.7m relative to the size of the loan book of RM3.9b. But, one key caveat in analyzing super-charged growth in loan book is to be aware of the problem of "growth can mask problems". Loans do not grow bad that early. Normally, people will try to make loans repayment until they seriously could not afford it. So, there is always a time lag between the time when the loan is made and the time the loan goes bad. As the personal loan book of MBSB has expanded 11.7x, yup, it is 1170% within 3 years, the stunning growth in the denominator can masks the problem of bad loans because the denominator is growing faster than the loan could get bad. If we assume that it take 2 years for the loan to go bad, it means that, the loan extended in 2008 is growing bad at a rate of 13.3%. Not exactly a very healty rate. If the current loan book goes bad at 13.3%, it means that the entire pre-rights issue equity of MBSB will be wiped off, MBSB will be in a technical bankruptcy. Luckily, they did a rights issue worth RM500mil, so they won't be in a technical bankruptcy if loans goes bad at 13.3%. Obviously, the 2 year period is a number that I plucked from thin air, I do not know the actual figure or have any experience to know what is the usual number. If the duration is shorter, then, the loan book is on a better shape. If the duration is longer, the loan book is on a worse shape and MBSB will need a bail out from the government.

I actually have some more stuff to say about MBSB. This post is a bit too long and it may take some time for you to digest the information. So, I will stop here. Will do a part 3 on MBSB later touching on their weak risk management skill.