Highlights

Malayam Banking Berhad - Strong Finish

Date: 27/02/2019

Source  :  PUBLIC BANK
Stock  :  MAYBANK       Price Target  :  9.90      |      Price Call  :  HOLD
        Last Price  :  8.94      |      Upside/Downside  :  +0.96 (10.74%)
 


The Group’s net profit of RM8.11bn (+7.9% YoY) for FY18 is slightly ahead of expectations at 104% and 105% of our and consensus full-year estimates respectively. Improvements have come from lower operating expenses (-1.0% YoY) and provisions (-20.5% YoY), both of which may not necessarily be sustainable. Net fund-based income is 3.1% higher YoY to RM17.1bn, underpinned by loans growth of 4.8%. Net fee-based income is 1.8% lower YoY to RM6.5bn however, impacted by poorer capital market conditions. While the Group has had admirable levels of success in some of its key growth initiatives, we reckon near-term earnings potential may be hampered by margin compressions and asset quality challenges. Our Neutral call and dividend discount-derived target price of RM9.90 are unchanged. Forward price-earnings valuations vis-à-vis the broader market is attractive nonetheless.

  • Loans growth. The Group’s loan base expansion has been broad-based, though mortgage (+7.6% YoY, +1.9% QoQ) and working capital-related (+6.4% YoY, +1.5% QoQ) loans which make up a combined 55% of its total portfolio are the more notable drivers. Subdued economic growth expectations and system loan expansions in its key geographies (Malaysia, Singapore and Indonesia) may be a dampener on earnings. Our estimates assume overall loans growth of 6% for 2019 and 7% for 2020.
  • Net interest margins improved a further 8bps to 2.38% on a QoQ basis, benefitting further from the unwinding of excess liquidity it built up early last year ahead of the General Elections. Mid- to longer-term however, margins may be under pressure from potential deposit competition, particularly with adoption of the Net Stable Funding Rate (NSFR) regime just around the corner (2020). Uncertain economic growth prospects may also factor into rate decisions regionally, with resultant re-pricing mismatches clouding the overall outlook.
  • Asset quality. While the gross impaired loans ratio has improved this recent quarter to 2.41% (3QFY18: 2.65%), we are still concerned as the amount of performing loans having to be impaired due to obligatory conditions being triggered remain decidedly high, suggestive of weak asset quality. Loan loss coverage ratio (including regulatory reserves) is a notch higher at 93.6% (3QFY18: 92.6%). The Group’s exposure to the oil and gas sector poses greatest risk to the balance sheet and/or earnings. Only 58% of borrowers are classified as normal, 28% are under the watch list, 1% are special mention accounts while 13% have been impaired.

Source: PublicInvest Research - 27 Feb 2019

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