Malayan Banking - Fond of This High Yielder

Date: 09/04/2019

Source  :  HLG
Stock  :  MAYBANK       Price Target  :  10.50      |      Price Call  :  BUY
        Last Price  :  8.94      |      Upside/Downside  :  +1.56 (17.45%)

Following the recent 3% pullback in share price (-5% from YTD peak), we turned bullish on Maybank as we believe the market has adequately priced in risks of an OPR cut and more Hyflux provision. In our opinion, the stock’s risk-reward profile now is skewed to the upside premised on being: (i) a prime candidate for rotational yield play among FBMKLCI constituents and (ii) less susceptible to foreign equity sell-off. Overall, we lift our FY19-20 earnings forecasts by 2% and introduced FY21 estimates. We upgrade Maybank to BUY (from HOLD) with an unchanged GGM-TP of RM10.50, based on 1.47x 2019 P/B.

Seeing that Maybank’s share price has declined 3%, following a more dovish stance by the FOMC on 20 Mar-19 (which led to market speculating BNM has more room to lower OPR), we are now re-examining our investment thesis and risk-reward profile of the stock. To note, our economics team does not expect an OPR cut in 2019 although BNM’s dovish tone should continue in the upcoming MPC meeting (6-7 May).

Impact from OPR cut. Assuming a symmetrical 25bp rate cut for variable loans and non-CASA deposits (while all other factors were held constant in our financial model), we find that this could reduce Maybank’s earnings by 2-3%; since group figures were used in our sensitivity analysis, actual impact is likely to be lower (it has sizeable overseas operations, comprising c.30%/c.40% of PBT/gross loans). Thus, this makes Maybank one of the least impacted lenders in the event of an OPR cut.

Hyflux newsflow less eventful. Fluidity of the Hyflux situation is not a major concern given that Maybank’s 2019 net credit cost guidance of 40bp has imputed additional bad loan allowances from this vs our even more conservative assumption of 42bp. To recap, the outstanding unprovisioned amount is SGD552m and <20% of the loan was provided for. With an estimated SGD100m Hyflux provision built into our numbers, we assessed that every 10% top-up will reduce our 2019 earnings forecast by 1-2%.

Forecast. We raise our FY19-20 earnings forecasts by 2%, after incorporating higher Islamic banking income contribution. We initially factored in a low growth assumption of 3% but have revised it up to 11% as we see preferential push for more Islamic banking services. In 2018, this division saw its total income and PBT growing 10-11% YoY, outstripping group’s expansion of 2-8% respectively. Besides, the proportion of Islamic business to Maybank’s total lending in Malaysia increased 2ppt to 59% (vs 5 years ago, contributing only 44%). This aside, we fine-tuned our financial model post the release of its FY18 annual report. Also, we introduce our FY21 estimates.

Risk-reward profile skewed to the upside. From the 3% share price pullback (-5% from YTD peak), we believe the market has adequately priced in risks of an OPR cut and more Hyflux provision (a stale development). Also, we view Maybank as a prime candidate for a rotational yield play, since it is one of the better dividend paymaster in FBMKLCI; the spread against 10-year Malaysia bond yield is currently at 2.7% vs a 5- year low of 1.3%. Additionally, we find the stock being less susceptible to foreign equity sell-off, seeing it is under-owned when stacked against other bigger domestic banks; Maybank’s foreign shareholding now is at 19.5% vs a 5-year low of 15.7%, Public Bank: 37.4%, CIMB: 26.2%.

Upgrade to BUY (from HOLD) with an unchanged GGM-TP of RM10.50, based on 1.47x 2019 P/B with 10.8% ROE, 8.3% COE, and 3.0% LTG. This is higher than its 5- year average of 1.32x (at +1SD) and ahead of the sector’s 1.14x. The premium is fair considering its regional exposure and leadership in the Malaysia’s banking scene. Furthermore, Maybank is a major player in the global Islamic banking space. Also, it offers superior dividend yield of c.6% (2ppt higher than peers).

Source: Hong Leong Investment Bank Research - 2 Apr 2019

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