Investment Highlights

• We maintain our BUY call on Malayan Banking (Maybank) with a lower FV of RM9.80/share (previously: RM10.60/share). This is based on a lower ROE of 11.1% leading to a FY20 P/BV of 1.4x. We tweak our FY19/20 earnings by -3.4%-2.7% to RM7.9bil/RM8.6bil by raising our credit cost assumption to 45bps from 40bps while factoring in another OPR cut of 25bps in 2H19.

• The group reported an improved core net profit of RM1.94bil in 2Q19 (+7.3% QoQ). Compared with 1Q19, the earnings improvement in 2Q19 was mainly due to lower provisions. Recall in 1Q19, a top-up in provisioning was taken for the group’s exposure to Hyflux.

• 6M19 earnings of RM3.75bil (-2.1%YoY) were within expectations, making up 45.6% of our and 45.5% of consensus estimates respectively.

• Total income growth was modest at 0.7% YoY for 6M19 as interest income was impacted by higher funding cost and OPR cut of 25bps in May 2019 while non-interest income (NOII) was dragged by marked-to-market losses in financial liabilities.

• Opex grew 2.7% YoY in 6M19 due to higher personnel and marketing expenses. Against the group’s total income growth of 0.7% YoY, the group posted a negative JAW of 2.0% YoY for 6M19. The group’s CI ratio of 47.9% was higher than our FY19 estimate of 46.0% due to the softer revenue.

• Loans picked up pace with YTD annualised growth rate of 3.2% or 4.6% YoY. This was contributed by the faster pace of loans in Malaysia and International markets with YTD annualised growth rates of 2.4% and 4.3% respectively.

• Net interest margin (NIM) contracted 9bps YTD to 2.24% on higher funding cost in Singapore and Indonesia while asset yield declined in Malaysia due to the recent OPR cut.

• Group GIL ratio rose to 2.62% from 2.48% in the preceding quarter contributed by impairments of retail SME and business banking loans in Indonesia as well as corporate banking loans in Malaysia related to the agricultural sector. Credit cost improved to 0.30% in 2Q19 from 0.47% in 1QF19. 6M19 credit cost was lower at 0.38% (6M18: 0.43%).

• The group’s capital ratios remained healthy with a CET1 ratio of 14.2%.

• An interim dividend of 25 sen/share (payout: 74.9%) has been proposed, which is similar in quantum to 6M18. However, the dividend reinvestment option under DRP is not applicable for this dividend as it will all be paid in cash, thus limiting the dilution of ROE. We understand the DRP will continue to be implemented and be applied to subsequent dividend payments.

Source: AmInvest Research - 30 Aug 2019