Investment Highlights

• We maintain our HOLD call on Malayan Banking (Maybank) with a revised fair value of RM9.10/share (previously RM9.20/share) after lowering our net profit estimates. We have fine-tuned our FY17/18/19 net profit slightly by -2.4%/-0.7%/-0.1% after imputing higher credit cost and OPEX as well as adjusting our total income estimates. Our ROE expectation for FY18 of 10.7% remain unchanged and we continue peg the stock to a P/BV of 1.3x.

• The group recorded a lower net profit of RM1.66bil in 2QFY17 (- 2.6%QoQ). This was mainly due to higher provisions for loan impairment in the quarter despite achieving an increase in total income.

• 1HFY17 net profit grew 29.9%YoY to RM3.36bil supported by higher net interest income, Islamic banking income and lower provisions. Cumulative earnings were within expectations, making up 48.9% of our and 46.6% of consensus estimate.

• Negative JAW continued to be recorded. 1HFY17 saw a negative JAW of 0.9% with growth in OPEX of 6.7%YoY driven largely by higher personal as well as admin & general expenses which outpaced its total income growth of 5.8%YoY. This led to a CI ratio of 49.3% in 1HFY17 against our expectation of 47.3% for FY17.

• Slower loan growth of 6.4%YoY in 2QFY17 compared to 10.1%YoY in the preceding quarter. This was contributed by a slower pace of loans in Malaysia and international markets (Indonesia, Singapore and other markets)

• NIM declined 4bps QoQ to 2.39% in 2QFY17. For 1HFY17, the group's NIM rose 13bps YoY to 2.41% attributed to higher yields from the securities portfolio and lower funding cost.

• 2QFY17 saw an improvement in group’s liquidity with a lower LD ratio of 93.8% from 94.7% in the preceding quarter. This was attributed to a slowdown in the group's loan growth. LD ratio for Malaysia was stable while that in Singapore and Indonesia declined in 2QFY17.

• Further upticks in impaired loans. Gross impaired loans increased by 4.2%QoQ to RM12.2bil in 2QFY17. By country, the GIL ratio was stable in Malaysia and Indonesia but higher in Singapore. In terms of segment, there was stress in the asset quality of the group's retail and corporate banking loans in Indonesia and Singapore. This has resulted in a further uptick in the group's GIL ratio to 2.53% in 2QFY17 vs. 2.40% in 1QFY17. Its loan exposure to oil & gas sector was lower at 3.89% in 2QFY17 compared to 4.06% in 1QFY17 contributed by largely by a decline in exposure to Malaysia and Singapore’s loan borrowers in that segment.

• Credit cost was higher at 0.69% in 2QFY17 vs. 0.45% in 1QFY17. For 1HFY17 credit cost was 0.57% (1HFY16: 0.82%), above our assumption of 0.50% for FY17.

• Capital ratios remained healthy with a fully-loaded CET1 ratio for the group and bank entity at 13.4% and 12.8% respectively. Its early assessment impact of MFRS 9 was a 60 to 90bps decline to its CET1 ratio. Should regulatory reserves be allowed by the authority to offset against the provisions required, we understand the impact will be mitigated.

Source: AmInvest Research - 5 Sept 2017