- We maintain our HOLD rating on Malayan Banking Bhd (Maybank), with a lower fair value of RM9.80/share, from RM10.30/share previously. This is based on a lower ROE of 13.3% (from 13.8% previously) for FY14F, leading to a reduced fair P/BV of 1.7x (from 1.8x).

- To recap, Maybank announced fresh impaired loans in 1QFY13 that were not provided for at that time as it deemed collateral to be sufficient. These were related to the corporate segment, which caused working capital impaired loans to increase by 12.9% QoQ or RM451.6mil to RM3,956.4mil in 1QFY13 from RM3,504.6mil in 4QFY12. These were related to a couple of manufacturing accounts.

- Subsequently in 2QFY13, Maybank hinted that it had assumed an almost zero collateral value for these loans, and thus made a higher loan loss provision of RM428.4mil in 2QFY13, compared to RM84.5mil in 1QFY13. Thus, credit costs were also correspondingly higher at an estimated 52bps in 2QFY13 vs. 11bps in 1QFY13.

- Maybank’s higher loan loss provisioning in 2QFY13 consequently led to better loan loss cover of 103.5% in 2QFY13 from 99.2% in 1QFY13, which is positive.

- We are reassured by the higher loan loss provisioning made in relation to these specific accounts in 2QFY13 and higher loan loss cover, as it may take some time for collateral value to be realised.

- There was an announcement by Lion Corporation (Lion Corp) on 25 October 2013 of it being classified under PN17. According to Lion Corp’s latest FY12 annual report, one of its principal bankers is Maybank. There are two other principal bankers.

- The total loans outstanding by Lion Corp was RM1,047.9mil as at end-June 2013.. On top of this, there is a total bond outstanding of RM744.4mil as at end-June 2013.

- We have revised upwards our assumption for loan loss provisioning for Maybank to RM1,390mil (from RM1,090mil previously) for FY14F. This is based on our new credit costs assumption of 39bps (from 31bps previously) for FY14F.

- We are positive on Maybank’s large earnings base of at least RM6bil, which will provide plenty of buffer for the next economic slowdown, although upside for share price is limited for now. We maintain HOLD.

Source: AmeSecurities