- We maintain our HOLD rating on Malayan Banking Bhd (Maybank) with an unchanged fair value of RM9.40/share. This is based on an ROE of 12.6% for FY15F, leading to an unchanged fair P/BV of 1.6x.

- Recall that Maybank’s loan loss provision for 3QFY14 turned out to be low, at only RM71mil in 3QFY14, vs. RM154mil in 2QFY14.

- This is despite a spike in the construction segment’s gross impaired loans to RM1,158mil in 3QFY14, from RM309mil in 2QFY14. This came from one large group of companies involved in construction of shipbuilding in Malaysia. 3QFY14’s credit costs were also extremely low, at only 7bps vs. 14bps in 2QFY14.

- We understand there is some loan loss provision made for the shipbuilding construction impaired loan.

- Taking a closer look at loan loss provision line, the low loan loss provision was partly boosted by a RM180mil one-off lumpy recovery.

- But, there was a large increase in loan loss provisioning for Maybank’s 78.98%-owned Indonesian subsidiary, PT Bank Internasional Indonesia Tbk’s (BII).

- We estimate the loan loss provision for BII to have more than doubled to RM206mil from RM99mil in 2QFY14.

- The movements in the lumpy recovery and BII’s loan loss provision suggest that, without the lumpy recovery, loan loss provision for the group would be pretty much flat on a QoQ basis.

- Thus, there appears to be minimal loan loss provisioning done for the shipbuilding impaired loan in the latest 3QFY14.

- This is also reflected in the drop in Maybank’s loan loss cover, which had declined by quite a fair bit to 95.4% in 3QFY14 from 107.7% in 2QFY14.

- To match back the loan loss cover to 107.7%, we estimate an additional loan loss provision of RM784mil. In our view, this provides some indication on the portion of that has not been provided for.

- Maintain HOLD.

Source: AmeSecurities