A humble start for Maybank as it posted 1Q19 earnings decline of -3% YoY; this was due to NIM compression, weak NOII, and higher bad loan allowances. That said, loans growth was preserved from previous quarter and asset quality was stable. Overall, results were in-line with expectations and hence, our forecasts are unchanged. In our view, the stock’s risk-reward profile is still 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. Retain BUY with GGM-TP of RM10.50, based on 1.47x 2019 P/B.

Within estimates. Maybank posted 1Q19 earnings of RM1.8b (-22% QoQ, -3% YoY). This was in line with expectations, making up 22% of both our and consensus full-year forecasts. Recall, 1Q18 accounted for 23% of FY18’s net profit.

Dividend. None declared as Maybank only divvy in 2Q and 4Q.

QoQ. The -17% decline in non-interest income (NOII) and the 8-fold jump in loan loss provision (additional allowances made for Hyflux-related accounts), dragged earnings down by -22%; the NOII drop was due to a RM268m loss incurred at its insurance business (contract liabilities widened and claims escalated). Also, net interest margin (NIM) contracted 8bp to 2.30%, hurting profitability.

YoY. Similarly, bottom-line fell -3% on weak NOII (-3%) and higher allowance for bad loans (+19%). Yet again, NOII was hauled primarily by lower income contribution from its insurance division and tepid fee income (-8%). Also, the results performance could have been better if not for NIM slipping 9bp (due to competition and upward repricing in deposits).

Other key trends. Loans growth was preserved at 4.8% YoY (4Q18: +4.8%) and was supported by a 4.8% YoY increase in deposits as well (4Q18: +5.6%). Given a similar growth profile between the two, loan-to-deposit ratio (LDR) remained stable at 93% (flattish on a sequential basis). While for asset quality, gross impaired loans (GIL) ratio was steady despite a mild uptick of 7bp QoQ to 2.48%.

Outlook. We expect NIM contraction to continue following the recent domestic OPR cut along with rising cost of funds in Indonesia given the lack of liquidity in the system. While for loans growth, the momentum is seen to be largely similar to current run-rate as Maybank chugs along by expanding organically (led by Malaysia and Indonesia, through consumer and SME lending while Singapore would be driven by the corporate segment). A recovery at its treasury business (thanks to falling MGS yields) is also expected to lift NOII. Hence, these coupled with strict cost controls can help to avert a negative Jaws ratio. Furthermore, we expect asset quality to remain sturdy.

Forecast. Unchanged as 1Q19 results were within estimates. Also, management kept its overall 2019 guidance.

Retain BUY and GGM-TP of RM10.50, based on 1.47x 2019 P/B with assumptions of 10.8% ROE, 8.3% COE, and 3.0% LTG. This is higher than its 5-year average of 1.31x (at +1SD) and ahead of the sector’s 1.14x. The premium is justifiable given its regional exposure and leadership position. Besides, it offers superior dividend yield of c.6% (2ppt higher than peers). In our opinion, the stock’s risk-reward profile is still 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.

Source: Hong Leong Investment Bank Research - 31 May 2019