Despite Maybank’s 2Q19 earnings grew by 7% QoQ, it was below expectations; this came on the back of softer-than-expected top-line growth. The rise in profit was due to lower bad loan allowances. Otherwise, we saw NIM slippage, taper ing loans growth, and weakening asset quality. Hence, we cut our FY19-21 net profit forecasts by 5-6%. However, we still believe that the stock’s risk-reward profile is skewed to the upside, premised on being: (i) a prime candidate for rotational yield play and (ii) less susceptible to foreign equity sell-off. Maintain BUY with a lower GGM-TP of RM9.50 (from RM10.30), based on 1.30x 2020 P/B.

Below expectations. Maybank registered 2Q19 earnings of RM1.9b (+7% QoQ, -1% YoY), lifting 1H19 net profit to RM3.8b (-2% YoY). This fell short of estimates (due to softer-than-expected top-line growth), making up 45-46% of both our and consensus full-year forecasts.

Dividend. 1st interim cash DPS of 25sen was declared (vs 2Q18: 15sen cash DPS but including non-cash portion of 10sen, was flat YoY). Ex-date TBD later.

QoQ. The 7% improvement in earnings was mainly due to lower loan loss provision (- 35%). Total income growth was soft at 1% as net interest margin (NIM) slipped 11bp to 2.19%, no thanks to the recent OPR cut and higher overseas deposit cost.

YoY. Bottom-line fell 1% on: (i) negative Jaws as opex grew faster than total revenue by 3ppt, (ii) booked in RM61m of impairment on financial investments vs a RM20m writeback in 2Q18, and (iii) higher effective tax of 1ppt.

YTD. Similar to YoY performance, negative Jaws from quicker opex growth (+3%) and the impairment on financial investments, amounting to RM94m (vs RM28m writeback in 1H18) caused net profit to dip 2%.

Other key trends. Loans expansion tapered slightly to 4.6% YoY (1Q19: 4.8%) while deposits growth moderated to 3.9% YoY (1Q19: +4.8%). In turn, loan-to-deposit ratio (LDR) inched up 1ppt to 94% sequentially. As for asset quality, gross impaired loans (GIL) ratio spiked up 14bp to 2.62%, no thanks mainly to a bad agriculture loan.

Outlook. Like other banks, arresting NIM contraction would not be easy since there is growing price-based competition for loans and we gathered cost of funds in Indonesia is rising given the lack of liquidity in the system. However, it will be compensated by loans growth, whereby 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). While for asset quality, we see limited deterioration from here on given pro active credit management practices and continued recovery efforts.

Forecast. We cut our FY19-21 net profit forecasts by 5-6% to account for softer NIM (factoring in another -4bp) and higher incremental net credit cost of 2-4bp.

Maintain BUY but with a lower GGM-TP of RM9.50 (from RM10.30), following our earnings cut and based on 1.30x 2020 P/B (from 1.40x) with assumptions of 10.2% ROE (from 10.8%), 8.5% COE, and 3.0% LTG. This is in line with its 5-year average of 1.30x but ahead of the sector’s 1.00x. The premium is justifiable given its regional exposure and leadership position. Besides, it offers superior dividend yield of >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 - 30 Aug 2019