Maybank’s 3Q19 net profit nudged up 3% QoQ (within expectations) on the back of wider NIM, better NOII, and lower effective tax rate. However, these positives were offset by higher loan loss allowances. Besides, lending growth tapered and asset quality weakened a little. Overall, our forecasts were left unchanged. 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. Hence, retain BUY and GGM-TP of RM9.50, based on 1.30x 2020 P/B.

In line. Maybank posted 3Q19 net profit of RM2.0b (+3% QoQ, +2% YoY), bringing 9M19 earnings to RM5.8b (-1%). This came in within expectations, making up 72-73% of both our and consensus full-year estimates.

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

QoQ. The 3% rise in earnings was mainly due to positive Jaws and lower effective tax rate (-2ppt); total revenue was up 10%, thanks to: (i) net interest margin (NIM) which widened 13bp and (ii) non-interest income (NOII) jumping 16% given better trading income (+53%). However, these were offset by higher loan loss provision (+2.5-fold).

YoY. Similarly, bottom-line was up 2% on positive Jaws and lower effective tax rate (- 1ppt). Pre-provision profit rose 18% as total income spiked 14% on robust investment showing (tripled). The doubling of bad loan allowances, capped overall performance.

YTD. Although pre-provision profit showed decent rise of 5%, the higher allowance for bad loans (+29%) and impairment on financial investments, amounting to RM71m (vs RM59m writeback in 9M18) caused net profit to tick down 1%.

Other key trends. Loans expansion tapered to 3.4% YoY (2Q19: +4.6%) but deposits growth gained momentum to 5.5% YoY (2Q19: +3.9%). In turn, loan-to-deposit ratio (LDR) was sequentially down 1ppt to 93%. As for asset quality, gross impaired loans (GIL) ratio inched up 5bp sequentially on the back of broad-based deterioration across its business portfolio in Singapore and Indonesia.

Outlook. Observing the sharp NIM recovery in 3Q19, we reckon most of its Malaysian deposits have been repriced downward. Hence, further sequential improvement will be difficult despite the cut in SRR ratio, in view of diminishing flexibility to optimize LDR and rising price based rivalry for local loans. That said, it will be compensated by lending growth, which we believe will pick up momentum as Maybank chase more overseas loans (in a discipline manner) coupled with a low base effect. As for asset quality, the regress is limited from here on, thanks to pro-active credit management practices and continued recovery efforts.

Forecast. Unchanged as 3Q19 results were within estimates.

Retain BUY and GGM-TP of RM9.50, based on 1.30x 2020 P/B with assumptions of 10.2% ROE, 8.5% COE, and 3.0% LTG. This is in line to its 5-year average of 1.28x but ahead of the sector’s 1.01x. The premium is fair 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 - 5 Dec 2019