Maybank’s 1Q20 profit was up 13% YoY given positive Jaws, where total income grew ahead of opex; this was led by better NOII but was capped by higher loan loss provision. Besides, loans growth slowed further while GIL ratio has started to inch up. Overall, results were below expectations and with Maybank painting a weaker showing ahead, we cut FY20-21 profit by 3-10%. Despite challenging short-term conditions, we reckon Maybank’s compelling dividend yield of c.7% should lend support to its share price. Maintain HOLD but with a lower GGM-TP of RM6.95 (from RM7.20), based on 0.92x FY21 P/B.

Below expectations. Maybank posted 1Q20 net profit of RM2.1b (-16% QoQ, +13% YoY). This was below our and consensus estimates, making up 27% of respective full year forecasts; we see loan loss provision creeping up further in subsequent quarters due to the impact of Covid-19 crisis.

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

QoQ. The 16% drop in earnings was mainly due to higher bad loan allowance, which tripled. If not for this, pre-provision profit was up 7% as total income expanded 4% vs an opex decline of 1%; despite net interest margin (NIM) contracting by 6bp during the quarter, non-interest income (NOII) spiked 20% due to better underwriting income at its insurance arm coupled with the absence of realized financial liability losses.

YoY. Bottom-line increased 13% given positive Jaws, where total revenue grew 15%, ahead of the 5% opex rise. Again, NOII shined with an acceleration of 56%; this came on the back of improved underwriting income contribution from its insurance division. However, this was capped by higher loan loss provision (+59%).

Other key trends. Both loans and deposits growth momentum slowed further to 0.3% (4Q19: +1.2%) and -2.5% YoY (4Q19: +1.6%) respectively. In turn, sequential loan-to deposit ratio (LDR) inched up 3ppt to 95%. As for asset quality, gross impaired loans (GIL) ratio climbed 6bp QoQ to 2.71%, mainly due to judgemental/obligatory triggers.

Outlook. NIM pressure is seen to persist into following quarters given May-20’s 50bp OPR cut and possibly another 25bp reduction in 2H20. Also, with the confluence of events from Covid-19 crisis and imminent recession, loans growth is expected to stay tepid. Besides, asset quality is poised to weaken but it should not spiral out of control (at least till end Sep-20); this is because Malaysian borrowers were granted 6-mth loans deferment while any restructuring & rescheduling (R&R) of loans affected by Covid-19 will not be tagged as impaired.

Forecast. Seeing 1Q20 results were below expectations and management guiding for weaker 2020 financial performance, we cut FY20-21 profit by 3-10% to factor in higher NIM slippage and net credit cost assumptions. Also, we introduce FY22 estimates.

Maintain HOLD but with a lower GGM-TP of RM6.95 (from RM7.20), following our earnings cut and rolling valuations to FY21. The new TP is based on 0.92x P/B (from 0.97x) with assumptions of 8.7% ROE (from 9.1%), 9.2% COE, and 3.0% LTG. This is beneath its 5-year mean of 1.24x but ahead of the sector’s 0.79x. The discount is fair as its ROE generation is 2ppt below the 5-year average while the premium to peers is warranted given its regional exposure and leadership position. Also, it offers superior dividend yield of c.7% (2ppt higher than peers). That said, we believe the stock’s risk reward profile is balanced by its below-average loans growth and dull asset quality.

Source: Hong Leong Investment Bank Research - 28 May 2020