Maybank’s 2Q20 core net profit was down 39% QoQ given higher impaired loan provision and negative Jaws. Also, NIM declined sequentially and loans growth remained lacklustre. However, asset quality held steady. Overall, results slightly missed estimates due to higher-than-expected provisions and we see 2H to be softer given elevated allowance run-rate as well; we reduce FY20-FY22 net profit forecast by 1-6%. Maybank’s risk-reward profile is still balance as there are no compelling re-rating catalysts. Retain HOLD but with a lower GGM-TP of RM7.35 (from RM7.55), based on 0.96x FY21 P/B.

Slightly below expectations. Excluding net modification loss, Maybank posted 2Q20 core net profit of RM1.3b (-39% QoQ, -35% YoY), which brings 1H20 sum to RM3.3b (-12% YoY). This slightly missed expectations, forming 49% of our full -year estimates (due to higher-than-expected provisions and we see 2H to be weaker given elevated allowance run-rate as well), while making up 53% of consensus.

Dividend. Surprisingly, none declared (vs 2Q19: 25sen) as management takes a wait and see approach, before divvying in 4Q.

QoQ. The 39% drop in core earnings was primarily due to higher bad loan allowances (+81%) and negative Jaws (total income declined at a quicker pace of 11% vs opex of -8%); essentially, net interest margin (NIM) slipped 13bp during the quarter while non interest income (NOII) decreased 23% (given weaker fees and underwriting income at its insurance arm).

YoY. Similarly, core bottom-line fell 35% on the back of higher loan loss provision (+4- fold). If not for this, pre-provision profit was up 6% as total income ticked up 1% vs an opex drop of 4%).

YTD. Although pre-provision profit jumped a commendable 15% (thanks to investment gains and better underwriting income at its insurance division - NOII spiked 30%), the higher allowance for impaired loans (tripled) caused core earnings to fall 12%.

Other key trends. Loans growth remained lacklustre at -1.0% YoY (1Q20: +0.3%) but deposits picked up momentum to +2.2% YoY (1Q20: -2.5%). In turn, sequential loan to-deposit ratio (LDR) fell 5ppt to 90%. As for asset quality, gross impaired loans (GIL) ratio improved 22bp QoQ to 2.49%, given the effect of loan moratorium.

Outlook. With potentially another OPR reduction (-25bp) in 2H20, we believe this will continue to exert pressure on NIM. Also, loans growth is anticipated to remain tepid as Covid-19 related headwinds drag performance. Separately, we see GIL ratio to stay at low levels for the rest of the year, considering troubled borrowers will receive targeted assistance from Maybank; however, this may mask actual damage and cause a lag in non-performing loan (NPL) formation if the situation does not improve expeditiously or an advent of Covid-19 second wave paralyses the country again.

Forecast. We cut FY20-22 profit forecast by 1-6% to factor higher bad loan provision.

Reiterate HOLD but with a lower GGM-TP of RM7.35 (from RM7.55), following our profit cut and based on 0.96x FY21 P/B (from 1.01x) with assumptions of 8.5% ROE (from 8.7%), 8.7% COE, and 3.0% LTG. This is beneath its 5-year mean of 1.22x but ahead of the sector’s 0.78x. The discount is fair as its ROE output is 2ppt below the 5- year average while the premium to peers is warranted given its regional exposure and leadership position. In our opinion, Maybank’s risk-reward profile remains balance as there are no compelling catalysts to re-rate the stock and management also sounded cautious on its near-term outlook.

Source: Hong Leong Investment Bank Research - 28 Aug 2020