Maybank’s 3Q20 Core Net Profit Rose 65% QoQ Due to Lower Bad Loan Allowances and Positive Jaws. However, Sequential NIM Slipped and Loans Growth Remained Lacklustre. That Said, GIL Ratio Ticked Down During the Quarter. The Only Surprise Was the Declaration of Interim DPS of 13.5sen. Overall, Results Were Largely in Line and Thus, Our Forecasts Were Kept. We Now Turn Positive on Maybank Given Leading Covid-19 Vaccines Have High Efficacy Rates, Indicating a Step Closer to Winning the War Against the Virus. Raise to BUY and Higher GGM-TP of RM9.00 (from RM7.35), Based on 1.17x FY21 P/B.

Broadly in line. Excluding net modification loss (in 2Q & 3Q20), Maybank registered 3Q20 core net profit of RM2.0bn (+65% QoQ, -2% YoY), which brings 9M20 sum to RM5.2bn (-10% YoY). This largely met our expectations, accounting for 82% of our full-year estimates but came in above consensus at 87%.

Dividend. Surprisingly, Declared Interim DPS of 13.5sen (vs 3Q19: Nil). Ex-date TBD Later.

QoQ. The 65% jump in core earnings was mainly due to lower bad loan allowances (- 54%). Despite net interest margin (NIM) narrowed by 5bp, it chalked in positive Jaws (total income grew 2% vs flat opex), thanks to better non-interest income (NOII, +5%); this was lifted by stronger fees (+11%) and investment-related income (+17%).

YoY. Core bottom-line declined 2% on the back of weak total income (-7%). However, this was cushioned by the drop in loan loss provision (-16%).

YTD. Although pre-provision profit jumped a commendable 8% (owing to investment gains and smaller underwriting loss at its insurance segment - NOII spiked 17%), the higher allowance for impaired loans (+79%) caused core earnings to fall 10%.

Other key trends. Loans growth remained lacklustre at -0.6% YoY (2Q20: -1.0%) but deposits picked up momentum to + 4.8% YoY (2Q20: +2.2%). In turn, sequential loanto-deposit ratio (LDR) fell 3ppt to 88%. As for asset quality, gross impaired loans (GIL) ratio improved 14bp QoQ to 2.35%, given the effect of loan moratorium.

Outlook. We see subsiding NIM pressure as OPR is already at all-time low. Besides, downward deposit repricing should aid gradual NIM recovery. That said, loans growth is seen to stay tepid for now as Covid-19 related headwinds drag near-term showing but should pick up pace 6-12 months down the road. Separately, we expect GIL ratio to stay at low levels in 1H21, since troubled borrowers can obtain targeted assistance from Maybank; however, it may hide actual damage and cause a lag in NPL formation if the situation does not improve swiftly. As such, management is likely to step up their pre-emptive provisioning in the short-haul but it will drop and normalize progressively.

Forecast. Unchanged as 3Q20 Results Were Largely Within Estimates.

Raise to BUY (from Hold) and higher GGM-TP of RM9.00 (from RM7.35), based on 1.17x FY21 P/B (from 0.96x) with assumptions of 8.5% ROE, 7.7% COE (from 8.7% to reflect risk-on mode and sector rotation into recovery stocks), and 3.0% LTG. This is beneath its 5-year mean of 1.21x but ahead of the sector’s 0.86x. 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. We turn positive on Maybank given leading Covid-19 vaccines have high efficacy rates, indicating a step closer to winning the war against the virus; this would spur faster economic recovery, owing to improve business and consumer confidence along with more lenient safety distancing measures. Also, it alleviates strain on businesses, curbing NPL formation.

Source: Hong Leong Investment Bank Research - 30 Nov 2020