The long-term outlook for Malayan Banking (Maybank) remains intact given its solid capital base (CET1: 13.6%; TCR: 18.25%) and leading position as the largest banking group in the country and fourth-largest in the ASEAN market. Nonetheless, in our view, the outlook in 2H18 will be more challenging compared to 1H18 given the risk of potentially higher levels of provisions, elevated funding costs and modest loan growth. As a result of this, we trim our FY18-20E earnings forecasts by 1.5-5.2% largely to account for a higher degree of net-interestmargin (NIM) pressure (of 8bps). We maintain our BUY with a revised PT of RM11.20 (down from RM12.00).

Key Priorities in 2H18 – Manage NIM, Maintain Pricing Discipline

Maybank saw a sharp 12bp decline in its 2Q18 NIM to 2.27% from 2.39% in 1Q18, which was largely attributable to higher funding costs and repricing effects of deposit rates. In our view, the NIM pressure is expected to ease subsequently in 3Q18 due to liquidity management initiatives while simultaneously maintaining pricing discipline.

Group Consumer Financial Services (GCFS) the Key Driver in 2018

Maybank’s GCFS division, comprising consumer, retail SME and business banking services, is expected to contribute approximately 60% of the group’s pre-tax profit based on our estimates (2017: 46.1%). We expect GCFS will contribute most of the new loan growth to the Group as the Global Banking unit is still seeing some derisking of its portfolio while being bogged down by high impairment charges.

Risks of Potentially Higher Credit Costs (>45bps) in 2018

At our recent meeting with management, there was no change in the guidance for 2018’s net credit cost, which is >45bps. Based on 1H18’s net credit cost of 44bps, this would imply a potentially higher level in 2H18.

Maintain BUY, PT Revised to RM11.20 From RM12.00

As we revise down our FY18-20E earnings forecasts by 1.5-5.2% to account for a higher degree of NIM compression of 8bps against our previous forecast and slower loan growth in 2018-20E, we cut our Price Target to RM11.20 (based on a 1.6x P/BV target on 2019E BVPS) from RM12.00 (at 1.74x P/BV target). Among the big-cap financial stocks, Maybank remains our preferred pick as it remains fundamentally solid and operationally robust. Downside risks – weaker NIM, rising caution in business sentiment, and higher impairments.

Source: Affin Hwang Research - 15 Oct 2018