Maybank’s 1Q20 net profit came in at RM2.05bn, rising 13.3% yoy but down 16.3% qoq. 1Q20 results accounted for 31.5% of our 2020 net profit estimate of RM6.5bn (prior to revisions). Nonetheless, the results are considered below our and consensus estimates. Weaker quarters ahead as guided by management, will be driven by: – i) net credit cost is set to rise further, potentially to between 75-100bps for 2020E; and ii) a ‘modification-loss’ of potentially RM1bn (arising from the hirepurchase portfolio) will hit Maybank in 2Q20 at its net-interest-income line. Maintain SELL, based on our revised PT of RM5.80.

Results Below Our Expectations, Expect Weaker Quarters Ahead

Maybank reported a decent 1Q20, with net profit at RM2.05bn (+13.3% yoy; -16.3% qoq), supported by a 14.7% yoy expansion in operating income, driven by: i) flat fund-based income; ii) robust insurance net-earned-premium growth yoy, but offset by weakness from non-interest income, higher overheads and more robust impairment allowances. Maybank’s management is undertaking a more conservative provisioning stance, and has set a net credit cost (NCC) guidance of 75-100bps for 2020 while expecting NCC to stay elevated in 2021E.

Key Takeaways From 1Q20 Results – Subdued Loan Growth, NIM Pressure

Key takeaways from the results: i) subdued group loan growth of -1.0% ytd; ii) a 6bps decline (qoq) in 1Q20 NIM to 2.23%, while full-year guidance at a 15bps compression (for the impact of 100bps cut in the OPR); and iii) 1Q20 net credit cost at 73bps (with more ‘overlays’ factored-in) vs. 47bps in 1Q19.

Revisions to 2020E-22E Net Profit Forecasts of -25%/-9.2%/7%

We are adjusting our forecasts by -25%/-9.2%/7% for 2020E-22E to account for: i) a larger degree of NIM compression in 2020E of 24bps, taking into account the impact of the RM1bn modification loss (based on an estimated EIR of 4.7%) and normalizing to 2.14% for 2021-22E (impact of the OPR cut not as bad as our previous expectation of 2.1%); ii) higher net credit cost of 80-89bps in 2020E-21E (from 52-55bps previously) as we factor-in additional provisions for ‘forward-looking assumptions’ of weaker macroeconomic variables.

Maintain SELL; PT Revised to RM5.80 (from RM6.00)

We maintain our SELL rating with a revised Price Target of RM5.80, based on a P/BV target of 0.77x based on 2021E BVPS of RM7.51 (cost of equity at 8.66% and 2021E ROE of 7.4%). As dividend expectations will be lower in 2020E-21E (4.0-5.7%), there could be risks of downward selling pressure on Maybank, in our view. Upside risks: lower credit default risks.

Source: Affin Hwang Research - 22 May 2020