We are maintaining our BUY rating on Malayan Banking Bhd(Maybank), with a higher fair value of RM9.80/share. This is based on an ROEfor FY12F of 14.7%, which translates into a fair P/BV of 2.1x.  

We estimate Maybank's core net earnings (stripping off severalone-off items) to be 10% below our estimates, but in line with consensus. Theshortfall for us came mainly from the overhead expense line, which turned out tobe 20% higher than our estimate. We believe this was due to expenses related toits IT transformation programme. Maybank also declared a GDPS of RM0.36, whichis well above our expectation of a final GDPS of RM0.32 for FP11.

2QFP11 was strong in terms of loans growth (annualised basisof 16.2%) while we consider NIM to be well preserved (-4bps QoQ on normalisedbasis). Net interest income, if stripping off a one-off item related to reclassificationof interest in suspense for a previously non-impaired loan, would be a robustat 9.9% QoQ. 

Asset quality was relatively unscathed judging by the 2QFP11'sperformance, despite upticks in loan loss provisions and impairment onsecurities. Gross impaired loans were lowered overall by a substantial 9.2%.While there were some write-offs, the better impaired loans were aided by asubstantial increase in recoveries, which is positive. Gross impaired loansratio was at 2.9% in 2QFP11, lower than 1QFP11's 3.3%. Loan loss cover hasrisen to 86.9% in 2QFP11 from 81.9% in 1QFP11. 

We expect 2QFP11 to provide some relief ahead in terms ofasset quality, which clearly had not deteriorated in any substantial way, butinstead had managed to record an improvement over the last six months. This is especiallypositive considering Maybank's previous historically high loan loss provisionsin major economic downturns. The 2QFP11 may thus be an indication of betterrisk management controls.  

Overall, 2QFP11 was strong in terms of top line growth, withasset quality unscathed despite the external uncertainty, and a generous doseof dividend added in. Maybank is now targeting a loan growth of 16.2% and ROEof 15.6% (lower than the 16% achieved in FP11 mainly due to higher equitybase). Credit costs areexpected to range between 35bps and 40bps, lower than ourestimated 59bps for FY12F. We thus have a lower ROE estimate of 14.7% FY12F. Webelieve key rerating catalysts are:- (a) improvement in asset quality, which willprovide comfort that an up-cycle in loan loss provisioning will likely beshort-lived; (b) better-thanexpected ROE; (c) better-than-expecteddividend.  


Source: AmeSecurities