Period  2Q14/1H14

Actual vs. Expectations Maybank’s 1H14 PAT of RM3,177m (+3 YoY) was within our expectation but came in slightly below consensus, making up 48% and 46% of respective fullyear forecasts.

Dividends  No surprises, an interim DPS of 24 sen (vs. 1H13: 22.5 sen) was declared, representing a dividend payout of 68% (vs. 1H13: 62%).

Key Results Highlights

1H14 vs. 1H13, YoY

 Maybank’s bottom-line growth (+3%) was held by lower non-interest income (-15%), but thankfully, this was mitigated by: (i) higher income contribution from Islamic banking (+26%), (ii) lower opex (-3%), and (iii) lower loan loss provision (-29%).

 Net interest margin (NIM) continued to slide (-14bpts) on the back of rising competition to augment loan books and deposits.

 Loan and deposit grew at a healthy clip of 13% and 9%, respectively, bringing its loan-to-deposit ratio (LDR) to 92% from 89%. So far, loan growth is on track with expectations but growth of deposit is trailing by 4%.

 Loan growth was primarily driven by its overseas operations in Singapore and Indonesia (+21%), while for deposit, it came mainly from current account & savings account (CASA) which surged 14%. CASA now represents 36% of total deposit base (+3ppts).

 Non-interest income fell 15% no thanks to: (i) lower fee income (-4%) and (ii) lower forex gains (-82%).

 Stringent cost controls saw Maybank’s opex falling by 3% on the back of lower personnel expenses (-5%). Consequently, cost-to-income ratio (CIR) fell by 70bpts to 48%. Notably, its JAW position could have widened if not for the decline in total income (-1%).

 Overall, asset quality remained robust where gross impaired loans felled 36bpts to 1.5% while gross loan loss provision dipped 31bpts to 1.6%. In turn, loan loss coverage (LLC) was better at 108% (+4ppts). Also, credit charge ratio improved to 0.2% (-11bpts).

 That said, business operation in Indonesia is a concern as its gross impaired loans spiked up 171bpts and may continue to inch upwards given that its 98%-owned subsidiary, Bank Internasional Indonesia (BII) has a low LLC of 48% (vs. 1H13: 86%).

 Annualised ROE narrowed to 13% (-1ppts), coming in below management full-year target of 15%.

 CET1, Tier 1 and total capital ratios improved 1%-2% to 12%, 13% and 16% respectively.

2Q14 vs. 1Q14, QoQ

 Quarterly earnings contracted 4% as this was due to: (i) lack of writeback from impairment losses on financial investments (2Q14: +RM115m vs. 1Q14: -RM29m) and (ii) higher effective tax rate of 27% (1Q14: 26%) from under-provisioning of tax last year.

 NIM fell marginally (-4bpts).

 LDR was relatively flat at 92% as loan and deposit grew in tandem (+2%-3%).

 CIR scaled back 2ppts to 47% given strict cost controls.

 Indicators for asset quality were intact. LLC was unchanged at 108% as gross impaired loans and gross loan loss provision dipped 2bpts. Notably, credit charge ratio improved 6bpts.

Outlook  Aided by its overseas operations, management retained its overall loans growth target of 13%. In Malaysia, loan growth is expected to match system loan growth of 9-10% as ETP-related and oil & gas investments are expected to pick up pace. However, consumer loan is expected to taper as consumers are likely to spend prudently under a rising cost of living environment. For Singapore, the outlook remains undeterred and management kept its 13% loan growth target as they intend to penetrate further into the business market. That said, trade financing to India and China has been the key growth driver so far. While for Indonesia, despite Jokowi administration coming into power, uncertainties still loom as businesses and consumers adopt the wait-and-see approach before investing into the future. As a consequence, management trimmed its Indonesia loan growth target to 16%-17% from 17%-20%.

 Management revised down its deposit growth target to a range of 10%-12% from 13% given its slow take-up rate in 1H14 (+9%). Maybank sees more robust deposit gathering activities in 2H of the year, in light of rising domestic interest rates environment.

 Given Maybank aggressiveness in an attempt to grow its loan books and deposit base, we expect NIM pressure to persist (-10bpts).

 Due to continuous improvement in its overall gross impaired loans ratio, we believe its credit charge could possibly stay at ~20bpts going forward.

 We expect CIR to stay at the current 47%-48% level as management pledged to continue enforcing stringent cost control measures going forward.

 ROE target was revised down to 14% from 15% as capital market activities had slowed down and not showing any sign of improvement.

Change to Forecasts No change to our forecasts. We maintain our FY14/FY15 net profit estimates of RM6,681m/RM7,539m respectively.

Rating Maintain OUTPERFORM

Valuation  Our TP of RM11.20 based on 1.9x FY15 P/B is unchanged. This is in-line with its 3-year average historical P/B.

 We like Maybank for its inexpensive valuation vs. domestic peers coupled with its decent dividend yields of 5%-6%.

Risks to Our Call     Further margin squeeze from tighter lending rules and stronger-than-expected competition.

 Slower-than-expected loan growth and deterioration in asset quality.

 Rising credit charge as result of an up-cycle in non-performing loan (NPL).

 Further slowdown in capital market activities.

 Unfavourable regulatory changes.

 Adverse currency fluctuations.

Source: Kenanga