Period

2Q15/1H15

Actual vs. Expectations

Maybank’s 1H15 PAT of RM3,284.9m (+3.4% YoY & similar to 1H14) was within our and market expectations, making up 48.2% and 47.8% of respective full-year forecasts. The subdued performance was dragged by higher operating expenses and impairment losses.

Dividends

No surprises, an interim DPS of 24.0 sen (similar to 1H14) was declared.

Key Results Highlights

1H15 vs. 1H14, YoY

Maybank’s subdued bottom line growth of 3.4% was dragged by increase in: (i) overheads at 15.3% (1H14: - 2.7%) mainly arising from increases in higher personnel costs (+17.3%) and administrative & general expenses (+30.2%), as well as (ii) higher provisions for bad loans at +50.6% (1H14: -29.0%).

Better performance was seen at the income level at +10.8% (1H14: -1.3%) driven by strong growth from the net interest income (NII), non-interest income (NOII) and Islamic Banking at 10.1%, 7.8% and 17.4%, respectively. The Islamic Banking fund-based income and fee-based income grew at 14.7% and 42.2%, respectively, whilst the NOII was bolstered by higher forex exchange gains & commission, service charge and fees.

However, NIM decreased by slightly by 4bpts despite improvement in yield loans in Malaysia and Singapore but dragged by higher deposit costs in both countries. (We assumed much lower NIMs at 2.13%).

Due to the increase in overheads, cost-to-income ratio (CIR) nudged by 2ppts to 49.5%, against our assumption of 47.5%.

Loans and deposits grew healthily at 15.6% YoY and 11.5% YoY, respectively, bringing its loan-to-deposit ratio (LDR) to 95% from 92%. On an annualised basis this translated into Loans and deposits growth rates of 11.3% and 6.3%, respectively. Previously management targeted both loan and deposit growth of 9-% to 10%. (vs. our expectations of growth in loans and deposits at 8.5% and 7.5% respectively.

Loans growth was primarily driven by its overseas operations (+23.5% and accounted for 42% of entire loan book) with Malaysia at 9.9%. Growth in Malaysia was driven by the consumer segment at 10.0% and the Business Banking & SME’s at 9.6% (39% of total loans).

Deposits growth came mainly from term/investment deposits, which surged by 16% (1H14: +7.2%). CASA surged by 9.2% (1H14: +14.0%) and now represents 36% of total deposit base (-40bps).

Overall, asset quality deteriorated slightly where gross impaired loans rose by 6bps to 1.56% and annualised credit charge was up to 27bps, vs. our assumption of 30bps. Loan loss coverage was down by 25ppts to 83.4% vs. industry average of 98%.

Annualised ROE narrowed to 12% (-1ppts), coming in below management full-year target of 13%-14%.

CET1, Tier 1 and total capital ratios remained healthy at 15.8%, 13.4% and 11.7%, respectively, with CET1 and Tier 1 improving by 4bps-18bps.

2Q15 vs. 1Q15, QoQ

Quarterly earnings contracted 6.8% as this was due to: (i) higher loan loss provisioning (2Q15: -RM301m vs 1Q15: - RM248m and (ii) lower NOII at -14.4% to RM1.24b

NIM was flat at 2.3% with CIR at the same level from the previous quarter.

LDR was up by 2ppts to 95%.

Asset quality looked shaky with gross impaired loans up by 6bps and credit charge ratio regressing by another 6bps to 0.29%.

Outlook

Maybank is facing a challenging environment with business sentiment remaining cautious with NIM compression to continue amid a challenging funding cost environment. Management is confident despite the weak outlook, asset quality remains stable with sporadic weaknesses.

With challenges expected in the 2H15, management has reviewed its FY15 guidance: (i) ROE to come in at 12-13% (Previously: 13-14%; Kenanga: 12%), (ii) Total loans growth of 8-9% (Previously: 9-10% &; Kenanga: 8.5%), (iii) Total deposits growth of 10-11% (Previously: 9-10%; Kenanga: +7.5%) (iv) NIM to decline 8-10bps (unchanged; Kenanga: -6bps) (v) CIR in between 47% and 48% (unchanged; Kenanga: 47.5%) and (i) Credit charge ratio of about 30bps (unchanged; Kenanga: 30bps)

Change to Forecasts

Since 1H15 results were in line with expectations, we make no changes to our FY15E/FY16E earnings of RM6,817m/RM7,021m.

Rating

Maintain OUTPERFORM

We like MAYBANK for its: (i) superior yield offerings of ~6%, and (ii) extensive regional exposure in ASEAN-5.

Valuation

As we have not made changes to our assumptions, our TP remains the same at RM9.74.

This TP is based on 1.5x FY16 P/B (previously 1.66x FY15 P/B). The lower P/B multiple is to reflect slower growth and weaker ROE generation moving forward.

The assumptions used to derive our GGM-TP are: (i) COE of 8.5% (unchanged), (ii) FY16 ROE of 11.3% (previously FY15 ROE of 12.2%), and (iii) terminal growth rate of 3% (unchanged).

Risks to Our Call

Steeper margin squeeze from tighter lending rules and stronger-than-expected competition.

Slower-than-expected loans and deposits growth.

Higher-than-expected rise in credit charge as result of a potential up-cycle in non-performing loan (NPL).

Further slowdown in capital market activities.

Unfavourable regulatory changes.

Adverse currency fluctuations.

Source: Kenanga Research - 28 Aug 2015