On-going concerns on asset quality dented Maybank 1H16 performance with higher allowances for impairments and subdued loans growth. As economy in the ASEAN region remained challenging, we revised our earnings downwards with a lower TP but maintained our MARKET PERFORM call.

1H16 core net profit (CNP) of RM2,587m (-21.3% YoY) was below expectations accounting for 41%/40% of our/consensus estimates brought about by higher allowances for impairments (at RM2,060m) and subdued loans growth. A 20.0 sen DPS was declared (within our expectations of a full-year DPS of 43.0 sen). Loans growth was slower than expected at +4.3% YoY with NIM facing downward pressure due to falling yields. Surprisingly, deposit taking improved by double-digit due to improved CASA growth, especially from overseas operations. On a quarterly basis, CNP fell 18.7% QoQ attributed to higher impairments with NIM continuing to fall. On a brighter note, both loans and deposits rebounded for the quarter to 2.1% and 3.8%, respectively.

6M16 vs 6M15, YoY

• Compared to the previous corresponding period, top line growth was slower at +8.7% (6M15: +10.8%) driven by fund-based income where Net Interest Income (NII) and Islamic income grew +9.4% and +6.1% (6M15: +10.1% and +7.4%), respectively. Islamic banking income was supported by strong financing growth of +12.5% with NIMs up by 1bps to 1.85%. Non-interest income (NOII) was at +9.3% (6M15: +7.8) attributed to higher fee & trading income (+386% to RM993m) but negated by falling net insurance income (- RM166m).
• Annualised NIM fell by 5bps to 2.18% as falling lending yield (12bps) outpaced the fall in cost of funds (9bps).
• Cost Income Ratio (CIR) was down by 1ppts to 48.8% (below industry’s CIR of 49.7%) as opex was contained at +6.8% vs. total income growth of +8.7%. Falling marketing expenses (-22.4%) constrained opex costs but negated by higher establishment costs of +27.6%.
• At the PBT level, Malaysia is still the biggest contributor, accounting for 80.3% (6M15: 70.4%) followed by Singapore at 6.1% (6M15: 13.2%) and Indonesia at 9.2% (6M15: 2.0%).
• Loans were slower compared to the previous corresponding period at +4.3% (6M15: +15.6%) vs. our estimates of +8% and the industry average of +5.6%. Loans were driven by domestic demand at +3.9% with international loans at +4.3%. Domestic loans were driven by Business Banking & SME (+11.7%) and mortgage at (+11.0%). There was a marginal change in loans composition with Malaysia at 57.8% (6M15: 57.7%), Singapore at 25.1% (6M15: 24.6%) and Indonesia at 8.2% (6M15: 7.4%).
• Deposits performed better at +12.5% (6M15: 11.3%) with domestic deposits growing at +7.5% vs overseas deposits at +20.8%. Deposits were driven by FDs (+7.1) with CASA growing at 3.0%. Nevertheless, CASA ratio fell by 3ppts to 32.0%. With subdued loans growth, LDR fell 7ppts to 88.5% (vs. industry’s +87.5%).
• GIL was higher by 78bps to 2.34% (vs industry’s 1.66%). Asset deterioration was evident in both Malaysia (+40bps to 2.23%) and Singapore (+10bps to 1.28%) but Indonesia saw improving asset quality falling 22bps to 3.99%. Hence, credit charge was up 57bps to 0.91%. 10% of the allowance for impairment losses were for the single account in Singapore that recently went under judicial management.
• Loan loss coverage (LLC) fell 13ppts to 70.5% (vs. the industry average of 89.5%) but well within the 70% regulatory requirements. The lower LLC is taking account collateral values at hand (with a 72% open market value discount).
• Capital adequacy remained strong with CET1 and CAR improved 210bps and 340bps to 13.8% and 19.2%, and still above the regulatory requirements of 7% and 10.5%, respectively.
• Annualised ROE was at 8.4%. This is weaker than our forecast of 10.0% and management’s guidance of 10-11%.

2Q16 vs. 1Q1, QoQ

• CNP fell by 18.7% dragged by higher allowances for impairments at RM1,181m (+34%).
  Total income continued to decline for the third consecutive quarter falling marginally by 0.8% dragged by falling NII (-0.8%) and NOII (-5.4%) but negated by higher contribution from Islamic banking at +6.0%.
• NIMs fell by 4bps to 2.18% attributed to falling yields outpacing COF.
• CIR was a tad 50bps higher to 49.1% with opex well contained at +0.1%.
• Mirroring the YoY growth, deposits outpaced loans (+3.8% vs +2.1%) forcing further improvements in LDR by 140bs to 88.5%. CASA was almost flattish at 32.0%
• Asset quality continued to decline with GIL ratio up by 23bps to 2.34% and higher allowances for impairments led to higher credit charge by 26bps to 1.04%.

Management believes that 2H16 will continue to be challenging, thus the team remain focussed on: (i) selective asset growth, (ii) maintaining strong liquidity and capital positions, and (iii) emphasising on cost discipline and improving productivity. It sees muted loans growth in both Malaysia and Singapore but better prospect in Indonesia due to government infrastructure spending and rate cuts. Asset quality will continue to be challenging with further uptick in credit costs. However, with only 56% of impaired loans non-performing, management expects write-backs once the economy gathers pace.

Despite the challenging environment, management is keeping to its FY16 guidance; (i) ROE of between 11%-12%, (ii) 8%-9% loans growth, (iii) 11%-12% deposits growth, (iv) NIMs compression at 8-10bps, and (v) credit costs of between 40bps to 50bps.

However, we have revised some of our assumptions for FY16/17E; (i) loans growth at 5%/6%(from 8.0%/8.5%, (ii) deposits at 13%/7% (from 10.0%/10.4%), (iii) No change in NIMs 10bps compression in FY16/stabilizing in FY17), (iv) No change in credit charge at 0.55%/0.45%, (v) No change in CIR at 48% for both FY16/FY17, and (vi) ROE at 9.49%/9.48% (10.0%/10.1% previously).

Forecasts earnings revised. With the revised assumptions, our forecast earnings for FY16E/FY17E are toned down by 3%/4% to RM6,111m/RM6,647m.

TP reduced with a MARKET PERFORM call. Our TP is revised downwards to RM8.46 (from RM9.07 previously). This is based on a 1.13x P/B FY17 (from 1.2x FY17 P/B). The lower P/B multiple is to reflect slower growth and weaker ROE generation moving forward. Assumptions that adopted in our GGM-TP are: (i) COE of 8.7% (previously 8.6%, (ii) FY17E ROE of 9.5% previously (from FY16E ROE of 10.1%), and (iii) terminal growth rate of 2.5% (unchanged). We maintained our MARKET PERFORM call.

Downside risks to our call are: (i) lower than expected margin squeeze, (ii) higher-than-expected loans and deposits growth, (iii) worsethan- expected deterioration in asset quality, (iv) further slowdown in capital market activities, and (v) adverse currency fluctuations

Source: Kenanga Research - 26 Aug 2016