12M16 core earnings of RM6,743m exceeded expectations, accounting for 110%/109% OF ours/market estimates. Fullyear dividend declared for the year was at 52.0 sen/share (exceeded). Our TP is raised to RM8.70 as operational efficiency will mitigate subdued loans. As environment is still challenging we maintain MARKET PERFORM.

Management’s focus on selective asset growth and operational efficiency mitigated slowdown in fund-based income. 12M16 core net profit (CNP) of RM6,742.9m (-1.4% YoY) exceeded our/market estimates accounting for 110%/109% of our/consensus estimates. Fall in bottom-line was mitigated by lower tax rate (21.3% vs FY15: 23.7%) despite higher impairments (+49.8% YoY). Top-line revenue of +4.8% YoY was broadly healthy with Net Interest Income (NII) at +4.1%, Islamic Banking income (+5.4%) and Non-Interest Income (NOII) at +5.2%. NIMs compression was at 6bps (vs. our and management’s expectations of under 10bps). The lower-than-expected compression was attributed to efficient funding where CASA ratio to Deposits improved by 2ppts to 34.3% whilst Fixed Deposits declined by 5ppts to 55.9%.

Loans were slower at +5.7% YoY (vs FY15: +12.3% YoY) vs. our expectations of +3%, management’s guidance of 3-4% and industry’s +5.3%. Deposits growth of +5.2% was above our expectations of +4% but higher than industry’s +1.5%. With both loans and deposits achieving similar traction, loan-to-deposit ratio (LDR) rose marginally by 50bbps to 93.2%. Opex surged slightly by 2.8% (led by admin. & general expenses) Cost to Income ratio (CIR) improved, falling by 90bps to 47.5% (vs. industry’s 48.9%). Asset quality deteriorated by 42bps to 2.3% with credit costs surging by 14bps to 0.46% (vs. our expectations and management’s guidance of 50-60bps). ROE of 10.4% was within management’s target of 10-11%% (but above our target of 9-10%.

Cautious ahead. With the view of muted loans growth ahead, potential competitive deposits ahead and concerns over further asset deterioration, income growth will focus on fee-based income supported by infra lending and cross selling initiatives throughout ASEAN. We expect Maybank to proactively manage its NIMs (via enhancing CASA) as it sees competition for deposits ahead. Taking a conservative stance, management is expecting a slight uptick in credit costs. Management guided for a conservative set of numbers FY17; (i) loans growth (6-7%) with deposits similar traction, (ii) ROE (10-11%), (iii) NIMs compressing by another 5-10bps, and (iv) credit costs around 50bps. The Group’s focus on building its CASA coupled with the expulsion of higher cost of funds will alleviate NIMs going forward in our view as credit costs could be higher than guided as preparation for MFRS9.

Forecasts earnings revised. With revised assumptions, our FY17 forecast earnings are raised slightly by 4% to RM6,636m and we introduce our FY18 earnings where earnings are expected to decline further due to the impact of MFRS9.

TP raised with a MARKET PERFORM call. We raised our TP to RM8.70 (from RM8.04 previously) implying potential 4% upside. This is based on a 1.16x P/B FY17E (from 1.08x FY17E P/B). The higher P/B multiple is to reflect higher growth and stronger ROE generation moving forward. Assumptions adopted in our GGM-TP are; (i) COE of 8.3% (previously 8.6%, (ii) FY17E ROE of 9.3% previously (9.1% previously), and (iii) terminal growth rate of 2.5% (unchanged). Maintained at MARKET PERFORM.

Source: Kenanga Research - 24 Feb 2017