Maybank’s 1QFY17 core earnings improved by +19% YoY and within expectations due to lower impairment allowances. No dividend declared as expected. TP raised to RM9.50 after applying a higher PB due to better fundamentals ahead. Call revised upwards to MARKET PERFORM as potential returns looks attractive.

Boosted by lower impairment allowances. Maybank’s core net profit of RM1702.8m (+19.3% YoY) was in line with ours/consensus accounting for 26%/24% of full-year estimates. The improvement in earnings was primarily due to sharp fall in impairment allowances (- 37.3%) as topline growth was meagre at +3.0% YoY. Topline was subdued as fee based income fell 15.0% YoY offset by fund based income growth of +5.4% YoY and strong performance from Islamic banking income at +24.2% YoY. Fund based income was driven by higher loans growth (+10.1% YoY) and improved NIM by 9bps (vs our expectations of 4-6bps compression) due to low funding costs and improved CASA. Opex was up by +7.0% YoY due to admin & general expenses (+15.1% YoY) forcing cost-to-income ratio to deteriorate by 2ppts to 50.5% (vs. industry’s 46.3%) as opex outpaced topline. At the PBT level, Malaysia is still the biggest contributor at 69.5% but overseas contribution fell by 3ppts to 30.5% from 1Q16 as Indonesia’s contribution fell 60bps to 8.7% while Singapore’s contribution improved by 40bps to 9.0%.

Loans (exceeded expectations) grew at +10.0% YoY driven by mortgages (+9.1% YoY) and SME’s (+11.2% YoY). On a geographical basis, loans were driven by domestic demand at +7.2% YoY (vs. domestic industry’s +6.0% YoY) with expansion in Singapore (+6.4% YoY) and Indonesia (+7% YoY). Deposits were slower than loans at +4.5% YoY with CASA faster than deposits at +16.3% YoY, prompting higher CASA ratio, which rose by 4ppts to 35.4%. Deposits were driven by domestic, growing at +2.8% YoY (vs. domestic industry’s +3.2% YoY), Indonesia (+2.5% YoY), but Singapore fell by 4.6% YoY. As loans outpaced deposits, loan-to-deposit ratio (LDR) surge by 5ppts to 94.7%. Asset quality was mixed as gross impaired loans (GIL) increased by 29bps to 2.4% but credit charge fell by 23bps to 0.32%.

Cautiously treading ahead. Despite the better than expected loans growth, management is still treading cautious ahead. However, management sees positive economic fundamentals ahead especially from Indonesia and Singapore. We are cautiously optimistic with the pickup on loans on the back of improved business demand. While NIM improved tremendously we caution on the uptick as compression will likely occur ahead along with the likely pickup in deposit taking activities when credit demand picks up.

Forecasts earnings revised slightly for FY18E. Our forecast earnings estimate for FY17E is maintained as reported earnings are within expectations thus far, but FY18E revised upwards by 9% to RM6,701m on the prospect of improved economic fundamentals across the home markets. TP revised upwards to RM9.50 (from RM9.17 previously) based on a FY18E 1.27x PB (from 1.23x FY18E 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 7.5%, (ii) FY18E ROE of 8.8% (8.5% previously), and (iii) terminal growth rate of 2.5% (unchanged). With a potential return of >7% we upgrade Maybank to MARKET PERFORM.

Source: Kenanga Research - 26 May 2017