While Maybank’s 1Q18 results were within expectations, fund-based income was disappointing with Islamic income and fee-based income supporting 1Q18 earnings. We, however, slash our forward earnings due to concerns on slower loans and overseas asset quality. TP revised to RM10.50 but call maintained at MARKET PERFORM due to uncertainty ahead.

Within expectations. 3M18 CNP of RM1.87b was within expectations accounting for 23.4%/22.8% of ours/consensus estimates. No dividend declared as expected as dividends are historically declared in the 2Q and 4Q.

Driven by tight opex and falling impairment allowances. 3M18 CNP improved by +9.9% YoY underpinned by flattish opex and falling impairment allowances (-6.1% YoY) while top-line improved at +5.4% YoY. Despite the improvement in top-line, fund-based income was disappointing falling by 0.5% YoY, but Islamic banking income and fee- based income registered double-digit growth of +11.0% and +14.0% YoY, respectively. Group loans growth was equally disappointing at +1.5% YoY (vs. guidance of mid-single digit and domestic system loans of +4.4% YoY), dragged by overseas loans. Supporting fund-based income was flattish NIM at 2.2%, below guidance/expectations of 5bps enhancement. Asset quality (GIL) was stable at 2.4%, and as expected credit costs fell 4bps to 0.46% (vs guidance/expectations of 40-45bps). With operational expenses contained, CIR fell by 2ppt to 47.7% (within guidance and on par with industry of 48% but below ours of 49%). No improvement QoQ, as CNP fell by 12% dragged by disappointing topline falling by 2.5%. Top-line was dragged by fee-based income falling double digit (-15%) mitigated by higher income from Islamic banking (+9%). Overall group loans were flattish but NIMs improved by 5bps. There was a slight deterioration in asset quality with a 3bps uptick GIL to 2.4% but credit charge was up by 26bps to 0.42% due to the implementation of MFRS9.

Uncertainty ahead. Despite the uncertainty in the business environment due to the recent GE14, management maintained its forecast for 2018 with; (i) loans at mid-single digit, and (ii) credit charge of 40-45bps, CIR of 48% and (iii) ROE of ~11%. Loans will still be driven by retail boosted by consumer spending in an expected environment of lower inflation and lower costs. We, however, expect slower loans ahead with the recent post GE14 developments with the potential uptick in credit costs due to concerns on overall asset quality, especially from overseas. We are positive on stronger income from its insurance business duly supported by the expected robust consumer spending.

Lower earnings. We revised down our FY18E/FY19E earnings by 1%/1.4% to RM7.9b/8.2b on account of lower loans and higher credit costs in FY18E and moderate loans, higher opex for FY19E.

TP revised but call maintained. Our TP is now at RM10.50 based a blended FY19E PB/PE of 1.4x/12.3x as we roll over our valuation to FY19. Our valuation implies 0.5SD below the PB/PE 5-year mean. We feel this is justifiable given the challenging loans growth prospect and risk in asset quality. The stock is looking attractive with the recent sharp retracement with potential total returns of ~11%, coupled with a superior dividend yield of 6% but since returns are just bordering into our OUTPERFORM definition coupled with uncertainty of asset quality and loans ahead we maintained MARKET PERFORM.

Source: Kenanga Research - 30 May 2018