PT MAYBANK Indonesia (Maybank Indonesia) posted 6M18 net profit of IDR933b (-7% YoY) dragged by weak fee-based income. No dividends announced as expected. Earnings forecasts for the Maybank Group are unchanged pending its upcoming 2Q18 results. We, however, reduced our TP to RM10.10 (from RM10.50 previously) pegging it to a lower PB due to concerns over challenging loans and fee-based income growth. Downgrade to MARKET PERFROM.

Weak earnings as top-line slides. YoY, 6M18 core net profit (CNP) of IDR932b fell 7% dragged by weak top-line despite impairment allowances falling by 22% to IDR650b. Weak top-line (-6%) was dragged by fee-based income (-29%) underpinned by weak other operating income which fell 28%. Fund-based income performed moderately (+3% YoY) despite resurgence in loans (+4%) (vs. our expectations of ~+4%) as NIMs fell by 4bps to 5.2%. On a positive note, asset quality improved as GIL fell 84bps to 2.4% with credit costs on a similar trend, falling 37bps to 1.16%.

QoQ, earnings improved slightly (+1%) as weak fee-based income (- 4%) mitigated top-line performance of +5%. Better loan performance (+4%) and improved NIM by 41bps to 5.4% drove fund-based income by +8%. However, impairment allowances surged by 56% mitigating operating income growth to 1%. Asset quality was mixed as GIL fell 65bps to 2.4% but credit charge surged 49bps to 1.4%.

Outlook. Loans grew within expectation and we do not see significant changes for loans driver, which is mainly driven by consumer banking (42% contribution to total loans vs. 1Q18 of 41%). The other major loans segments (consumer banking, SMME, commercial high-end and corporate banking) saw rebound from 1Q but risk of derailment in corporate and SMME segments remains a concern, as the Indonesian Presidential elections heats up in the coming months coupled with the on-going global trade friction.

No change in Group forecasts for now pending 2Q18 results at the end of the month. Historically, Maybank Indonesia’s contribution has been small, <10%, (FY17 and 1Q18 at <9% and ~6% respectively). We, however, expect Maybank Indonesia contribution to Group PBT for 2Q18 to be lower assuming that other markets performed better as expected.

Valuation and call revised downwards. We revised our TP downwards to RM10.10 (from TP10.50) based on a blended FY19E PB/PE of 1.3x/12.0x (previously 1.4x/12.4x). Our valuation implies 1SD below the PB/PE 5-year mean. We feel this is justifiable given the challenging loans and fee-based income growth arising from the uncertainty of the on-going trade friction and uncertainties in the domestic economy’s direction in 2H18. Potential share price upside is limited (at ~3%) but coupled with compelling dividend yield of ~6%, this gives the stock a potential return of ~9%. Hence, downgrade to MARKET PERFORM.

Risks to our call are: (i) constricting margins, (ii) higher-than-expected loans and deposits growth rates, (iii) worse-than-expected deterioration in asset quality, (iv) further slowdown in capital market activities, and (v) adverse currency fluctuations.

Source: Kenanga Research - 01 Aug 2018