While Maybank’s 6M18 results were within expectations, fund-based income was disappointing with Islamic income and fee-based income taking up the slack to support earnings. We slash our forward earnings estimates due to concerns on challenging loans growth and lower contribution from NOII. TP revised to RM10.00 but call maintained at MARKET PERFORM due to uncertainties ahead.

In line. 6M18 CNP of RM3.83b is in line, accounting for 48%/47% of our/market estimates. A DPS of 25.0 sen/share declared (within expectations).

Earnings supported by lower impairment allowances and strong NOII. 6M18 CNP was up by 14% driven primarily by drop in impairment allowances (-20.5% YoY). Top-line moderated to 3% YoY supported by Islamic banking income (12% YoY). NOII rebounded by 5% YoY boosted by strong contribution from insurance business (RM674m). Group loans growth was recorded at <5% (below guidance but within our expectations) with domestic loans of ~+6% surpassing domestic system loans of +5% YoY) but fall in NIM (-10bps vs. guidance expectations of 5bps enhancement) brought the fall in NII (-2% YoY). Asset quality was mixed as GIL rise 11bps to 2.6% but credit charge fell 13bps to 0.44% (within guidance).

QoQ, CNP was up by +5% as top-line was flat, higher impairment allowances (+14%) and a lower tax rate by 2ppts. Flattish top-line was supported by NOII (~4%) as NII (-2%) fell and soft contribution from Islamic banking. Rebound in group loans improved at +2% with NIM under pressure by 8bps to 2.3%. For the quarter, further weakness in asset quality as both GIL and credit charge rose by 27 and 5bps respectively.

Challenges ahead but a strategy in place. Despite uncertainties ahead, Maybank maintained its forecast for 2018 with; (i) a mid-single digit loans growth, (ii) credit charge of 40-45bps, (iii) CIR of 48% and (iv) ROE of ~11%. Although its loans growth target will be a challenge, it expects a pick-up in domestic corporate lending by 4Q18 while cooling property measures in Singapore expected to impact loans growth in 2H18. We are positive on stronger income from its insurance business duly supported by the expected robust consumer spending that will support its NOII. We expect NIM to stabilize ahead as management will reduce its strategy of shoring up its liquidity in 1H18. We also do not expect a significant uptick in credit cost ahead, as significant provisions were made in 1H18 with uptick in impaired loans in other sectors (excluding power) are relatively benign.

Lower earnings. We revised down our FY18E/FY19E earnings by 4%/2% to RM7.9b/8.2b on account of weak contribution from fee-based income. Our assumptions for FY18E/FY19E are: (i) loans to grow at 4.8%/4.9% (unchanged), (ii) compression in NIM by 2bps (from 5bps enhancement for FY18E but unchanged or flat for FY19E, and (iii) credit costs at 50bps (unchanged) and CIR at 48% (unchanged) for both financial years. We also reduced NOII growth by 7% for both financial years.

TP revised marginally but call maintained. Our TP is now at RM10.00 (from RM10.10 based on a blended FY19E PB/PE of 1.3x/13.2x (unchanged). Our valuation implies 0.5SD below the PB 5- year mean. We feel this is justifiable given the challenging loans and NOII growth. Dividend yield is still the most attractive at 6.0% and with potential total returns <9% we reiterate MARKET PERFORM.

Source: Kenanga Research - 03 Sep 2018