Coming from a recent management meeting, we revised slightly our conservative FY18E/FY19E earnings with a slightly lower TP as we ascribed a lower PBV on challenging loans and fee-based income ahead. Even so, as valuations are attractive with a compelling dividend yield, we reiterate OUTPERFORM.

Softer loans growth. We understand that overall group loans for 9M18 will likely come below the system. Recap system’s loans for Sep ended +5.7% YoY (annualized at +5.6% YoY) with the group’s loans in 1H18 ending at +4.6% YoY. The Group’s Community Financial Services (CFS) which contributed >55% of total loans (and covers consumers, retail SME and Business Banking) are expected to stay resilient. Corporate lending remains under pressure and with internal and external headwinds pointing to a slowdown ahead with challenging growth likely persisting into FY19. In terms of portfolio, CFS contributes 70% of domestic loans followed by Global Banking (GB) at 30%, with Singapore portfolio comprising 45% of GB and remainder CFS while Indonesia has 75% CFS and 25% GB. The bulk of the Group loans come from the domestic market (59%), with Singapore making up 26% while Indonesia contributed 7% as of 1H18.

Top-line to be affected by fee and fund-based income. We expect the Group’s upcoming 3Q NII and NOII to be soft from weak NIM (YoY compressing but improving QoQ due to the release of expensive FDs) and volatile capital markets activities. While the Group complied with its NSFR requirements early, the extension of NSFR as announced by BNM recently will give a breather to most banks as it sources for cheaper funding but this is immaterial to Maybank as its CASA ratio has always been >35% above the industry average of ~31%. We understand also that asset quality is stable in 3Q (with no major deterioration), with credit costs likely at the same level in 1H18.

Moving forward into 2019, we view the key driver for its loans growth will be from consumer lending. The economy is expected to be stable with risks of unemployment low thus Maybank will continue to have a higher risk appetite from households. With OPR expected to be stable throughout 2019 coupled with stable employment, risk of deteriorating asset quality is benign, supporting the appetite for higher exposure in households.

Slight revision in earnings. Our FY18E/19E earnings are tweaked slightly by -1%/1% at RM7.5b/8.2b as we view our assumptions as duly conservative: (i) loans to grow at 4.8%/4.9% (unchanged), (ii) compression in NIM by 3bps for FY18E, flat for FY19E (both unchanged), and (iii) credit costs at 50bps/45bps (unchanged) for FY18E/FY19E and CIR at 48% (unchanged) for both financial years. For NOII, we factored in a 3%/6% growth (previously 5%/6%) for FY18E/FY19E on strong performance from its insurance business due to lower claims (~78% vs FY17: 92% vs 1H18: ~78%) offsetting weak fee and investment income.

TP revised marginally but call maintained. Our TP is now at RM9.75 (lowered from RM10.00) based on a blended FY19E PB/PE of 1.23x/13.0x (from 1.3x/13.2x previously). Our valuation implies 1.0SD below the PB 5-year mean. We feel this is justifiable given that the stock has been trading in the last 12 months at a PBV between its 5- year average to -1SD given the challenging loans and NOII growth. At current price, dividend yield is still the most attractive in our banking universe at >6.0%, and with potential total returns ~11% we reiterate OUTPERFORM.

Source: Kenanga Research - 09 Nov 2018