MAYBANK’s 3M19 are within expectations despite lower earnings due to unexpected higher impairments. Asset quality stayed stable and comfortable with impairments expected to remain within guidance. TP raised to RM10.35 as we roll over to FY20 and reiterate our OUTPERFROM call on account of undemanding valuations and attractive dividend yield.

In line despite lower earnings. 3M19 CNP of RM1.81b came within our/market expectations, accounting for 22% of both our and market estimates. No dividend declared as expected.

Higher provisioning dragged earnings. YoY, CNP of RM1,809m fell 3% as top-line was soft (grew <1% to RM5,860m) with higher impairments (+18% to RM604m). While NII fell 2%, Islamic banking continued to grow (+11%) as Islamic financing outpaced conventional loans by 380bps to +7%. NOII (-3%) was dragged by higher insurance claims & commission fee mitigated by rebound in its investment & trading income to RM477m. Group loans growth was wihin expexpectations 4.8% mitigated by a soft domestic (+3.8% vs system’s +4.9%) with Indonesia gaining traction by 4ppts to +11.3% while Singapore moderated by 110bps to +3.4%. NIM (-8bps was below guidance (3 of 3-5s compression) due to higher traction in FDs (at +8% vs CASA 1%). CIR of 48% was in line with estimates/guidance of 47% vs industry of 48% on higher opex mainly due to surge in personnel costs (+6%). GIL saw an 11bps uptick mainly from 26bps uptick in R&R and Performing loans impaired due to Judgement while NPL saw improvement (-15bps) to 1.72%. Credit cost was above guidance (40(of 40bps) 47bps due to extra provisioning of existing impairments.

QoQ, CNP fell (-22%) dragged by top-line (-7%) and impairment allowances (>100%). Weak top-line was exacerbated by weak NOII (+17%) compounded by weak abysmal contribution from investment & trading income of RM9m (vs 4Q18: RM265m). Loans were flat with NIM falling 8bps. Slight uptick in GIL (+7bps) was seen due to uptick in R&R and Performing loans impaired due to Judgement. Due to higher impairments, credit loss jumped by 41bps to 0.47%.

Conservative assumptions maintained. Going forward, we expect NIM to prevail as guided. We do not expect a repeat of the intensive FD taking (especially from Indonesia given that the Presidential election is over). We understand from management that issue from a particular overseas account is likely to be settled by 2019; hence, no change in credit costs guidance. We maintain our conservative assumptions; (i) ROE at ~10.5%, (ii) CIR at 47%, (iii) NIM compression of 5bps (from - 3bps), (iv) credit costs at 40bps, (v) loans growth <5%, and (vi) flat NOII.

Earnings forecasts. Our FY19E earnings are lowered slightly on account of higher NIM compression.

TP raised and Call maintained. Our TP is now raised to RM10.35 (from RM10.20) based on a target PBV of 1.28x (implying a 0.8SD below mean) as we roll over to FY20E numbers. The lower mean is to reflect the on-going uncertainties prevailing domestically and externally, coupled with on-going issue from an overseas account. We expect overall asset quality to remain stable ahead especially domestically; hence, a higher BV/share (+9%) is anticipated ahead. As valuations are undemanding coupled with dividend yield that is the most attractive in our banking universe at >6.0%; we reiterate OUTPERFORM.

Risks to our call are: (i) constricting margins, (ii) lower-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 - 31 May 2019