We gathered from our recent meeting with Maybank that asset quality has been stable - positive but pre-emptive provisions will continue to be booked in to build up loan loss reserves. At this stage, the answers to questions such as peak impaired loans and adequacy of pre-emptive provisions, among others, remain elusive. We revised our FY20E/FY21E net profit by -7%/+1% mainly as we raised our two-year cumulative credit cost forecast to 160bps (from 150bps), and lowered FY20E DPS to 21.5 sen (from 38.5 sen) to bring our payout assumption in line with the range used for peers (up to 40%). Trading at FY21E PER of 11.2x and PBV of 0.9x, its valuations look fair. MARKET PERFORM retained with lowered RM7.70 TP.

We met up with Maybank recently and set out below the salient points from the meeting.

Pockets of growth opportunities. Given the current environment, Maybank is, understandably, more focused on preserving asset quality rather than growth. In any case, demand, especially from the corporate segment, has also been muted due to the uncertain outlook. That said, Maybank still sees pockets of opportunity for growth coming mainly from the domestic operations, namely retail and the SME (SRF and other SME lending programmes) segments.

Update on target assistance. Similar to most of the other banks, the vulnerable segment was Maybank’s main focus when it was reaching out to borrowers. The vulnerable segment includes those in the low income group as well as sectors that have been most impacted by the pandemic. Management had mentioned in Aug that these sectors accounted for around 7% of loans. Unfortunately, no figures were shared at this juncture as to the take-up rate, apart from it being lower than expected (more details to be shared during the 3QCY20 results briefing). That said, management did highlight that R&R activities will still continue and thus, the take-up rate would rise over time.

Asset quality update. Recall Maybank made RM1b in management overlay in 1HFY20, the bulk of which relates to several specific accounts. We understand that the pre-emptive provisions remain pre- emptive, i.e. the allowances have not “crystalised” as the loans have not deteriorated at this juncture. In fact, we were made to understand that overall asset quality has largely been stable. While the stability of asset quality thus far is a positive, Maybank will continue booking in pre-emptive provisions and build up its loan loss reserves (2QCY20 LLC: 83%; LLC + regulatory reserves: 99%). For now, management maintained their 2020E credit charge guidance of 75-100bps (1HFY20: 104bps, annualised). Following on from the above and the 1HFY20 results, we have revised up our FY20E credit cost assumption to 93bps from 80bps but tweaked down FY21E charge-off assumption to 67bps from 70bps. All-in, we now forecast a two-year (FY20-21) credit cost of 160bps from 150bps.

Dividend – Not much guidance was provided on this front, but management did say that assuming a similar payout ratio to peers (c. 30%), and after taking into consideration the outlook and capital plans, among others, an all cash dividend is a possibility. We are also updating our FY20E dividend payout assumption with a downward revision to 40% from 70% to be in line with the range assumed for other banks. With the lowered payout, we assume an all-cash dividend (vs DRP previously). Our FY21E payout assumption of 70% is unchanged. Overall, our FY20E/FY21E DPS have been revised to 21.5 sen/41.5 sen from 38.5 sen/39.5 sen.

Forecasts. The above changes coupled with some fine-tuning result in FY20E/FY21E net profit being revised by -7%/+1%, respectively.

MARKET PERFORM maintained with revised TP of RM7.70 (from RM7.85) post the earnings revisions. Our TP is based on a GGM- derived target FY21E PBV of 0.98x. While visibility on asset quality is still hazy and its higher exposure to the corporate segment puts the group at risk to potential chunky defaults and provisions, we are positive with respect to Maybank’s ongoing efforts to front-load its loan provisions as this puts the group on a firmer recovery path.

Source: Kenanga Research - 21 Oct 2020