We maintain our OP call but lower our GGM-derived PBV TP to RM10.40 (COE: 9.7%, TG: 3.3%, ROE: 12.0%) having incorporated lower inputs per MAYBANK’s new guidance. Post meeting, we are still assured by the long-term viability of group operations and market standing. Its recent M25+ updates focus on building a more sustainable foundation that could further embolden the stock as a solid long-term yield provider, albeit with more modest ROE readings. MAYBANK is still one of our 4QCY22 Top Picks.

Key takeaways from our recent meeting with the group are as follows:

- Provisions well grounded. Recap that the group made a heavy one-off loan provision during 2QFY22 in relation to specific leisure and O&G accounts, leading to total management overlays of RM1.73b. For the time being, the group will remain prudent with its provisions management as the ongoing interest rate upcycle may trigger repayment issues in the subsequent periods. Threats may persist amongst the lower income bracket, although we do not believe implications from here to be significant. That said, the healthier economic landscape would likely allow the group to keep its 40-50bps credit cost guidance for FY22 with materialising recoveries and control measures possibly enabling a 30 bps exposure for FY25.

- Rising rates still a benefit. Amongst its peers, MAYBANK commands the highest fixed rate loans proportion (27% vs. average 17%), which is attributed to its strong auto financing presence in Malaysia and fixed rate mortgage facilities in Indonesia. The majority of these accounts were captured pre-pandemic and hence should not be stretching margins (i.e. diminishing benefit as opposed to expanding losses).

- On the deposits front, the group also possess one of the highest CASA ratios (44%) which it anticipates progressive migration towards short-term fixed deposit products. However, the group may not be overly aggressive in price matching strategies, likely awaiting rates to stabilise. Though competition here is rising, the group’s leading market share and brand could likely keep its position intact.

- 2-3x topline CAGR (FY21-25) to be driven organically. To achieve its updated M25+ growth target, the group seeks to employ heavier technology spend to build more engaging capabilities. The group opines that acquisitions for inorganic growth are not likely a priority as more sustainable results could be delivered with stronger in-house resources. However, this could entail some ROE pressure in the near-term in favour of more sustainable performances, resulting in the group trimming its FY25 ROE guidance to 11-12% from 13-15%. On the flipside, strategies to boost regional presence are unlikely to see regulatory challenges.

Forecasts. Post updates, we tone down our FY23F earnings by 5% as we factor in greater digital investments.

Maintain OUTPERFORM but with a lower TP of RM10.40 (from RM11.05). In addition to the lower earnings, we also revised our GGM-derived PBV to 1.36x (from 1.43x) owing to slightly lower ROE inputs at 12.0% from 12.5%. While we had previously imputed lower-than-guided ROE (13-15%), we believe the more conservative range could instil greater confidence for delivery, hence our applied 12%. Other GGM inputs (COE: 9.7%, TG: 3.3%) are unchanged.

Despite the lower TP, we still firmly believe that MAYBANK could provide the most sustainable returns via its consistently leading dividend yields (7-8%). This is further secured by the group’s long-term vision to ensure operational sustainability remains in check and affirms its leading position in the market. MAYBANK is one of our 4QCY22 Top Picks.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) slowdown in capital market activities, (v) unfavourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 2 Nov 2022