Maybank’s 3Q13 results were within our and consensus expectations. Positive  highlights  include  strong  forex  gains,  improved  contribution from  insurance,  stable  NIM,  tight  cost  control  and  lower  loan impairment  allowances  sequentially.  Our  MYR11.40  FV  is  unchanged. However, valuations have become attractive  following the recent share price correction, prompting us to upgrade our call to BUY from Neutral.

• 3Q13 results  in line.  Maybank’s 3Q13 net profit of MYR1.75bn (+16% y-o-y; +11% q-o-q) was within our and consensus expectations,  despite 9M13 net profit of MYR4.8bn (+13% y-o-y) coming in 3% above our and consensus full-year estimates, when annualised. 9M13 forex gain stood at  MYR1.5bn  (9M12:  MYR509m)  as  Maybank  benefited  from  the appreciation  of  USD  vs  MYR  due  to  its  USD  net  asset  position. Depending on exchange rate movements ahead, such income could be volatile and thus, we are leaving our earnings forecasts unchanged.
• Results  highlights.  Maybank  enjoyed  another  quarter  of  strong  forex gains  (MYR891m  vs  2Q13:  MYR408m;  3Q12:  MYR61m).  While  such gains  may  be  volatile  ahead,  depending  on  forex  rate  movements,  we take  heart  that  contribution  from  insurance  tends  to  be  seasonally stronger in 4Q,  while improved  capital market activities should help lend support  to  non-interest  income.  In  addition,  net  interest  margin  (NIM) was  stable  q-o-q,  contribution  from  insurance  surged  (+114%  y-o-y; +610%  q-o-q),  while  productivity  improved  further  with  cost-to-income ratio  (CIR)  down  to  46.9%  (2Q13:  48.4%;  3Q12:  51.7%).  Loan impairment  allowances  were  also  lower  q -o-q  due  to  the  absence  of lumpy  provisioning for corporate loans made in 2Q13, as well as stable asset quality. Loan growth, however, trended below target.
• Forecasts. No changes to our earnings forecasts.
• Investment Case.  We maintain  our MYR11.40  FV  (15.0x  FY14F  EPS). Fundamentally,  our  view  that  Maybank  will  be  one  of  the  major beneficiaries of  the  Economic Transformation Programme (ETP)  has not changed.  However,  we  think  valuations  have  become  attractive  again following  the  4.5%  correction  in  share  price  since  its  2Q13  results  (vs+4.3%  for  the  FBM  KLCI).  We  also  note  that  Maybank’s  foreign shareholding level  of around 22.5%  is  down from a peak of around 26% at  end-May  2013.  Hence,  we  think  the  risk-reward  profile  is  tilting towards the positive again and upgrade our call to BUY from Neutral.

3Q13 results review
3Q13 results in line with expectations.  Maybank’s  3Q13 net profit of MYR1.75bn (+16% y-o-y; +11% q-o-q) was within our and consensus expectations, despite 9M13 net  profit  of  MYR4.8bn  (+13%  y-o-y)  coming  in  3%  above  our and  consensus fullyear  estimates,  when  annualised.  9M13  forex  gain  stood  at  MYR1.5bn  (9M12: MYR509m),  as Maybank benefited  from the appreciation of USD vs  MYR due to its USD  net  asset  position.  Depending  on  exchange  rate  movements  ahead,  such income could be volatile and thus, we are leaving our earnings forecasts unchanged.

Net interest income and forex gains underpin  income growth.  3Q13 net interest income rose  3% q-o-q (+7% y-o-y) on the back of decent loan growth (see below)and stable NIM. Average funding cost was up 8bps q-o-q,  but this was cushioned by higher  average asset yield (+7bps q-o-q)  and loan-to-deposit ratio (LDR) (88.2% vs. end-2Q13:  87.5%).  Y-o-y,  NIM  was  down  an  estimated  21bps  mainly  due  to  the dilution  in  average  asset  yield  (-19bps  y-o-y),  while  average  funding  cost  was  up 10bps y-o-y.  Meanwhile,  3Q13  non-interest income inched up 1% q-o-q (+28% y-oy). Similar to the previous quarter, Maybank benefited from  the appreciation of the USD (vs  MYR) as its net asset position in the greenback resulted  in  a stronger forex gain  of  MYR891m  (2Q13:  MYR408m;  3Q12:  MYR61m).  Possibly,  trading  and customer  flows  for  forex  also  improved  during  the  quarter.  Contribution  from insurance  was  up  significantly  (+114%  y-o-y;  +610%  q-o-q)  but  these  were  partly offset  by  higher  mark-to-market  (MTM)  losses  for  trading  securities  and  hedging derivatives  of  MYR506m  (2Q13:  MYR78m  loss;  3Q12:  MYR87m  gain).  Overall, operating income rose 2% q-o-q and 14% y-o-y.

Overheads largely under control, leading to positive jaws. Maybank continued to do  a  commendable  job  in  keeping  a  tight  rein  on  costs  (-1%  q-o-q;  +3%  y-o-y). Personnel cost (largest component of overheads) was down 4% q-o-q and flat y-o-y, while admin and general expenses fell 12% q-o-q and y-o-y. As such, 3Q13 cost-toincome ratio (CIR)  improved q-o-q  and  y-o-y  to  46.9% (2Q13: 48.4%;  3Q12: 51.7%) while pre-impairment profit was up a healthy 5% q-o-q and 25% y-o-y. Loan  impairment  allowances  down  sequentially  in  the  absence  of  lumpy provisioning.  3Q13  loan  impairment  allowances  fell  35%  q-o-q  mainly  due  to  the absence of lumpy allowances that were made for corporate accounts last quarter. Yo-y, loan impairment allowances soared 266% mainly on higher collective allowances (+250%  y-o-y).  On the whole, 3Q13 credit cost was lower 33bps vs 52bps in 2Q13 (3Q12:  10bps),  figures  annualised.  Management  did  not  think  there  were  any systemic asset quality issues at this stage  but with 9M13 credit cost (annualised) at 32bps, Maybank nudged up its  credit cost guidance for 2013 to 33-35bps from the earlier  guidance  and  our  assumption  of  30bps.  The  sequential  drop  in  loan impairment  allowances  helped  lift  q-o-q  net  profit  growth  to  11%  but  y-o-y,  growth was dampened to 16%.

Loan and deposit growth.  Loan growth  softened to +2.3% q-o-q (+12% y-o-y)  vs +3.1% q-o-q in  2Q13  (+10.1% y-o-y),  weighed by flat  domestic corporate loan book q-o-q  (due  to  repayments)  and  adverse  foreign  currency  translation  impact  from Indonesia (we estimate 100bps impact to q-o-q growth).  Annualised loan growth of 9.3%  was  still  trending  below  the  12%  target  but  close  to  our  10%  assumption, although management expects the gap to close further,  having seen strong requests for  corporate  loan drawdowns in 4Q.  On an annualised basis, domestic loan growth was 8.7% while growth overseas was 10.5%. Domestic consumer loan  growth was healthy  (+11.3%,  annualised),  thanks to mortgages, auto loans and ASB financing, while  the  small  and  medium  enterprise  (SME)  segment  (+9.2%,  annualised  –although from a smaller base) continued to reflect the fruits of the revamped retail SME  business  model.  Overseas  loan  growth  was  led  by  Hong  Kong  (+29%)  and China (+63%) thanks to trade financing and corporate loans, as well as Singapore (+11%).  We  do  note  that  the  Greater  China  loans  now  account  for  8.6%  of  its overseas loan book, as compared  to 6.7% two years ago.  Meanwhile, total deposits 
rose  11.8% (annualised) and 14.4% y-o-y,  with current account and savings account (CASA) and fixed deposit growth of 15.4% and 14.5% respectively.  With that, both LDR and CASA ratio  rose  q-o-q to 88.2% (end-June: 87.5%) and 36.1% (end-2Q13: 34.2%). 

Asset quality and capital ratios.  Absolute gross impaired loans was broadly stable sequentially (+0.6% q-o-q; +7.1% y-o-y),  but the gross and net impaired loan ratios saw  marginal  improvements  to  1.83%  (end-June:  1.86%)  and  1.06%  (end-June: 1.09%)  due  to  the  enlarged  loan  base.  Gross  impaired  loan  ratios  improved  for Malaysia and Singapore, but BII saw a rise in the ratio (2.13% vs. 1.81% at end-Jun ’13)  due  to  more  stringent  NPL  recognition  for  Syariah  loans.   Loan  loss  coverage (LLC)  also  improved  to  106.3%  from  103.5%  at  end-2Q13.  Finally,  Maybank disclosed fully-loaded group and bank  Common Equity Tier 1 (CET1) ratios of 9.86% and 8.38% respectively, assuming a dividend reinvestment rate of 85%.

Other briefing highlights
Maybank  retained  its  KPIs  for  this  year,  which  include  an  ROE  of  15%  and  loan growth of 12%.  The group  also see  an improvement in its  investment banking (IB)pipeline (especially IPOs) in 4Q, which would help support fee income. Despite the target to achieve 40% contribution from overseas by 2015, Maybank  is not  in  a  rush  to  do  any  deals.  Management  also  highlighted  that  raising  overseas contribution  may  not  necessarily  mean  expanding  into  new  countries  as  growing faster in existing overseas markets will also help to achieve the target.

Risks
The  risks  include:  i)  slower-than-expected  loan  growth,  ii)  weaker-than-expected NIMs,  iii)  weaker-than-expected capital market activities,  iv)  a  deterioration in asset quality,  v)  adverse  foreign  exchange  movements,  and  vi)  adverse  regulatory changes.

Forecasts
No changes to our earnings forecasts.

Valuations and recommendation
Our FV of MYR11.40 is unchanged. This is based on our sector benchmark 2014 P/E of  15.0x.  However,  we  are  upgrading  our  recommendation  to  BUY  from  Neutral. Since the announcement of its 2Q13 results, the stock has been  down 4.5% vs FBM KLCI’s  +4.3%  (2Q13  results  were  in  line  with  our  and  consensus  expectations). Following the correction, we think valuations have become attractive again and the risk-reward profile is tilting towards the positive, in our view. Fundamentally, we remain positive on the outlook for the domestic front,  thanks to the  emergence  of  a  new  investment  cycle.  The  group’s  strong  domestic  corporate presence means  Maybank will be one of the major beneficiaries of the rollout of the Economic Transformation Programme (ETP) projects.  Apart from that, the group  is also less vulnerable to  domestic  policy changes in  the property market sector  as it has  a  more  diversified  loan  book,  both  sectorial  and  geographical.  The  recent improvement  in  capital  market  activities  should  also  bode  well  for  earnings  and sentiment, given Maybank’s strong investment banking franchise.  Finally, Maybank’s foreign  shareholding  level is currently  around  22.5%,  ie  pre-general  election  levels and down from a peak of around 26% at end-May 2013. We believe the combination of:  i)  decent  valuations,  ii)  attractive  dividend  yields,  and  iii )  a  reduction  in  foreign shareholding level, means that  its  share price should hold up relatively better vs   that of its peers, when the US Fed begins tapering its quantitative easing.

Source: RHB