Maybank’s  9M14  results  missed our  and  consensus  estimates  as  NIM stayed  flat  QoQ  despite  the  OPR  hike,  while  non-interest  income  had another  soft  quarter.  Downgrade  to  NEUTRAL  with  a  revised  TP  of MYR10.20  (5.5% upside).  We lower  our FY14/FY15 net profit projections by  5%/9%  respectively.  The  sector  is  facing  headwinds  (eg  tightening liquidity, weak capital markets) which may extend into 2015.

3Q14 net profit of MYR1.6bn (-8% YoY, +2% QoQ)  was below our and consensus  expectations,  with  9M14  net  profit  of  MYR4.8bn  (-1%  YoY) accounting for 71%  of our  and consensus full-year estimates.  This was principally due to a lack of pickup in 3Q non-interest income (-3% QoQ, -28%  YoY),  partly  cushioned  by  lower-than-expected  9M  credit  cost  of 16bps (annualised) vs our earlier 30bps forecast.

Results highlights.  3Q14 positives were: i) net interest income chalked up healthy growth (+3% QoQ, +6% YoY) as loan growth picked up pace, and  ii)  credit  cost  stayed  low  at  7bps  (annualised)  despite  the deterioration  in  asset  quality.  Otherwise:  i)  3Q14  net  interest  margin (NIM) was flat QoQ (-13bps YoY) as higher average funding cost offset a mild expansion in asset yield, ii) non-interest income remained soft (-3% QoQ,  -28% YoY) due to unrealised marked-to-market losses and lower forex  income,  iii)  cost-to-income  ratio  deteriorated  to  50.3%  (2Q14: 46.6%; 3Q13: 46.1%) post-cost compression in 2Q14, and iv) absolute gross  impaired  loans  jumped  14%  QoQ  (+3%  YoY)  due  to  a  chunky corporate loan related to the construction sector. However, as the loan was  collateralised,  credit  charge  for  the  quarter  stayed  low.  Thus,  the gross  impaired  loan  ratio  rose  15bps  QoQ  to  1.65%  while  loan  loss coverage dropped to 95.4% from 107.7% at end-2Q14.

Loan  and  deposit  growth.  Loan  growth  picked  up  pace  (3Q14:  +3% QoQ  vs  2Q14:  +2%  QoQ),  thanks  to  domestic  corporate  and international  -  other  markets.  Annualised  loan  growth  of  10%  was  still below the 14% target. Deposit growth was 3% QoQ (11% annualised).

Capital.  As  at  end-September,  fully-loaded  group  and  bank  common equity tier 1 (CET-1) ratios were  10.6% (June: 10.7%)  and  9.5%  (June: 9.6%) respectively.

Forecasts and investment case.  We reduce  our FY14/FY15 net profit projections  by  5%/9%  respectively,  mainly  on  account  of  lower  noninterest income projections.  Our FY14F ROE of 13.2% is in line with the revised 2014 ROE target of 13-14%. We lower our GGM-derived TP  by 8% to MYR10.20 (from MYR11.00). Downgrade to NEUTRAL from Buy.

Other briefing highlights

2014  ROE  target  toned  down  to  13-14%.  Given  the  weak  9M14  results, management lowered its  2014 ROE target to 13-14% from 14%. Recall that the 14% ROE target was a revised target that was reduced during the 2Q14 results briefing from the earlier guidance of 15%.

More on chunky impaired loan. According to management,  the corporate involved is  in  the  shipbuilding  industry.  Maybank  believes  that  with  ongoing  contract  works and new contract flows, the outlook for the corporate should improve ahead. We  note  the  drop  in  loan  loss  coverage  this  quarter  to  95.4%  following  the classification  of  this  corporate  account  as  impaired.  This  is  the  lowest  level  since 1Q12. We believe Maybank  would be keen to build up the loan loss coverage again and hence, leave our 30bps credit cost for 2015 unchanged. For 2014, given the low credit cost of 16bps, we lower our 2014 estimate to 22bps from 30bps. Nevertheless, 
this still implies higher loan provisioning in 4Q14.

Update on Bank Internasional Indonesia (BII).  Management said the deterioration in  BII’s  asset  quality  was  due  to  the  corporate  segment,  specifically,  its  structured trade portfolio as well as corporates involved in the mining and oil and gas industries. BII  has  since  tightened  its  credit  approval  process  and  is  now  focusing  on  large corporates as well as state-owned enterprises (SOEs). At this juncture, management thinks BII’s  non-performing loans (NPLs)  would likely stabilise around current levels and does not foresee any further significant spikes ahead. While the recent  reduction in fuel subsidy could impact the retail   segment, Maybank believes the Government would also adjust the minimum wage level to help compensate for higher inflation. Management also thinks there is still scope to raise lending rates without adversely impacting asset quality.  

Still positive on  debt capital market (DCM)  activities ahead.  Maybank  remained positive with respect to its  local  DCM pipeline, citing demand from ongoing project works related to the Economic Transformation Programme.

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
We lower  our FY14/FY15 net profit projections by 5%/9% respectively, mainly after cutting FY14-15 non-interest income projections by 17% p.a . As mentioned above, we lower our credit cost estimate for FY14 to 22bps from 30bps, which helps cushion the weaker non-interest income for FY14.  We  also  introduce our FY16  numbers in this report.

Valuations and recommendation
Our  GGM-based  TP  is  lowered  to  MYR10.20  from  MYR11.00,  after  taking  into account the earnings revisions above and a roll forward in  valuations to 2015.  Our GGM assumptions include: i) COE of 9.8%,  ii)  12.8% ROE (previously  13.8%),  and iii)  5.5%  long-term  growth.  Our  TP  implies  2015  P/BV  of  1.7x,  below  its  10-year average  P/BV of  2.1x. We think this is fair as we project ROEs of  about  12.5-13.2% for FY14-16, below Maybank’s 10-year average ROE of 14.3%.

Overall, from the recent round of results, we believe the sector will continue to face headwinds in 2015 similar to this year. This includes continued NIM pressure on the back of tightening liquidity, poor visibility in both corporate lending and capital market activities as  well as  potential concerns over asset quality given rising interest rates and  inflation  (from  the  GST  implementation).  Apart  from  the  above,  Maybank  may face additional  headwinds such as  concerns over  its Indonesian operations as well as  potentially  higher  loan  provision  requirements  to  beef  up  coverage.  Thus,  we downgrade our recommendation to NEUTRAL from Buy. In mitigation, dividend yields remain attractive and should help provide downside support, in our view. 

Source: RHB