Maybank’s 1Q15 results met expectations, thanks to healthy net interest income growth as NIM was well managed. We keep our NEUTRAL call and MYR10.00 TP (10% upside). While Maybank’s earnings tend to be seasonally stronger in the coming quarters, potential dampeners we see include NIM pressure due to the need to lower the LD ratio and higher credit cost to raise loan loss coverage levels.

1Q15 net profit of MYR1.7bn (+6% YoY, -12% QoQ) was in line with our and consensus expectations, accounting for 24-25% of our and consensus full-year estimates.

Results highlights. The main positive was the healthy growth in net interest income (+9% QoQ, +11% YoY) on the back of 11bps QoQ (-8bps YoY) expansion in net interest margin (NIM). Healthy growth in its low-cost current account and savings account (CASA) deposits allowed Maybank to shed costlier deposits and lower its funding cost. Noninterest income was also up a healthy 18% Yo Y, thanks to stronger forex income. These, however, were partly offset by higher overheads (+15% YoY) on the back of higher personnel (partly driven by adjustments for collective agreements) and marketing expenses. Loan impairment allowances were also up 18% YoY on lower recoveries. QoQ, the drop in net profit was largely a reflection of seasonality.

• Loan and deposit growth. Loan growth started off the year on a softer footing with annualised growth of 8% (+14% YoY) slightly below the 9-10% target. Growth was driven by overseas markets (ex-Singapore and Indonesia). Domestic loan growth was 4% (annualised), led by community financial services on the back of pre-GST activities. Annualised deposit growth was 7% (+13% YoY) with growth driven by international markets. CASA deposit growth was healthy at 9% (annualised) or 12% YoY. Overall, group loan-to-deposit ratio stood at 92.2% (4Q14: 91.8%; 1Q14: 91%) while CASA ratio was 35.4% (4Q14: 35.2%; 1Q14: 35.8%).
• Asset quality. Absolute gross impaired loans ticked up 1% QoQ (+13% YoY) due to specific accounts in Indonesia and Singapore. Loan loss coverage eased further to 93.5% from 95.6% at end-2014 (1Q14: 107%).
• Capital. As at end-Mar, fully-loaded group and bank common equity Tier 1 ratios were 10.6% (Dec: 10.6%) and 9.4% (Dec: 9.2%) respectively.
• Forecasts and investment case. We have left our earnings forecasts unchanged. Maintain NEUTRAL and our MYR10.00 TP.

Briefing highlights 2015 headline KPIs and guidance retained for now. Maybank retained its headline key performance indicator (KPIs) for 2015, as well as its other guidance for now. These include: i) ROE of 13-14% (1Q15: 12.5%, annualised), ii) group loan growth of 9-10% (1Q15: 8.3%, annualised), and iii) group deposit growth of 9-10% (1Q15: 6.8%, annualised). Apart from that, management continued to guide for NIM compression of 8-10bps due to continued deposit cost pressure, non-interest income contribution of 33-35% as well as a more normalised credit cost of 30bps.

Although ROE, loan and deposit growth were trending below targets, Maybank highlighted that 1Q tends to be a seasonally slower period and was optimistic of a pickup in the quarters ahead. That said, management was also cognisant of the softer macro environment. This has impacted its global banking business in Malaysia and Indonesia while Singapore has seen a slowdown in corporate lending due to weaker trade-related financing and lower commodity prices. On the other hand, community financial services had done well in 1Q15 in the major markets – ieMalaysia (possibly some pre-GST spending activities, according to Maybank), Singapore (small and medium enterprises (SME), private wealth and mortgage) and Indonesia. While there could be some moderation in consumer spending activities post-GST implementation, 2Q15 consumer lending activities would be cushioned by the Hari Raya festivities.

Higher LD ratio but no issue in terms of LCR compliance. Maybank’s loan-todeposit (LD) ratio of 92.2% remained above the 85-90% comfort level, but management said its domestic and overseas operations met liquidity coverage requirements (based on transitional arrangements) of the various countries. Management continues to see funding cost pressures and said that it will remain disciplined in terms of pricing and selective in terms of the types of costlier deposits that it competes for. Nevertheless, management remains committed to lowering the LD ratio in the quarters ahead.

Restructured and rescheduled (R&R) loans. Maybank was still seeking clarification from Bank Negara (BNM) on the issue but does not expect the impact to be too significant. Incorporation in Singapore. No major update here as Maybank has not decided whether to opt for partial or full incorporation. Nevertheless, management guided a timeline of 2017 for incorporation.

No need for further capital raising beyond existing DRP. Maybank highlighted its operations in Myanmar (newly incorporated) and Indonesia as potential subsidiaries that require further capital injection ahead, but management believes the existing dividend reinvestment plan (DRP) is sufficient to help with its capital conservation requirements and does not foresee any further need to raise capital . Management has set in place internally to hold a capital buffer of 1-2%-pts above the minimum regulatory requirements.

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 change to our earnings forecasts.

Valuations and recommendation Our GGM-based TP of MYR10.00 is unchanged. Our GGM assumptions include: i) COE of 9.8%, ii) 12.5% ROE, and iii) 5.5% long-term growth. Our TP is based on a 2015 P/BV of 1.65x, below its 10-year average P/BV of 2.1x. We think this is fair as we project ROEs of about 12.2-12.7% for FY15-17, below Maybank’s 10-year average ROE of 14.3%.

Overall, Maybank has got off to a decent start for 2015, especially amid a slew of earnings disappointments reported by banking stocks for the 1Q15 reporting quarter. While Maybank’s earnings tend to be seasonally stronger ahead, we see the possibility that its bottomline growth could be dampened by, among others: i) NIM pressure. Assuming Maybank keeps to its plan to lower the LD ratio to <90%, deposit growth will need to outpace loan growth ahead, and this would put NIMs und er pressure; and ii) loan loss coverage ratio slid further to 93.5% as at end-Mar 2015 (end-2014: 95.6%). Maybank had previously said that it plans to rebuild coverage levels back to >100% this year. This would mean higher loan provisioning will be required ahead, unless there is a significant improvement in asset quality. No change to our NEUTRAL call on the stock.