Review

• Maybank posted better 4Q results after dismal 1H16 performance. Post the downward revision to our estimates in 2Q, YTD net profit of RM6.7bn now represents 110% and 109% of ours and consensus full year estimates. The improvement came from lower-than-expected allowances.

• Versus 3Q16, PBT surged by 31.5% QoQ mostly due to a combination of higher income and lower overhead expenses. Muting the impact was the RM293.7mn increase in allowances during the quarter.

• The net charge off rate climbed to 62 bps from 41 bps a year ago. Gross impaired loans (GIL) ratio deteriorated, rising YoY and QoQ to 2.28% on the back of increases in NPLs, R&R loans, and performing loans impaired due to judgmental/ obligatory triggers in all key geographic markets. The loan loss coverage stood unchanged at 72%. The watchlist for Maybank’s borrowers with O&G related exposure widened to 42% from 40% in 3Q and 21% in 2Q.

• From a year ago, 9M16 PBT declined by 3.4% YoY. Operating income broadened by 4.8% YoY, making up 100% of our full year forecast. Maybank’s weaker profit was driven by higher net impairment losses, which had risen to RM3.02bn from RM2.01bn a year ago.

• Including Islamic Banking, net fund based income advanced by 5.2% YoY to RM15.3bn – anchored by a growth of 10.8% in Group Community Financial Services (CFS) and higher YoY contributions from Group Investment Banking and Group Insurance and Takaful.

• Loans for the group advanced by 5.7%. By geography, advances grew at robust pace in Indonesia (+8.7% YoY). In Malaysia, growth paced up in the 2H to expand by 6.3% YoY. Similarly, despite the challenging market environment, loans and advances in Singapore broadened by 4.5% YoY.

• Total group deposits accelerated in tandem with loans, rising 5.2% YoY. Respectively, deposits in Malaysia widened by 3.1% YoY while Singapore and Indonesia broadened by 4.4% and 2.9% YoY. Maybank’s loans to deposit (LD) ratio rose to 93.2% (FY15: 92.7%). Meanwhile, net interest margins (NIM) dipped to 2.27% from 2.31% in FY15, attributed to increased competition driving loan yields lower, higher COF and impact from the OPR cut in July.

• Net fee based income climbed 4% YoY to RM6.96bn due to higher investment and trading income and net earned insurance premiums. Maybank reported MTM gains on securities and derivatives totalling RM170mn (vs. loss of RM81.9mn a year ago) while trading income was boosted by gains on disposal of financial investments available-for-sale amounting to RM1.04bn (FY15: RM353.9mn). Fee income however, remained soft - falling 4.5% YoY attributed to decreases in underwriting fees, brokerage income and fees on loans.

• Overhead expenses accelerated by a modest pace of 2.8% YoY to RM10.6bn as higher establishment costs (+9.7% YoY) and administration & general expenses (+15.0% YoY) was offset by contractions in personnel costs (- 2.0% YoY) and marketing expenses (-14.0% YoY). On the back of positive JAWS, Maybank’s cost to income ratio improved by almost a notch to 47.3% from 48.2% a year ago.

• Elsewhere, its CET1 and total capital ratio stood at 13.6% and 18.9%. Proposing a final dividend of 35 sen, total DPS for FY16 will amount to 52 sen (FY15: 54 sen). This represents a payout of 78%.

Impact

• Incorporating the FY16 results, we tweaked our FY17 and FY18 net profit forecast to RM7,517.4mn and RM8,440.7mn. We forecast FY19 net profit to increase by 7.3% to RM9,054.3mn.

Outlook

• Management remains cautious of the loans outlook in Malaysia and Singapore due to weak demand and banks remaining selective in approving loans. In Malaysia, competition for deposits will remain keen. NIM could compress by only 5 bps in 2017 as decreases in Malaysia’s NIM is offset by a more stable margin outlook in Singapore.

• Management also expects potentially further asset quality deterioration in Singapore should the O&G and SME weakness persist. In Malaysia, credit cost uptick can be expected on ongoing NPL issues and downside risk emerges from new global macroeconomic headwinds. Sectors which may pose asset quality risks include steel manufacturing and real estate (in particular shopping malls and office space).

• Management appears to have a more positive outlook in Indonesia, noting the tax amnesty programme and fiscal spending on infrastructure projects could support economic growth and mitigate downside risk to the Rupiah.

• Revealing FY17 targets, management foresees: 1) loans and deposit growth of 6-7%, and 2) ROE of between 10.0% and 11.0%. Credit charge could remain elevated at between 45 and 55 bps.

Valuation and recommendation

• We raise TP to RM8.60 from RM8.00 on the back of the slight upward revision to our earnings estimates. This translates to a reasonable implied FY17e PBV of 1.16x. The industry is currently trading at average PBV of 1.14x. With that, we upgrade Maybank from sell to HOLD.

• Key upside/downside risks to our fair value include: 1) solid improvement in overseas operations, 2) potentially stronger earnings from cross border internal strategies within its regional operations, 3) better contributions from a pickup in capital market activities and the insurance and takaful business, 4) pricing pressure resulting in pressure on NIM, and 5) potential rise in defaults in the group’s O&G exposure in Singapore.

Source: TA Research - 24 Feb 2017