Review

• Maybank reported weaker 1HFY19 results. 1HFY19 net profit declined by 2.1% YoY, underpinned by unexciting income growth of 1.0% YoY, higher overhead allowances (+3.4% YoY) and a 2.5% increase in allowances for impairment losses. YTD net profit stood at RM3,750mn, accounting for 44% and 46% of ours and consensus full year estimates. ROE slipped to 9.8% (1HFY18: 10.8%), resulting in management revising its 2019 ROE target lower to between 10% and 10.5%.

• A full cash interim dividend of 25 sen (1HFY18: 25 sen) has been proposed. Dividend payout ratio stood at 74.9% (FY18: 77.3%). Elsewhere, the group’s CET1 and total capital ratio will stand at 14.23% and 17.98% - post the proposed dividend.

• Amidst the challenging macro environment, 1HFY19 total income broadened to RM11,750mn vs. RM11,635mn a year ago. Net fund based income (NII) - including Islamic Banking, widened 1.0% YoY but contracted by 3.3% QoQ. Total loans and advances climbed 4.6% YoY with all core markets posting positive yearly loan growth.

• In descending order, Indonesia’s loans accelerated by 6.1% YoY, followed by Malaysia (+4.2% YoY) and Singapore (+2.3% YoY). By segment, Consumer Financial Services (+6.5% YoY) was the main driver for loans, followed by SME and business banking (+4.7% YoY). Loans outstanding in Corporate Global Banking however, fell by 1.3% YoY due to repayments.

• Total group deposits grew 3.9% YoY. Deposits in Malaysia accelerated by 4.6% YoY. Deposits accumulated from overseas operations broadened, but at a softer pace of 2.7% as the banks released pricier deposits in Singapore and Indonesia. With that, Maybank’s loans to deposit (LD) ratio stood little changed at 93.4% vs 92.8% a year ago. QoQ, net interest margin (NIM) narrowed by 11 bps to 2.19% due to the OPR cut in Malaysia. Higher funding costs, mainly from Singapore and Indonesia also resulted in a 9 bps compression in NIM on a YoY basis.

• 1HFY19 fee income slipped 6.7% YoY due to lower commissions, fees from loans and brokerage income. Despite that, overall non-interest income (non-NII) surged 59% YoY. Cushioning the decline in fee income were sharply higher investment income and realised gain on derivatives. Additionally, the group recorded MTM gains of RM418.8mn in 1HFY19 vs. loss of RM343.3mn in the previous year.

• YoY, net impairment losses rose 2.5% YoY to RM1,089.6mn as compared to RM1,063.3mn in 1HFY18. The increase was mostly attributed to additional provisions made for some corporate accounts in 1Q. Sequentially, net impairment losses eased by close to 30% QoQ due to the high base effect in 1Q. Inching towards management FY19 net off credit charge guidance of 40 bps, annualised net charge off rate stood at 38 bps (1HFY18: 44 bps). Expecting potential asset quality weaknesses due to weak macro backdrop, management has raised net off credit charge guidance to between 40 and 45 bps.

• Meanwhile, total gross impaired loans (GIL) slipped to RM995.6mn compared to RM1,091.5mn in 1HFY18. Nevertheless, the GIL ratio deteriorating to 2.62% from 2.48% in 1QFY19, but was of little changed YoY. The increase was due to increases in non-performing loans, which resulted in a 29 bps uptick in the NPL ratio. Impairments due to judgemental/obligatory triggers, on the other hand improved by 16 bps YoY.

• By segment, the upticks in GIL were due to operations in Indonesia (+26 bps QoQ to 4.26%) and Malaysia (+25 bps QoQ to 2.11%). Meanwhile, the GIL ratio in Singapore improved by 23 bps to 3.26%. By sub-segment, we note some upticks in the: 1) mortgage book for Indonesia, and 2) auto financing for Malaysia. GIL for: 3) retail SME in Indonesia, Malaysia and Singapore, 4) business banking in Indonesia, and 5) corporate banking in Malaysia, also saw some deterioration.

• The group’s cost to income (CTI) ratio climbed to 47.9% from 46.7% a year ago. Total overhead expenses in 1HFY19 broadened by 3.4% YoY on the back a 6.4% increase in personnel costs. Elsewhere, marketing expenses jumped 10% YoY but admin & general expenses declined by 5.4% YoY.

Impact

• We lowered our FY19/20/21 projections by revising loan and fee income growth assumptions on the back of more easing envisaged from a prolonged trade war. We also foresee further contraction in NIM due to potential additional rate cuts. Taken together, we adjusted our FY19/20/21 net profit forecasts to RM8,287/8,468/8,823mn from RM 8,542/9,120/9,973mn previously.

Outlook

• Overall outlook remains challenging. Ongoing trade tensions are expected to dampen growth prospects in Singapore. Loan growth could ease arising from cautious business sentiment. In Malaysia and Indonesia, NIMs could come under further pressure due to recent rate cuts as well as competition from deposits. Asset quality risks have also escalated, leading to the increase in net credit charge off rate guidance for FY19. With that, management has also lowered its ROE guidance to between 10% and 10.5% from 11% previously.

Valuation

• Deriving an implied PBV of 1.23x based on the Gordon Growth Model, we adjust Maybank’s TP to RM8.60 from RM9.30, underpinned by the downward revision to our FY20 earnings forecast. With that, we downgrade Maybank from buy to HOLD, as the potential total upside has narrowed to between 7% and 12%.

• Key upside/downside risks to our fair value include: 1) stronger-thanexpected earnings from cross border internal strategies within its regional operations, 2) better contributions from a pickup in capital market activities, 3) improvement and less volatile income contribution from the insurance and takaful business, and 4) further defaults in the group’s exposure in Singapore and Indonesia.

Source: TA Research - 30 Aug 2019