Review

• Maybank’s 9MFY19 net profit declined by 0.7% YoY, underpinned by 39.6% increase in net impairment losses. YTD net profit stood at RM5,749mn, accounting for 69% and 72% of ours and consensus full year estimates. ROE slipped to 10.1% (9MFY18: 10.8%), within lowered 2019 ROE target of between 10% and 10.5%.

• Amidst the challenging macro environment, 9MFY19 net operating income broadened by 5.3% YoY to RM18,248mn vs. RM17,329mn a year ago. Net fund based income (NII) - including Islamic Banking, widened 2.6% YoY and 8.5% QoQ.

• Total loans and advances continued to soften, rising at a slower pace of 3.4% YoY (vs. +4.6% YoY in 2QFY19), with growth mostly led by Malaysia (+5.3% YoY). Yearly loan growth in Singapore and Indonesia contracted by 0.1% and 1.7%, after growing by 2.3% and 6.1% respectively in the previous quarter.

• In Malaysia, Consumer Financial Services (+6.6% YoY) was the main driver for loans, thanks to healthy increases in mortgages, unit trust, auto finance and credit cards. SME and business banking also accelerated at a stronger pace of 5.4% (vs. +4.7% YoY in 2QFY19) due mostly to strong demand from the SME segment (+11.6% YoY). Loans outstanding in Corporate Global Banking recouped, rising 2% YoY as growth in the 2Q was impacted by some lumpy repayments.

• Total group deposits grew at a healthier pace of 5.5% YoY. Deposits in Malaysia accelerated by 7.5% YoY. Deposits accumulated from overseas operations broadened, but at a softer pace of 1.9%. On the back of stronger deposit growth, Maybank’s loans to deposit (LD) ratio slipped to 92.5% vs. 94.4% a year ago. QoQ, net interest margin (NIM) improved by 13 bps to 2.32% as Malaysia deposits were fully repriced post the OPR cut in May and on continued FD release in Indonesia. YTD, NIM stood at 2.27%, 6 bps lower compared to 2.33% in FY18.

• Meanwhile, the net fee based income jumped 12.5% YoY in 9MFY19, driven by net disposal gain in securities and MTM gains on lower bond yields. Nevertheless, commissions, service charges and fees declined by 4.5% YoY as higher commission income and underwriting fees were muted by declines in brokerage income and fees on loans.

• YoY, net impairment losses surged 39.6% YoY to RM2,025mn as compared to RM1,451mn in 9MFY18. The increase was driven by some asset quality weakness in business segments in Singapore and Indonesia. Sequentially, net impairment losses more than doubled to RM935mn (2QFY19: RM452mn). Exceeding management FY19 net off credit charge guidance of 40-45 bps, annualised net charge off rate stood at 50 bps (9MFY18: 41 bps).

• Meanwhile, total gross impaired loans (GIL) jumped to RM1,954mn compared to RM1,510mn in 9MFY18. The GIL ratio climbed to 2.67% from 2.62% in 2QFY19, but was of little changed YoY. The increase was due to increases in non-performing loans, which resulted in an 11 bps QoQ uptick in the NPL ratio. Impairments due to judgemental/obligatory triggers, on the other hand improved by 3 bps QoQ.

• By segment, the upticks in GIL were due to operations in Indonesia (+79 bps QoQ to 5.05%) and Singapore (+13 bps QoQ to 3.39%). Meanwhile, the GIL ratio in Malaysia improved by 4 bps to 2.07%. By sub-segment, we note some upticks in the: 1) mortgage book for Malaysia, Singapore and Indonesia, and 2) credit cards in Singapore. GIL for: 3) retail SME in Indonesia, Malaysia and Singapore, 4) business banking in Indonesia, and 5) corporate banking in Singapore and Indonesia, also saw some deterioration.

• The group’s cost to income (CTI) ratio climbed to 47.1% from 46.9% a year ago – within guidance of 47%. Total overhead expenses in 9MFY19 broadened by 5.5% YoY on the back a 6.9% increase in personnel costs. Elsewhere, marketing expenses jumped 12.4% YoY followed by establishment costs (+3.8% YoY).

• Elsewhere, the group’s CET1 and total capital ratio stood at 14.4% and 18.1% - after proposed full cash dividend. The liquidity coverage ratio (LCR) stood at 141.5% - comfortably above regulatory requirements.

Impact

• We lowered our FY19/20/21 projections by revising loan growth assumptions lower to 3.8%/4.3%/4.7% from 4.9%/5.2%/6.1% on the back of more easing envisaged. Additionally, we raised our credit charge assumptions to 49/47/47 bps from 46/43/42 bps. Taken together, we adjusted our FY19/20/21 net profit forecasts to RM7,942/8,085/8,393mn from RM8,287/8,468/8,823mn previously.

Outlook

• Overall outlook remains challenging. Ongoing trade tensions are expected to dampen growth prospects in Singapore. However, there are some prospects for growth coming from finance, business and tourism-related services. Additionally, management foresees rising demand from the reconfiguration of the supply chain from China to ASEAN.

• In Malaysia and Indonesia, loan growth could remain subdued arising from cautious business and consumer sentiments. Other downside risks include rising asset quality risks as well as further margin compression due to rate cuts as well as deposit competition.

Valuation

• Tweaking the risk free rate assumption to 3.6% from 4.0% in our Gordon Growth model, along with the downward revision to our earnings estimates, our implied PBV is maintained at around 1.24x. With that, we maintain Maybank’s TP at RM8.60 but upgrade Maybank from sell to HOLD, as the potential total upside has widened to >7%.

• 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 key operating markets.

Source: TA Research - 29 Nov 2019