This article first appeared in The Edge Financial Daily on November 12, 2018

Malayan Banking Bhd
(Nov 9, RM9.29)
Maintain outperform with a lower target price (TP) of RM9.75: Coming back from a recent Malayan Banking Bhd’s (Maybank) management meeting, we have ascribed a lower price-to-book value (PBV) on challenging loans and fee-based income ahead. Even so, valuations are attractive with a compelling dividend yield.

Corporate lending remains under pressure and with internal and external headwinds pointing to a slowdown ahead with challenging growth likely persisting into the financial year ending Dec 31, 2019 (FY19). In terms of the portfolio, CFS contribute 70% of domestic loans followed by global banking (GB) at 30%, with the Singapore portfolio comprising 45% of GB and the remainder being CFS, while Indonesia has 75% CFS and 25% GB. The bulk of group loans come from the domestic market (59%), with Singapore making up 26%, while Indonesia contributed 7% as of the first half (1H) of FY18.

We expect the group’s upcoming 3Q net interest income and non-interest income (NOII) to be soft from weak-net interest margin (NIM) (compressing year-on-year but improving quarter-on-quarter due to the release of expensive fixed deposits) and volatile capital-market activities. The extension of the net stable funding ratio as announced by Bank Negara Malaysia was immaterial to Maybank as its current account savings account ratio had always been more than 35% — above the industry average of 31%. We understand also that asset quality was stable in 3QFY18 (with no major deterioration), with credit costs likely at the same level in 1HFY18.

Moving forward into 2019, we view that the key driver of its loan growth will be from consumer lending. The economy is expected to be stable with risks of unemployment low, thus Maybank will continue to have a higher risk appetite from households. With the overnight policy rate expected to be stable throughout 2019, coupled with stable employment, risk of deteriorating asset quality is benign, supporting the appetite for higher exposure to households.

Our FY18 and FY19 earnings estimates have been tweaked respectively by -1% (at RM7.5 billion) and 1% (at RM8.2 billion) as we view our assumptions as duly conservative: i) loans to grow at 4.8%/4.9% (unchanged); ii) NIM compression by three basis points (bps) for FY18; flat for FY19 (both unchanged); and iii) credit costs at 50bps and 45bps (unchanged) and the cost-to-income ratio at 48% (unchanged). For NOII, we have factored in a 3%/6% growth (previously 5%/6%) for FY18/FY19 on a strong performance from its insurance business due to lower claims offsetting weak fee and investment income.

Our TP is now at RM9.75 (lowered from RM10) based on a blended FY19 estimate of 1.23 times price-to-book value (PBV) and 13 times price-to-earnings ratio (from 1.3 times and 13.2 times respectively). Our valuation implies one standard deviation (SD) below the PBV’s five-year mean. We feel this is justifiable given that the stock has been trading in the last 12 months at a PBV between its five-year average to -1SD given the challenging loan and NOII growth. At the current price, its dividend yield is still the most attractive in our banking universe at above 6%, and with potential total returns around 11%, we have reiterated our “outperform” call. — Kenanga Research, Nov 9