This article first appeared in The Edge Financial Daily on April 26, 2017

Malayan Banking Bhd
(April 25, RM9.37)
Downgrade to hold with an unchanged target price (TP) of RM9.20: We downgrade Malayan Banking Bhd (Maybank) to “hold” from “add” due to its strong share price performance year-to-date (YTD) that has outperformed the FBM KLCI. As such, we believe that the expected recovery in financial year 2017 (FY17) net profit growth is priced in as its FY18 price-earnings ratio (PER) is almost two standard deviations above the five-year average. 

Upside risks to our call include stronger-than-expected loan and fee income growth, while downside risks include a further increase in impaired loans and higher credit costs upon the adoption of Malaysian Financial Reporting Standard 9 in 2018.

As of April 21, 2017, Maybank’s share price was up 14.6% YTD, more than double the 7% rise in the FBM KLCI over the same period. Its share price closed at RM9.40 on last Friday, ahead of our TP of RM9.20.

Our views on earnings prospects for Maybank in 2017 are unchanged. We continue to project a recovery in the group’s net profit growth from a decline of 1.4% in FY16 to an expansion of 8% in FY17. The key driver of FY17 earnings is likely to be the expected normalisation of loan loss provisioning (LLP). We forecast a 1.1% drop in Maybank’s LLP in FY17, compared to a 68.3% jump in FY16.

The surge in its share price pushed up Maybank’s rolling forward PER from 11.5 times in December 2016 to 12.9 times last Friday. The current rolling one-year forward PER valuation is unattractive, in our view, as it is two standard deviations above the five-year average of 11.1 times. We are of the view that the positive earnings outlook for Maybank in 2017 is largely already priced in.

There has been market talk that Maybank could list its insurance unit, Etiqa. If this materialises, we believe it would be positive for Maybank as it would enable the group to unlock the value of its investment in this entity. We estimate that Maybank’s potential gain from the deal would be in the region of RM1.7 billion to RM3.5 billion (17 sen to 35 sen per share), assuming that Etiqa is listed at 1.5 times to two times book value. This would raise our TP to between RM9.37 and RM9.55, not far off from the current market price of RM9.40. — CIMB Research, April 24