This article first appeared in The Edge Financial Daily on December 5, 2017

Malayan Banking Bhd
(Dec 4, RM9.25)
Maintain buy recommendation with an unchanged target price (TP) of RM10.50 per share: Malayan Banking Bhd’s (Maybank) nine months of financial year 2017 (9MFY17) net profit rose 24% year-on-year (y-o-y) to RM5.38 billion (earnings per share were flat y-o-y), in line with both street’s and our expectations. Operationally, Maybank saw improved 9MFY17 fund-based income (+10% y-o-y), with net interest margin (NIM) at 2.39% (+13 basis points [bps] y-o-y), while overall loans were up 5.3% y-o-y and 1.2% q-o-q (expansion across Asean). Despite a 7% y-o-y increase in 9MFY17 operating expenses, the cost-to-income ratio remained steady at 49.1%. A lower 9MFY17 annualised credit charge, down to 48bps from 64bps (9MFY16), coupled with the absence of substantial impairments, drove the overall 9MFY17 profitability higher. This was also reflected in 9MFY17 return on equity (ROE) at 10.3% vis-a-vis 9.2% in 9MFY16. On the credit cost outlook, management reiterated its unchanged guidance of 50bps for 2017 against our more conservative assumption of 53bps.

Despite two consecutive quarters of NIM compression, down 4bps in the second quarter of FY17 (2QFY17) and subsequently another 4bps to 2.35% in 3QFY17, we believe that downside risks are mitigated by asset-liability management strategies, while there is no rush to compete for deposits (our 2017 forecast at 2.3%). As at Sept 17, Maybank had a loan-to-fund and equity ratio of 75.4%, while the liquidity coverage ratio of 137% as at Sept 17 was far above the minimum requirement.

Our TP of RM10.50 is based on a 2018 estimated (E) price-to-book value target of 1.5 times (with cost of equity at 8.2% and 2018E ROE at 9.8%). We maintain our 2017 to 2019 forecasts as we believe that Maybank’s operating income momentum will be sustained by current economic fundamentals. Downside risks include a rise in credit cost and subdued loans. — Affin Hwang Investment Bank Research, Dec 4