Malayan Banking Bhd
(Dec 11, RM8.87)
Maintain “buy” with target price of RM10.30. Given a slowdown in industry growth, we believe Maybank, with its more balanced and diversified portfolio coupled with its relatively attractive dividend yield in excess of 6%, could serve as a safe haven in the current challenging market environment.

Maybank’s relatively muted pre-provision operating profit in the first nine months of financial year 2014 (9MFY14) (-4.7% year-on-year [y-o-y]) was largely attributed to weaker brokerage income (-20.8% y-o-y) as a result of weaker brokerage volumes in Thailand (due to the political crisis) and an 80.8% y-o-y contraction in forex income cumulating to a 12% y-o-y decline in non-interest income.

However, the group’s non-interest income should recover in 2015 on the back of stronger investment banking fee income with a number of sizeable IPOs slated, and recovery in forex fee income flows as the volatility in the current forex environment should help propel forex spreads.

Apart from the spike in impaired loans from a single group of companies related to the shipbuilding sector, overall asset quality remains relatively benign.

As such, management remains comfortable with its current loan loss coverage ratio despite the ratio declining from 107% in the second quarter (2QFY14) to 96% in 3Q. Management has fully impaired the loan exposure to the group of shipbuilding companies and believes the loan has sufficient collateral, partly backed by contracts and cash flow from the existing business.  Our simulation indicates that in a worst-case scenario, return on equity could derate from the current 13.4% to 11.7%, dragging price-to-book value down to 1.39 times vs the current 1.5 times (or a 7% decline in share price). — UOB KayHian Research, Dec 11

This article first appeared in The Edge Financial Daily, on December 12, 2014.