Malayan Banking Bhd
(Sept 3, RM10.02)
Reiterate buy with an unchanged target price (TP) of RM12: Malayan Banking Bhd’s (Maybank) first half of the financial year ended June 30, 2018 (1HFY18) net profit stood at RM3.83 billion, up 14% year-on-year (y-o-y), underpinned by a stronger second quarter whereby a net profit of RM1.96 billion was up 4.7% quarter-on-quarter and 18% y-o-y. For 1HFY18, pre-provisioning operating profit continued to expand by 7.3% y-o-y as overheads declined by 1.6% y-o-y and insurance surplus transfers increased by more than 100%, sustained by a fund-based income growth of 1.6% y-o-y. This was, however, offset by weaker non-interest income for 1HFY18 due to lower realised investment gains and mark-to-market losses. Overall net credit cost for 1HFY18 was 44 basis points (bps), with provisions down 20.5% y-o-y, declining from 57bps for 1HFY17 despite setting aside a provision of RM315.1 million related to Hyflux Ltd (in Singapore). Hyflux is now undergoing a balance sheet restructuring involving disposal of key assets funded (and secured) by Maybank Singapore (the Tuaspring Integrated Water and Power Project, with exposure at S$602.4 million [RM1.81 billion], and TuasOne, with exposure at S$56.2 million).
Management has guided for a revision of 2018 net credit cost from 40-45bps to above 45bps due to potential for more accounts (overseas) getting impaired (our FY18 assumption is 53bps). Meanwhile, management will potentially manage its net interest margin (NIM) (1HFY18: 2.33%) in 2HFY18 after taking a cautious move to boost its liquidity coverage ratio (LCR) (1QFY18: 153.3%; 2QFY18: 144.9%).
We have maintained our “buy” rating on Maybank, with our TP of RM12 unchanged (based on a price-to-book value target of 1.74 times, cost of equity of 8.2% and 10.5% FY19 return on equity). We have not made changes to our earnings forecasts. Downside risks include cautious business sentiment and an increase in impairment or provisions. — Affin Hwang Capital, Sept 3