Malayan Banking Bhd
(Feb 9, RM9)
Maintain buy call with a lower target price (TP) of RM10.80. We met the management recently. Overall, funding costs have risen due to competition for retail deposits. This was due to the implementation of the liquidity coverage ratio requirement under Basel III. Contributing to the rise was the high funding cost for Islamic banking. Strong competition for retail deposits is expected to continue. 

We understand the capping of fix deposit rates of Basel II recently has helped to slightly ease funding cost pressure in Indonesia. 

Overall, for the group, higher funding cost is expected to continue to impact the group’s net interest margin (NIM). While NIM remains under pressure, we gather the group will continue to focus on product bundling and profitability of its overall relationship with customers.

Oil and gas (O&G) exposure represents circa 2.6% of the group’s loan book. This is lower comparatively to some of its peers such as AMMB Holdings Bhd, CIMB Group Holdings Bhd and Affin Bank Bhd which have exposures of 3.5%, 3.5% and 4% to total loan book respectively. 

We understand that the group’s exposure to the O&G sector is skewed towards companies supplying offshore supply vessels and that most of its loans to the sector are secured by collateral. 

With the dramatic drop in oil prices, management alluded that the critical points to consider in their review of the portfolio are: i) borrower’s cost of production relative to the oil price; ii) types of contracts that have been awarded to the borrowers and iii) if there are any termination clauses in the agreements executed by the borrowers. 

We believe the areas to keep an eye on for asset quality moving forward will be: i) the extent of time of which oil prices remain low; ii) price trend for crude palm oil (CPO). If the CPO price falls below RM2,000 per tonne, this will warrant a closer look and iii) financing towards acquisition of higher-end apartments where there has been a supply glut.

We expect the volatility of the market to be positive for the group’s foreign exchange income.We understand that the group’s equity intial public offering pipeline is still healthy while for debt capital market transactions, we believe the activities in bond market will be slower should there be any project delays or deferments as well as any rise in interest rates resulting in unattractive bond pricing. 

The management sees further room for growth in asset management and insurance business.

Recall in the third quarter of financial year 2014 results, the group’s fee income had been impacted by higher contract liabilities for insurance business as a result of a drop in Malaysian Government Securities (MGS) yield which consequently caused its net income from insurance and takaful business to decline. 

Moving ahead, should the United States interest rate rise due to the US Federal Reserve’s tightening, any increase in MGS yield will be positive on the group’s net income from insurance and takaful business as this will lower its contract liabilities. 

We understand the lower interchange fees imposed by Bank Negara Malaysia on payment cards will result in lower card-related fees for the group. 

Based on our understanding, the group is mixed in terms of card issuance and merchant business.

We have revised our net profit estimate for FY15, lower by 6.9%, to RM6.54 billion as we have imputed lower net order imbalance indicator, higher credit cost as higher cost of fund.

We maintain our “buy” call on Malayan Banking (Maybank) with an adjusted TP of RM10.80 (previousy: RM11.20) based on price-to-book multiples of 1.8 times FY15 book value per share. Our TP implies a price-earnings ratio of 14.6 times. We continue to like Maybank for its diversified loan portfolio and attractive dividend yield among the larger capitalised banks. — MIDF Research

This article first appeared in The Edge Financial Daily, on February 10, 2015.