This article first appeared in The Edge Financial Daily on February 21, 2020

Malayan Banking Bhd
(Feb 20, RM8.42)
Maintain buy with an unchanged target price (TP) of RM10.30: Earnings of Malayan Banking Bhd’s (Maybank) Indonesia unit fell 14.9% year-on-year (y-o-y), due to higher provisions which grew 35.9% y-o-y as it maintained a conservative stance. Maybank Indonesia set aside provisions primarily in the commercial segment which was impacted by a challenging economic environment. Compared to last year, the gross non-performing loan (NPL) level stood at 3.3% in the fourth quarter of financial year 2019 (4QFY19) versus 2.6% in 4QFY18.

Operating income grew 3.9% y-o-y supported by a 15% y-o-y expansion in non-interest income attributable to global market related fees, bancassurance, investment and e-channel transaction fees. Meanwhile, net interest income rose 0.8% y-o-y as interest expense grew 9.3% y-o-y to 7.31 trillion rupiah (RM2.22 billion) versus interest income growth of 4.7% y-o-y. Net interest margin declined 17 basis points y-o-y to 5.07%, due to the stockpiling of liquidity prior to Indonesia’s general election.

Maybank Indonesia’s total customer deposits fell 5.3% y-o-y to 110.6 trillion rupiah, due to the reversing of its earlier build-up in liquidity after the general election. Non-current and savings account fell 3.1% y-o-y to 70.1 trillion rupiah.

Total loans contracted 8.1% y-o-y to 122.6 trillion rupiah, due to Maybank Indonesia’s continued conservative stance in growing its asset selectively. The bank also decided to have an exit strategy for selected loans in the corporate and commercial segments. Putting into context, as at 4QFY19, global banking booked moderate loans growth of 3.4% y-o-y to 32.1 trillion rupiah, while community financial services non-retail loans was 17.1% lower y-o-y to 48.3 trillion rupiah. Nevertheless, its loan-to-deposit ratio was at a healthy level of 94.1%, while its liquidity coverage ratio stood at 145.2%.

Operating expenditure grew 6.2% y-o-y, which is considered under control. The rise was attributable to the incentives paid for mudharabah deposits which grew 79.3% y-o-y. Discounting these incentives, the actual operating cost was flat.

There is no change to our earnings forecasts for now as the Maybank group will be announcing its result later this month.

We should highlight that Maybank Indonesia saw better operating profits despite lower loans. It also saw a sequential quarter of results. Notwithstanding Maybank Indonesia’s results, we expect the Maybank group to see an improved performance in 4QFY19 continuing from 3QFY19. We opine that its operation in Malaysia remains solid and would provide a stable base for the group. There could also be potential improvement in FY20. Our unchanged TP of RM10.30 is based on pegging its FY20 book value of equity per share to 1.4 times. We should note that its dividend yield of above 6% should provide a buffer from any downside risk. — MIDF Research, Feb 20