This article first appeared in The Edge Financial Daily on July 4, 2018

Malayan Banking Bhd
(July 3, RM8.98)
Maintain buy with an unchanged fair value (FV) of RM10.70: We maintain our “buy” call on Malayan Banking Bhd (Maybank) with an unchanged FV of RM10.70 per share, supported by our financial year ending Dec 31, 2019 (FY19) return on equity forecast of 11.2%, leading to a price-to-book value of 1.5 times. Our “buy” call is premised on an attractive valuation after the recent heavy selldown in the stock, its diversified earnings and dividend yield of more than 5%.

MGIB as at the end of FY17 contributed 28.8%, 31% and 26.6% of Maybank Group’s assets, funding and profit before tax (PBT) respectively. MGIB also accounted for 36%, 49% and 37% of Maybank (MBB Domestic) assets, funding and PBT respectively in FY17. In the first quarter of FY18 (1QFY18), Maybank Islamic loans comprised 57.7% of the group’s total loans in Malaysia.

MGIB targets to contribute 50%, 50% and 40% of the group’s assets, funding and PBT respectively by 2020. The “Islamic first” strategy saw MGIB’s assets rising, reaching a high of RM202.5 billion in FY17. Total financing and PBT were the highest at RM163.6 billion and RM2.27 billion respectively. It had a strong local market share of 33.6% and 31.2% in 1QFY18 respectively for financing and funding. Management hinted that MGIB’s growth will be organic.

MGIB introduced an Islamic World Mastercard, Ikhwan-I, in May 2018. Through this card, 0.2% of spending will be donated to charity, which will eventually be channelled into waqaf and zakat funds. Also, to provide a rent-to-own ownership, a house ownership scheme, Houzkey, has been introduced. We understand that funds from investment accounts could be channelled for the acquisition of assets under this scheme. The bank will be the owner of the property. Customers renting it will be given an option to purchase the property from the bank. The purchase price of the property will be locked in and rental payments could be fixed for up five years.

The domestic Islamic banking business is operated under a leverage model. Meanwhile, in Indonesia, it is operated under an Islamic banking window. The leverage model of MBB Domestic, as we understand it, has advantages in terms of operating cost compared with a fully stand-alone operation. This can be observed via MGIB’s low CI ratio of 34.3% in 1QFY18 compared with the group’s 47.6%. The leverage model provides greater clarity on strategic directions, taking its cue from the group’s overall business strategy.

MGIB’s net profit margin was lower at 1.88% in 1QFY18, versus the group’s net interest margin of 2.39% on higher funding cost for Islamic banking compared with conventional banking. MGIB’s cost of funding was higher on a lower current and savings account (Casa) ratio of 26% (Maybank Group’s Casa ratio: 35.3%). The bulk of the group’s customers still hold conventional deposits. Management is addressing this shortcoming for Islamic banking and hopes to improve MGIB’s funding cost moving forward.

In 2016, Islamic financing only covered 3.4% of total trade globally, compared with 96.6% by conventional trade financing facilities. Bank Negara Malaysia targets to raise this to 10% by 2019. This opens up opportunities for growth in Islamic trade financing to support exports of halal products internationally.

Other priorities for Islamic banking in 2018 would be to diversify the underlying assets of its unrestricted investment accounts, grow its wealth management business and to develop the Islamic capital market. Management also plans to develop distribution capabilities for the issuance of sukuk, syndicated financing and trade financing. The group has announced the cancellation of its 16th dividend reinvestment plan on the electable portion of the final dividend for FY17 on softer market conditions. The final dividend for FY17 of 32 sen will be fully paid out to shareholders in cash on July 6, 2018. — AmInvestment Bank, July 3