This article first appeared in The Edge Financial Daily on November 19, 2018

Malayan Banking Bhd
(Nov 16, RM9.45)
Reiterate sell with an unchanged target price (TP) of RM9.20: We have met up with management of Malayan Banking Bhd (Maybank) recently. Key takeaways from the meeting are as follows: Management believed that consumer sentiment had softened, although it foresaw pockets of growth for certain segments of the mortgage and hire purchase markets. As it targets mostly properties valued in excess of RM350,000 per unit, we do not foresee Maybank loosening its credit policies and increasing its exposure to the affordable housing space.

Clarifying on its participation in a fund established by Bank Negara Malaysia in the Budget 2019 announcement, the RM1 billion fund for lower-income homebuyers would be used to compensate for the differential in the interest rate. According to Maybank, the credit assessment for this group of borrowers would not be loosened.

For the business segment, corporate activities are expected to remain subdued. In the third quarter, businesses held back due to the need for more clarity on government policies. However, ongoing macro and financial market volatilities could further delay investment plans and corporate activities.

The growth momentum in Singapore is still robust, although we foresee construction activities easing as demand for new properties softens.

In Indonesia, economic growth reportedly slowed in the third quarter of 2018. There are expectations that future economic conditions could worsen, dampening household consumption, while business activities could also slip due to unfavourable macro factors. We also foresee businesses delaying investment and corporate activities ahead of the upcoming general election in April 2019.

Other downside risks to earnings include a falling net interest margin (NIM). We continue to envisage NIM pressure on Maybank’s Malaysian and Indonesian operations from both yields and deposits. Management expected more NIM compression in 2019 unless concerns over policy uncertainties clear up and corporate loans improve.

Management also expected asset quality to remain intact and did not envisage further provision for the exposure to Hyflux’s Tuaspring and TuasOne. On a smaller scale, the rise in interest rates in Singapore could trigger some deterioration in the small and medium enterprise portfolio as costs increase.

There has been no change to our earnings estimates pending more clarity from Maybank’s upcoming result announcement. We have maintained our TP at RM9.20 and reiterated our “sell” call.

Key upside and downside risks include stronger-than-expected earnings from cross-border internal strategies, better contributions from a pickup in capital market activities, an improvement in and less volatile income contributions from the insurance and takaful businesses, further defaults on the group’s exposure to Singapore and rising risk from the business banking portfolio in Malaysia. — TA Securities, Nov 16