KUALA LUMPUR (June 11): RHB Research has upgraded its rating for Malayan Banking Bhd (Maybank) to "buy" with a target price (TP) of RM9.60 (from RM7) following an upward revision of TP on lower equity risk premium assumptions.

In a note today, the research house said in the current liquidity-driven rally, Maybank fits its investment criteria for banks with low net interest margin (NIM) sensitivity rate cuts, wider non-interest income (non-II) base, strong provision buffer and solid capital position to safeguard dividend prospects.

"We make no changes to our earnings forecasts, but revise our TP to RM9.60 after imputing a lower equity risk premium assumptions in our GGM [Gordon growth model] valuation — in line with the latest house assumption.

"Our revised TP is based on GGM-derived P/BV of 1.25x, which is below the historical mean of 1.38x," it said.

RHB Research said dividend yields, although lower at 5% compared with 7-8% previously, remain attractive.

To recap, the first-quarter of 2020 (1Q20) pre-provision operating profit rose 24% year-on-year (y-o-y) — driven mainly by a sharp 3.7 times jump in investment and trading gains to RM769 million, as well as a mild 5% y-o-y increase in overhead expense.

It said asset quality was stable in 1Q20, with gross impaired loans (GILs) up a slight 1.5% quarter-on-quarter. GIL ratio edged up to 2.71% from 2.65% in the previous quarter, mainly due to impairments based on judgemental triggers.

"Non-performing loan (NPL) ratio was stable at 2.2%, while the LLC [loan loss coverage] ratio improved to 81.5% (4Q19: 77.3%)," it added.

Additionally, Maybank's management has revised its credit cost guidance to 75-100bps from 45-50bps for FY20F, with much of it to come from Malaysia and Singapore.

"Impairment charges are expected to stay elevated in FY21, as the NPL cycle typically lasts 18-24 months.

"NIM is now expected to narrow by 15bps instead of 5bps, given the bigger-than-expected cuts in policy rates," it said.

It added that day-1 modification loss arising from waiver of interest on deferred hire purchase instalments is estimated at RM1 billion.

"Management is in discussions with authorities and hopes to have a reasonable solution before 2Q20 result announcement in late August," said the research house.

It also noted that Maybank's relatively balanced non-II base, with core fee income at a smaller 46-47% on non-II should help mitigate the impact from slowing trade and loan-related fees.

"The bank can also lock in profits from its sizable RM2.75 billion of unrealised market-to-market bonds gains to prop up the top line," it said.

At 10:47am, Maybank's share price dropped 0.73% or six sen to RM 8.14 with a market capitalisation of RM92.17 billion.