Malayan Banking - Generous dose of dividend BUY

We are maintaining our BUY rating on Malayan Banking Bhd (Maybank), with a higher fair value of RM9.80/share. This is based on an ROE for FY12F of 14.7%, which translates into a fair P/BV of 2.1x.  

We estimate Maybank’s core net earnings (stripping off several one-off items) to be 10% below our estimates, but in line with consensus. The shortfall for us came mainly from the overhead expense line, which turned out to be 20% higher than our estimate. We believe this was due to expenses related to its IT transformation programme. Maybank also declared a GDPS of RM0.36, which is well above our expectation of a final GDPS of RM0.32 for FP11.

2QFP11 was strong in terms of loans growth (annualised basis of 16.2%) while we consider NIM to be well preserved (-4bps QoQ on normalised basis). Net interest income, if stripping off a one-off item related to reclassification of interest in suspense for a previously non-impaired loan, would be a robust at 9.9% QoQ. 

Asset quality was relatively unscathed judging by the 2QFP11’s performance, despite upticks in loan loss provisions and impairment on securities. Gross impaired loans were lowered overall by a substantial 9.2%. While there were some write-offs, the better impaired loans were aided by a substantial increase in recoveries, which is positive. Gross impaired loans ratio was at 2.9% in 2QFP11, lower than 1QFP11’s 3.3%. Loan loss cover has risen to 86.9% in 2QFP11 from 81.9% in 1QFP11. 

We expect 2QFP11 to provide some relief ahead in terms of asset quality, which clearly had not deteriorated in any substantial way, but instead had managed to record an improvement over the last six months. This is especially positive considering Maybank’s previous historically high loan loss provisions in major economic downturns. The 2QFP11 may thus be an indication of better risk management controls.  

Overall, 2QFP11 was strong in terms of top line growth, with asset quality unscathed despite the external uncertainty, and a generous dose of dividend added in. Maybank is now targeting a loan growth of 16.2% and ROE of 15.6% (lower than the 16% achieved in FP11 mainly due to higher equity base). Credit costs areexpected to range between 35bps and 40bps, lower than our estimated 59bps for FY12F. We thus have a lower ROE estimate of 14.7% FY12F. We believe key rerating catalysts are:- (a) improvement in asset quality, which will provide comfort that an up-cycle in loan loss provisioning will likely be short-lived; (b) better-thanexpected ROE; (c) better-than-expected dividend.  


Source: AmeSecurities