Malayan Banking - Dancing with “cheap money”

Malayan Banking Bhd (“MAYBANK”) is likely to be one of the key beneficiaries from the QE3 implementation in the US, which is expected to attract strong liquidity inflows into emerging countries. Maybank, with its strong Kim Eng brokering network in the region, is likely to see an impressive rise in earnings for 4Q12/1Q13 with the possibility of the group delivering or even outperforming its fee-related incomes growth. In addition, earnings upside could also come from a lower credit charged-off rate going forward as well as a stronger than expected loan growth from the ETP-rollout. The group offers a good dividend yield of 6.3%. Our Target Price of RM10.40, based on 2.0x FY13 P/BV, implies a reasonable 14.9x FY13 PER.  

Expecting strong contributions from non-interest income. If the history (under QE2) can be of any guide, the group’s trading income from its wholesale banking and investment bank will mostly likely see a strong increase in 4Q12/1Q13 after the QE3 announcement on Sept 13th. The key fundamental driver will likely be trading and fee related incomes and hence, we see buying opportunities in Maybank given the likely earnings upside in the upcoming quarter.    

Expanding overseas contributions. Maybank also has an extensive regional presence and the bank aspires  to derive 40% of its pre-tax profit from overseas businesses by 2015. (This number is currently at 28% for 1HFY12). The target appears reasonable to us. From a rear mirror view, post the 2010 August QE2 announcement, Kim Eng’s PBT actually moved up from SGD9.6m in 2Q2010 to SGD41.8m in 3Q2010 and SGD39.8m in 4Q2010.  If the history repeats itself under QE3, we reckon that Kim Eng will likely deliver at least a +4.7% extra growth in its PBT over the next two quarters. If this materialises, the overseas profit contribution share to the group will reach 32.7% in 2013, moving up closer to the 40% target.  As such, we would recommend adding  trading positions in Maybank with the expectations that higher equity market activities will boost its trading and fee-related incomes. Maybank’s Kim Eng could potentially offer it solid and steady fee-based incomes from the ASEAN region over the next 3-6 months, contributing to the group a higher non-interest income. 

Strong links to GLCs, lowest cost of funding and a solid Islamic Banking franchise could also be its key medium-term investment drivers.  It  is  also  positioned  well  to  benefit  from  an  increase  in  financing demand for large infrastructure projects, especially government-related ones.   We expect the stock to be largely earnings driven over the next 3 to 6 months. Our FY12 estimates are close to the consensus and hence we expect an earnings rerating by the market if the group delivers a stronger than expected quarterly results in 4Q12.

Maintaining OUTPERFORM with a Target of RM10.40. Given its continuing good prospects, we are maintaining our OUTPERFORM rating on MAYBANK. We peg our Target Price at RM10.40, based on 2.0x FY13 P/BV, implies a reasonable 14.9x FY13 PER.  

Source: Kenanga