KUALA LUMPUR: Affin Hwang Capital Research is maintaining its hold call for Malayan Banking Bhd (Maybank) after a relatively unexciting first quarter but the results were within its expectations.

It said on Friday its target price was revised to RM8.75 from RM9, now based on a 1.24 times 2020E price-to-book value (P/BV) target from a 2019E P/BV target of 1.3 times, with cost of equity at 9.1% and 2020E ROE of 10.1%. 

“Our assumptions include: 2019 loan growth at 3.4%, net credit cost at 47bps, CIR at 45.4%, and NIM at 2.3%. Downside/upside risks: rise in credit cost; subdued loan growth,” it said.

Maybank’s 1Q19 net profit was RM1.81bn (-3.3% year-on-year; -22% on-quarter), with a relatively flat operating income year-on-year, while provisions continued to normalise (+18.6% on-year, more than 100% on-quarter).

The 1Q19 net profit accounted for 23% of Affin Hwang Research’s 2019 forecast and was broadly in line with its estimate, but below consensus.

The research house said Maybank’ quarter was unexciting, with loan growth flat qoq and +4.8% on-year, while NIM saw a 9bps on-year compression to 2.3%, primarily due to funding cost pressure. 

“For 2019, our concerns are mainly centred on challenges for Maybank’s loan book, NIM (due to an overall higher funding base) and potentially more chunky impairments in light of weaker market conditions,” it said.

The results within Affin’s expectations; provisions spiked in 1Q19.

It elaborated that Maybank’s 1Q19 net profit of RM1.809bil came in 3.3% lower on-year as the group saw a flat operating income year-on-year (fund-based income +1.6% year-on-year; fee-based/non-interest income down 1.6% year-on-year) while overall impairment allowances and losses were up 27% year-on-year and >100% on-quarter. 

The higher credit cost of 47bps in 1Q19 (+6bps year-on-year and 40bps on-quarter) came largely from its Singapore operations (due to provisions related to exposure to Hyflux Ltd). 

In fact, for 1Q19, Maybank Singapore was in the red with a pre-tax loss of S$79.7m and had provisions amounting to S$243mil (RM738mil).
 
“At this juncture, we understand that Maybank has already appointed receivers over the Tuaspring power plant asset and intends to recover the value of the remaining assets.

“Management has maintained its 2019 ROE target at 11% and net credit cost guidance of 40bps. In terms of asset quality, its group GIL ratio saw an increase of 7bps on-quarter to 2.48%, largely due to spikes at its Indonesia branch. 

“The overall operating income of the group is being driven by its solid fund-based income, though some NIM compression (three to five bps) will be inevitable due to the OPR cut. Maybank’s CIR has been steady at 47.9%. Maybank’s balance sheet remains strong, with a CET 1 ratio of 14.55%,” it said.