Maybank Indo saw net profit dropped 16% YoY in 2Q20, no thanks to tepid total income and surge in bad loan provision. Also, loans continued to contract and NPL ratio has risen further. Overall, results were largely within expectations and hence, forecasts were unchanged. In our opinion, the stock’s risk-reward profile remains balanced as there are no compelling re-rating catalysts, despite being able to offer superior dividend yield. Keep HOLD and GGM-TP of RM7.55, based on 1.01x FY21 P/B.

Largely in line. Maybank Indonesia (79%-owned subsidiary) registered 2Q20 profit of IDR290b (-46% QoQ, -16% YoY), which brought 1H20 sum to IDR828b (+9% YoY). This was largely in line with both our and consensus expectations, making up 57-61% of respective full year forecasts (we believe loan loss provision will remain elevated in subsequent quarters due to impact from Covid-19 headwinds).

QoQ. The 46% decline in bottom-line was due to weak total income (-5%) and higher loan loss allowances (tripled); net interest and non-interest income (NOII) fell 6% and 2% respectively, because of loans contraction (-8%), lower fees (-22%), and trading gains (-51%). However, net interest margin (NIM) improved 8bp to 5.04% given a drop in cost of funds (better deposits mix, skewing towards CASA).

YoY. Similarly, net profit dipped 16% on the back of tepid top-line (-5%) and surge in bad loan provision (+27%); shrinkage in loans growth (-16%), fees (-35%), and trading gains (-16%) were key culprits dragging total income.

YTD. Earnings rose 9%, thanks to positive Jaws (from a narrower fall in total income vs opex of 3ppt) and normalizing downward effective tax rate (-5ppt).

Other key trends. Loans growth contracted 16.0% YoY (1Q20: -9.4%) while deposits followed suit by falling 15.5% YoY as well (1Q20: -8.8%). That said, loan-to-deposit ratio remained high sequentially at 108% (+3ppt QoQ). As for asset quality, gross NPL ratio spiked 135bp QoQ to 5.0% mainly due to its trading, restaurant, hotel, and ‘other’ segments; also, lower loan balances contributed to the rise in NPL ratio.

Outlook. We see the multiple interest rate cuts this year (4x so far, totalling to -100bp) to continue exert pressure on NIM; however, Maybank Indonesia’s focus on discipline deposit pricing and better funding management could help to prevent a sharper NIM erosion. Moreover, seeing the confluence of events from Covid-19 headwinds, loans growth is anticipated to remain tepid; it may worsen in the event of a second partial lockdown as number of infections have increased since the gradual reopening of its economy. If this was to occur, asset quality is poise to weaken further. That said, pick - up in loan restructuring would help to limit a more significant sag in NPL ratio.

Forecast. Unchanged as Maybank Indonesia’s 2Q20 results were largely in line with estimates; it contributes c.6-7% to group’s PBT (immaterial). We note Maybank Group is poised to release its 2Q20 results on 27 Aug.

Retain HOLD and GGM-TP of RM7.55, based on 1.01x FY21 P/B with assumptions of 8.7% ROE, 8.7% COE, and 3.0% LTG. This is beneath its 5-year mean of 1.23x but ahead of the sector’s 0.78x. The discount is fair as its ROE output is 2ppt below the 5- year average while the premium to peers is warranted given its regional exposure and leadership position. Furthermore, it offers superior dividend yield of c.7% (2ppt higher than peers). That said, the stock’s risk-reward profile is balanced by its below-average loans growth and dull asset quality.

Source: Hong Leong Investment Bank Research - 4 Aug 2020