MAYBANK had a good start to FY20 as a surge in NoII helped lift 1QFY20 CNP by 13% YoY. That said, there were some negative surprises from the conference call, principally for NIM and credit cost guidance. Day One modification losses of RM1b could further dampen earnings, although the banks are in discussions with the authorities on this. FY20E/FY21E net profit toned down by 5%/1%, while TP trimmed to RM6.90. We keep our MARKET PERFORM call, as the stock is supported by dividend yields of 5-5.5%.

1QFY20 CNP of RM2b (+13% YoY/-16% QoQ) accounted for 30% of our and 27% of consensus FY20E net profit. Despite the strong headline figure, we consider the results to be slightly below expectations. Management now guides for 15bps NIM compression (our earlier FY20E: -14bps YoY, which partially includes Day One modification losses) and credit cost of 75-100bps (vs. our earlier FY20E of 64bps).

Results’ highlights. Key positive from the results was the jump in Non Interest Income (NoII), up 56% YoY/+20% QoQ, driven by market-related income (e.g. higher realised trading gains and brokerage fees). With that, Maybank took the opportunity to make some pro-active loan allowances, resulting in the spike in 1QFY20 credit cost to 74bps (1QFY19: 47bps/4QFY19: 25bps) - a key negative from the results. The proactive provisioning encompassed allowances for the weaker macro environment (RM600m provision) and for potential slippage in the retail portfolio (RM200m). Gross impaired loans rose 10% YoY/+2% QoQ, with the increase arising from both domestic and overseas portfolios. With the higher allowances, loan loss coverage improved QoQ to 77% (4QFY19: 73%). We also note that net interest income was soft due to NIM compression (-2bps YoY/-6bps QoQ, pressured by policy rate cuts) while loan growth was subdued (flat YoY/-1% QoQ) as growth from domestic operations was offset by a contraction from overseas.

Key briefing highlights. (i) NIM compression revised higher from the earlier squeeze of 5bps due to higher-than-expected policy rate cuts across key markets and weak loan growth; (ii) FY20E credit cost guidance raised to 75-100bps vs. earlier guidance of 45-50bps (2019: 44bps), with Malaysia and Singapore as the more vulnerable markets. The last time credit cost reached such levels was back in FY09, at 93bps. Also, Maybank thinks credit cost could remain elevated for FY21; (iii) c.RM1b was guided for Day One modification losses from the HP portfolio, but a clearer picture would only be available in the next results as banks are still in discussion with the authorities; (iv) Dividend policy is still 40%-60% (actual payouts have been >70% over the past few years) and dependent on earnings, as well as need to preserve capital; and (v) Loan growth run rate to be similar as that in 1QFY20.

FY20E net profit reduced by 5%. We raised our credit cost assumption to 80bps, but this is offset by a 10% uplift in FY20E NoII. Given the revised NIM guidance, we add a further 8bps NIM compression to our earlier 14bps drop to partly reflect the RM1b modification losses. Our FY21E projections are largely unchanged, after some fine-tuning. FY20E/21E DPS revised down by 4 sen/5 sen to 38.5 sen/39.5 sen, based on a revised payout ratio of 70% p.a. We assume Maybank resumes with its DRP programme.

MARKET PERFORM maintained but TP trimmed to RM6.90 from RM7.00, based on a GGM-derived target CY20E PBV of 0.94x. We think mounting revenue and asset quality challenges ahead will put a lid on earnings and dampen dividends. That said, our FY20E dividend yield of 5.1% may provide downside support to share price. Scanning the sector, RHB (OP, TP: RM5.15) and ABMB (OP, TP: RM2.30) are our preferred picks. Near-term, these banks are relatively less impacted by the Day One modification losses that the sector is expected to incur in 2QCY20.

Risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected
deterioration in asset quality, (iv) further slowdown in capital market activities, and (v) adverse currency fluctuations.

Source: Kenanga Research - 22 May 2020