Malayan Banking Bhd
(Nov 13, RM6.85)
Buy at RM6.84: We have upgraded our fair value to RM7.04 from RM5.97 based on 16 times FY11 earnings per share (EPS) to better reflect the full-year earnings potential of the new enlarged entity. Given that its upside potential is now in line with the market, we are upgrading our call on the stock to market perform from underperform.

Excluding three one-off items — RM80 million from the sale of available for sale securities, RM67 million loan syndication fee from PT Bank Internasional Indonesia (BII) and RM25 million tax credit from BII — 1Q net profit of RM746.6 million (+30.5% year-on-year) accounted for 28.7% and 26.4% of our and consensus forecasts respectively.

Main deviations came from stronger-than-expected non-interest income and improvement in net interest margin (NIM). Besides the three one-off boosts, the strong earnings was underpinned by higher net interest income, strong non-interest income as well as higher Islamic income. The quarter-on-quarter drop in loan loss provision (LLP, lower credit charge) and RM25 million tax credit (BII) also contributed to the double-digit earnings growth.

Although BII’s contribution to the group is still relatively small, it recorded improvement in profitability ratios amidst a slight uptick in non performing loans (NPLs). BII’s subsidiary WOM Finance also continued its turnaround.

Net NPL and loan loss coverage (LLC) ratios improved by four basis points (bps) and 33bps respectively, but gross NPL ratio deteriorated slightly (4bps) given that gross absolute NPLs increased by 3.6% q-o-q as annualised net NPL formation jumped. Although the trends were mixed, overall asset quality is still stable.

We upgrade FY10 and FY11-FY12 forecasts by 19.5% and 12.8% respectively to account for higher non-interest income and NIM as well as the one-off items in 1QFY10.

We now believe that Maybank will be able to exceed its FY10 return on equity (ROE) key performance indicator of 11% and are projecting ROE to rise to 12.1% in FY10

and 13.5% in FY12 (from 9.9% in FY10). However, its higher acquisition costs and the massive cash call mean that its ROE will still be sub par (or below pre-acquisition ROE of 15%-16%) over the next two to three years. Although BII’s prospects are promising (given a high-margin, low-penetration rate market environment in Indonesia), the group as a whole would need to integrate and ensure strong risk management and processes before embarking to realise the potential of BII. — RHB Research, Nov 13


This article appeared in The Edge Financial Daily, November 16, 2009.