This article first appeared in The Edge Financial Daily on August 2, 2019 - August 8, 2019

Malayan Banking Bhd
(Aug 1, RM8.69)
Maintain neutral with an unchanged target price (TP) of RM9.10: Malayan Banking Bhd’s (Maybank) Indonesian subsidiary saw its second quarter of financial year 2019 (2QFY19) net profit slip 17.6% quarter-on-quarter to 341.9 billion rupiah (RM100 million) as a conservative stance with regard to its loan loss provisions was maintained.

Certain business loans remained on watch as challenging market conditions continued to weigh. On a positive note, the first half of financial year 2019 operating profit was a higher 2.1% year-on-year (y-o-y) to two trillion rupiah due to higher interest (+2.4% y-o-y) and fee-based income (+14.1% y-o-y).

While the group has seen some levels of success in certain key growth initiatives, near-term earnings potential is likely to be hampered by margin compressions and asset quality challenges. Our “neutral” call is retained, with TP unchanged at RM9.10. Forward price-earnings valuations vis-a-vis the broader market is attractive nonetheless.

Net interest income is 2.4% higher y-o-y to four trillion rupiah as net interest margin remained at a steady 4.8%, despite a surplus liquidity position in which the bank undertook to mitigate any unforeseen risks during and post the recent general election. Fee-based income growth is a stronger 14.1% y-o-y, driven by global market-related fees, bancassurance, loan administration, loan recovery and other services provided.

Loan growth is a healthy +6.6% y-o-y, driven by a 25.6% growth in its global banking business, supported by loans to state-owned enterprises and top-tier corporates for infrastructure and investment. The bank’s liquidity position is robust, with customer deposit growth of +10.1% y-o-y, helping contribute to a loan-to-deposit ratio of 92.3% (1QFY19: 90.1%) with liquidity coverage ratio at 165.7% (1QFY19: 145.8%).

Asset quality saw further deterioration on a sequential basis, with gross non-performing loans at 3.06% (1QFY19: 2.9%), reflective of the challenging operating environment. Loan loss provisions also increased by 46.3% to 975 billion rupiah as at June 30, mainly due to a few specific names in the commercial segment. Sector-wise, manufacturing shows the highest levels of delinquency, followed by the restaurant and hotel sector. Maybank Indonesia’s capital position remains strong however, with its capital adequacy ratio at 19.1%. — PublicInvest Research, Aug 1