This article first appeared in The Edge Malaysia Weekly on October 7, 2024 - October 13, 2024

MOST analysts anticipate further upside to the share price of Malayan Banking Bhd (KL:MAYBANK) but are keeping a close watch on whether the country’s largest banking group can sustain a recent improvement in second-quarter net interest margin (NIM) after six straight quarters of sequential drops.

“The immediate concern for me is their ability to plug declining NIMs, sustainably,” says Clement Chua, a banking analyst at Kenanga Research.

Bloomberg data as at Oct 3 showed 12 analysts having a “buy” call on the stock, seven with a “hold” and one, a “sell”. The average 12-month target price stood at RM11.42, suggesting more upside from Maybank’s closing price of RM10.54 that day.

At that price, Maybank’s market value stood at RM127.19 billion. It is still, by far, the largest public-listed company on Bursa Malaysia. The second largest — Public Bank Bhd (KL:PBBANK) — has a market value of RM88.71 billion.

“We see further upside, as we think Maybank’s total returns [including dividends] are likely to continue outperforming peers. We like its falling gross impaired loan ratio, high loan loss coverage and intact [provision] overlays which support earnings, along with strong non-interest income momentum,” Tushar Mohata, a banking analyst at Nomura Research, tells The Edge.

Nevertheless, he notes that the group plans to slow down its strong loan growth to preserve NIM.

“That, and high operating expenditure growth as well as low return on equity (ROE) in Indonesia are my main areas of monitoring,” he adds. Nomura Research has a “buy” call on Maybank, with a target price of RM12.50.

While banks have had a good run in the stock market in recent months, Maybank’s year-to-date (YTD) share price gain, at 25.8%, has not been as strong as some of its peers such as CIMB Group Holdings Bhd (KL:CIMB) (46.9%) and AMMB Holdings Bhd (KL:AMBANK) (29.3%). Still, it was better than that of RHB Bank Bhd (KL:RHBBANK) (20.8%), Hong Leong Bank Bhd (KL:HLBANK) (14.1%) and Public Bank (11.5%).

A combination of factors has held back Maybank’s share performance, observes David Chong, a banking analyst at RHB Research. “For instance, its NIM compression in 1H2024 was sharper than peers’ due to funding cost pressures to fund strong loan growth. Also, the interim dividend payout in 1H2024 was lower than expected while, valuation-wise, it is quite close to its long-term average,” he tells The Edge.

“We do note that Maybank plans to dial back on loan growth in 2H2024 to help alleviate some of the NIM pressure, while we are hopeful of a catch-up in its 4Q2024 dividend declaration.” RHB Research has a “neutral” call and RM11.30 target price on Maybank.

After a streak of sequential declines, Maybank’s NIM finally grew — by two basis points (bps) to 2.02% — in the second quarter of the financial year ending Dec 31, 2024 (2QFY2024). NIM was down 12bps year on year.

In 1HFY2024, NIM fell 15bps y-o-y, the steepest decline among banks that saw a margin drop in that period apart from Affin Bank Bhd (KL:AFFIN), whose NIM declined 21bps.

Chong believes Maybank’s NIM is likely to improve in the third quarter, q-o-q, but could falter in the fourth quarter because of seasonal deposit competition and the impact of US interest rate cuts.

In a recent interview, Maybank president and group CEO Datuk Khairussaleh Ramli assured that the group was managing NIM much better, pointing out that the industry’s fierce competition for deposits was no longer as intense as it was last year.

“At the end of the day, we want to focus on better-yielding assets and manage our liquidity better. We may not want to overly grow our assets if we cannot get the right liquidity,” he said. He also said loan growth would likely slow to 7% to 8% this year, from 9.2% last year.

Khairussaleh is anticipating continued quarter-on-quarter improvement in NIM in the next two quarters; at worst, it will be similar to that in 2QFY2024. He recently guided that NIM for the full year may be down by 10bps, narrower than last year’s 27bps drop.

Be that as it may, some analysts are cautious about the impact of US Federal Reserve interest rate cuts, in particular on Maybank’s Singapore operation. The Fed cut rates by an oversized 50bps last month in what is expected to be the beginning of more cuts to come.

“I don’t really have any major concerns about Maybank, but I am slightly worried about the impact of the US Fed rate cuts and currency headwinds on its Singapore operations,” Hong Leong Investment Bank Research banking analyst Chan Jit Hoong tells The Edge. In an Oct 4 report, he notes that the bank’s management had guided that every 25bps reduction in the US benchmark rate could hit NIM by 2bps.

Nevertheless, Chan believes Maybank’s Singapore and Indonesian operations have promising prospects. “We like that management is ready to pounce on opportunities lying within the Malaysia-Singapore corridor over the mid-term, and that Maybank has a strong shariah franchise in Indonesia — well ready to capture market share and the low industry penetration,” he says.

Nevertheless, Chan maintains his “hold” call and target price of RM10.80 on Maybank, based on 1.3 times price-to-book value on FY2025 forecasts. “This is in line with its five-year pre-pandemic average P/BV of 1.27 times, but above the sector’s 0.92 times. Overall, Maybank’s current valuations seem fair and we reckon that its risk-reward profile is balanced.”

On dividends, Nomura’s Mohata notes that Maybank aims to at least maintain dividend per share (DPS) at the same level in FY2024 as last year’s 60 sen. It recently declared an all-cash interim DPS of 29 sen (payout ratio: 70%).

“We are not overly concerned by the flat 1HFY2024 DPS (effectively, a payout ratio reduction, as earnings have grown) and see minimal risk of the dividend payout ratio being cut materially from FY2023’s 77%. We think the reduction is merely out of prudence and 2HFY2024 payout can be raised in case earnings momentum remains strong,” he says in a recent report.

He sees Maybank’s net profit growing to RM9.94 billion in FY2024 from RM9.35 billion last year, before improving further to RM10.59 billion in FY2025. Maybank’s net profit stood at RM5.02 billion in 1HFY2024, up 9% y-o-y.

Analysts also note that any write-backs in Maybank’s provision overlays, which stood at RM1.7 billion as at end-June — unchanged since 2022 — could support its earnings.

“We see the possibility of a partial write-back of the management overlay. We estimate that every 10% write-back … would enhance our FY2024-FY2025 net profit forecasts for Maybank by about 1.2%,” CGS International Research says in an Aug 28 report after the bank’s earnings release.

It notes that Maybank will also benefit from a data centre boom. “It has started to benefit from the projects to construct data centres in Malaysia, as it has booked in loans of about RM2.2 billion for these projects, while another RM1 billion of loans for these [projects] are in the pipeline.” 

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