Maybank- Feeling the chill SELL

Price: RM5.10
Target Price: RM4.60
Recommendation: SELL


· Maybank’s 9MFY09 net profit of RM1,810m was in line with expectations (-19% YoY), accounting for 78% of consensus estimates (inline) and 73% of ours (inline). 3Q net profit of RM503m was weak. 9MFY09 results were characterized by: 1) lower investment banking earnings with pretax profit falling RM78m,
2) a significant jump in provisions for loan losses of RM464m,
3) impairment cost of RM242m for MCB Bank,
4) higher interest expense on issuance of capital securities and
5) RM193m foreign exchange losses.

· Bearish operating outlook. We believe the 9MFY09 results further highlight the difficult conditions although the management indicated a more confident 2009. It is likely that the group’s underlying PBT will see a further decline, compounded by low operating leverage, some further markdowns and rising bad debt provisions.

· Potential write-off on BII investment. We are still concern about potential further write-off on BII investment by 4QFY09. Management indicated that Indonesia’s market discount rate has shot up to 20%, from 16%, when the acquisition took place recently. Despite no further details, we believe the write-off should be in range of RM700-800m. The write-off could offset more than one quarter of Maybank’s profit, resulting in underperforming consensus’ FY09E net profit of RM2,332m. In 1QFY09, Maybank had written-off RM242m of its investment in MCB Pakistan when market discount rate increased to 20% from16%.

· We maintain our SELL recommendation for Maybank. A key catalyst for a rerating to BUY rating is near term value accretion from its M&A activities. The outlook for the next few years will be weigh down by the following concerns:
(1) lack of revenue growth due to moderating net interest income growth
(2) the potential of the newly focused mortgages products may be limited by intense competition
(3) dividend payout deterioration
(4) the issuance of hybrid capital and sub-debts could potentially increase its cost of funds and reduce its local competitiveness and
(5) anticipation of a lower ROE. We raise our target price to RM4.60 (from RM3.90 previously) based on a conservative 1.1x FY10BV of RM4.20. We stepped-up our targeted P/BV multiple of 0.2x, which is inline with the banking sector rerating over the past 6 months.