Is Malayan Banking Bhd (Maybank) Worth Investing In Now?

Today, as at 27 June 2018, Malayan Banking Bhd (Maybank) is trading at RM 8.88 a share. It is an 18.4% decline from RM 10.88 a share recorded two months ago on 22 May 2018.

Source: Google Finance

You may ask:

1. What happened to Maybank?
2. Should I buy, hold, or sell Maybank shares?
3. How do I avoid buying Maybank shares at RM 10.88 in May 2018?

For a start, a sharp fall in prices of good stocks are always a welcoming sight to value investors. They present opportunities for value investors to invest & accumulate shares of good stocks at lower prices, and thus, improving return on investment (ROI) of their stock portfolio. As such, the next few questions would then be:

1. What is a good stock?
2. Is Maybank a good stock?

I believe the definition of a good stock varies from one individual to another.

After all, there is a saying, ‘Beauty is in the eye of the beholder’. In general, if you are a value investor, a stock is viewed to be good or ‘investment-grade’ if it has the following characteristics:

1. Past track record of growing profits consistently.
2. Strong cash position and balance sheet strength.
3. Capable of sustaining profit growth in the Future.

As such, I did a ‘Post-Mortem’ on Maybank to assess its investment potential. In this article, I’ll summarize my recent findings on Maybank and share a few simple methods of valuing Maybank shares. Thus, here are 11 key things that you need to know about Maybank before you invest.

#1: Steady Growth in Net Interest Income (NII)

Maybank’s NII has grown steadily from RM 9.30 billion in 2012 to RM 12.15 billion in 2017. It is contributed by continuous increment in loans, assets and financing assets from RM 311.8 billion to RM 485.6 billion and maintaining a stable net interest margin (NIM) of 2.3% – 2.5% during the period.

Source: Annual Reports of Maybank

#2: Steady Growth in Non-Interest Income

 

Maybank’s Non-Interest Income had increased from RM 5.33 billion in 2012 to RM 6.03 billion in 2017. This is mainly contributed by stable growth in its fee-based income that include underwriting fees, commissions, fees on loans, advances & financing, brokerage income, and service charges.

Source: Annual Reports of Maybank

#3: Loans Impairments are High in 2015 – 2017

Maybank incurred high impairment losses on its loans, advances & financing assets over the last 3 years. Net Impaired Ratios increased from 0.95% in 2013 to 1.58% in 2017. This is caused by losses from credit facilities offered to a few sectors that are experiencing a slowdown. They include oil & gas, mining and shipping industries in Malaysia, Singapore and Indonesia.

In response, Maybank had reduced its loan exposure to oil and gas borrowers from 4.35% in December 2016 to 3.49% in March 2018. Net Impairment Ratio had improved from 1.58% in 2017 to 1.20% in Q1 2018.

Source: Annual Reports of Maybank

#4: Slow Growth in Earnings

Maybank’s shareholders’ earnings had grown at a slower pace as the banking group’s high impairment losses had cancelled its growth in both net and non interest income achieved, particularly in 2015 – 2017. Earnings have increased from RM 5.75 billion in 2012 to RM 7.52 billion in 2017.

Source: Annual Reports of Maybank

#5: Strong Capital Position

Maybank has reported total capital ratio (TCR) of 18.48% in Q1 2018, which is substantially higher than 9.875% required by Bank Negara Malaysia. Thus, it shows that the banking group has adequate funds to weather an economic crisis if it happens and to pursue growth in the future.

#6: Riding on Growth in ASEAN

Maybank is the only banking group to have a presence in all countries within the ASEAN region. Its key oversea markets are Singapore and Indonesia. The oversea markets have accounted for 25 – 30% of Maybank’s profits before tax (PBT) over the last 6 years.

Moving ahead, economies in the ASEAN region is expected to grow due to a boost in infrastructure investments from China, rapid growth in e-commerce activities, and a general rise in affluence levels across the region. For the next 3 years, Maybank has laid out its strategic objectives where it targets to be:

1. The Top Community Bank in ASEAN.
2. The Leading Wholesale Bank linking Asia in the ASEAN region.
3. The Leading Insurer in ASEAN.
4. The Global Leader in Islamic Finance
5. Digital Bank of Choice

#7: P/B Ratio is on the Low-Side.

Maybank has grown its net assets a share from RM 5.19 in 2013 to RM 6.72 in Q1 2018. Based on its stock prices, Maybank’s P/B Ratio:

1. Lowest: 1.22 (2016)
2. Highest: 1.92 (2013)
3. 5-Year Average: 1.51  

As I write, the stock price of Maybank is trading at RM 8.88 a share. Thus, its P/B Ratio is 1.32, which is closer to its lowest recorded in 2016 and is beneath its 5-Year Average of 1.51.

#8: Dividend Yield is on the High-Side

Maybank has maintained its dividends per share (DPS) at 50 – 60 sen for the last 5 years. Based on its stock prices, Maybank’s Dividend Yield:

1. Lowest: 5.38% (2013)
2. Highest: 6.43% (2015)
3. 5-Year Average: 6.00%

At RM 8.88 a share, its current dividend yield is 6.19% if Maybank maintains its DPS at 55 sen for 2017. Therefore, its dividend yield is close to its highest recorded in 2015 and is above its 5-Year Average of 6.00%.

#9: Dividends Reinvestment Plan (DRP)

From 2013 to 2017, Maybank had issued 10 series of DRP to its shareholders, allowing them to receive additional shares of Maybank instead of cash for its dividends. In most cases, the issue price for DRP is set at a marginal discount to the market price of Maybank shares close to the time of declaration.

For Maybank, the discount offered is usually around 5% from its stock price. So, should I accept or reject the DRP offer? Here, I believe your own answer is dependent on the following factors:

1. Are there any other investments which are better than its DRP?
2. Do you need cash for other financial commitments?
3. Is the issue price below its 5-Year P/B Ratio Average of 1.51?
4. Is the issue price above its 5-Year Dividend Yield Average of 6.00%?

#10: How to Avoid buying Maybank at RM 10.88 on 22 May 2018?

Simple. Let’s do a calculation of its P/B Ratio and Dividend Yields when it is priced at RM 10.88 on 22 May 2018 based on:

1. Net Assets a share: RM 6.72 (Q1 2018)
2. Dividends per share: RM 0.55 (Year 2017)

I found:

1. P/B Ratio: 1.62 (Above its 5-Year Average of 1.51)
2. Dividend Yield: 5.06% (Lowest, even lower than its lowest of 5.38%)

In this case, if an investor follows the formula where he buys Maybank when its P/B Ratio is low and Dividend Yield is high, he would successfully avoid a purchase on Maybank shares at RM 10.88 a share.

It’s not complicated.

#11: Ian’s Verdict on Maybank

Maybank has delivered steady growth in profits and stable dividend payouts to its shareholders over the last 6 years. It is well-capitalized and is poised to capitalize on growth opportunities in the ASEAN region. The key risk lies in how well the banking group manages its asset quality as it incurred loss from loan impairments, particularly in 2015 – 2017.

So, is Maybank a good investment?

Well, I can’t answer that for you as it depends on:

1. Is 6.19% of dividend yield attractive to you?
2. Are Maybank shares suitable to be included into your portfolio?
3. How long do you intend to hold onto Maybank shares?
4. Will you buy more Maybank shares if they drop further?

If you are unsure, perhaps, it is best to take time to do some soul searching & craft an investment plan first before investing.

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