PP 7767/09/2010(025354)

Malaysia
31 March 2010
RHB Research
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
31 March 2010
MARKET DATELINE

Banking Recom : Overweight

(Maintained)
More Licences, But Competition Should Not Deter
Growth
Table 1. Sector Comparison
Bank Price FV PER (x) CAGR P/Book (x) ROE (%)
(RM/s) (RM/s) Rec CY08 CY09 CY10 (%) CY08 CY09 CY10 FY08 FY09 FY10
Public Bank - F 11.66 13.12 OP 15.1 15.5 13.6 10.6 4.1 3.5 3.1 27.3 24.5 24.2
Public Bank - L 11.62 13.12 OP 15.1 15.5 13.6 10.6 4.1 3.5 3.1 27.3 24.5 24.2
Maybank 7.46 8.96 OP 17.0 16.3 13.3 21.7 2.2 1.8 1.9 9.9 12.1 12.8
CIMB Group 13.98 16.24 OP 25.6 17.8 14.8 18.1 2.9 2.5 2.3 11.9 15.0 16.1
AMMB 4.99 6.13 OP 15.8 13.2 11.1 13.7 1.6 1.4 1.2 11.6 11.8 12.1
EON Capital 7.03 8.07 OP 36.4 14.3 13.1 11.2 1.5 1.4 1.3 4.2 10.1 10.0
Affin Holdings 2.89 3.03 MP 14.2 11.2 10.1 8.4 0.9 0.9 0.9 6.8 8.1 8.6
Hong Leong Bank 8.64 9.05 MP 16.6 15.2 15.3 1.5 2.5 2.3 2.0 16.7 14.8 13.4
AFG 2.87 3.27 OP 16.7 17.6 13.1 21.5 1.6 1.5 1.4 16.8 8.6 9.1
RHB Capital * 5.69 NR NR 11.7 10.2 9.7 7.8 1.6 1.4 1.3 13.3 12.3 13.0
Sector Wt. Avg. ^ 17.2 15.0 12.6 2.3 2.0 1.8 13.2 13.0 13.3
Sector Wt. Avg. (Ex-Maybank) 16.6 14.0 12.3 2.3 2.0 1.8 15.5 15.0 15.2
Sector Wt. Avg. (Ex-Maybank & PBB) 17.3 13.5 11.8 1.9 1.7 1.5 11.6 11.5 11.8
Source : RHB Research Institute, I/B/E/S Estimates * Not under our coverage

♦ More competition but local banks can thrive. Despite the impending Chart 1. Industry NPL
issuance of seven new banking licences, we believe that local banks will 95

90
(%)

continue to thrive under an economic recovery environment. Local banks 85

are already very competitive (as reflected by the increasing share of total
80

75

assets in the system as well as venturing overseas) while the new 70

65

licenced banks are not allowed to compete in the domestic retail business. 60

Hence, we believe local banks can still thrive under a competitive

55

50

environment. 45

40

♦
35

Earnings growth momentum to pick up steam and not expected to Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

be weighed down by competition. Earnings momentum will be Chart 2. Industry LLC

underpinned by loan growth, stable to improving NIM, rising non-interest
(RMm) Gross NPL(LHS) Gross NPLratio (RHS) Net NPLratio (RHS) (%)
17.0
69,000.0

income and declining LLP, partly offset by rising overheads. All these 64,000.0 15.0

should not be impaired by the increased competition.

59,000.0 13.0

54,000.0
11.0

♦
49,000.0

Regulatory adoptions and capital management. Most banks 44,000.0

9.0

indicated neutral to slightly positive from the impact of FRS139 and Basel
7.0
39,000.0

5.0

II IRB approach while Basel III is still uncertain. With excess capital,
34,000.0

29,000.0 3.0

banks have the potential and capacity to pay higher dividend, pending 24,000.0 1.0

Basel III. We believe the final Basel III standard is likely to be watered
Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09

down from the initial concept paper and banks will be given more time to
comply and phase in the changes.

♦ Valuations still have room for upside, foreign shareholding

relatively low and M&A excitements. P/B and PER valuations of banks
are trading at/or one standard deviation below post Asian-financial crisis
mean except for Affin and CIMB (P/B) as well as HL Bank and Public Bank
(both P/B and PER). More importantly, all banks are still trading at below
previous peaks, implying room to advance further. Foreign shareholding
levels have bounced off lows but still well below recent highs. Last but
not the least, talks of M&A should excite investors’ interests.

♦ Investment case. We continue to believe that the sector will take the
lead in taking the market to higher grounds. This will be underpinned by
the above mentioned factors. Moreover, most banks have their unique
story to sustain investors’ interests. Thus, we are maintaining our
Low Yee Huap, CFA
Overweight rating on the sector. Top pick is Maybank. For exposure to
(603) 92802175
big cap and highly liquid stocks, we also like CIMB, AMMB and Public low.yee.huap@rhb.com.my
Bank. AFG, EON Cap and RCE Cap are also rated as Outperform while
Affin and HL Bank are Market Perform.

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INCREASING COMPETITION

♦ More licences – competition to intensify in an already crowded market. The G2G banking licence issued
to ICBC of China late last year and seven new licences to be issued by June 2010 under the Financial Sector
Masterplan as well as other potential new G2G licences would add to the already crowded market place and
further intensify competition. The issuance of seven new licences was announced in Apr 09 which consists of
two new Islamic banks, two new commercial banks that will bring in specialised expertise to address gaps in the
sector and three new world-class commercial banks that can offer significant value propositions.

♦ Domestic banks’ competitiveness has increased. Despite the intensifying competition, we retain the view
that domestic banks (where all undertook major transformations) have increased their competitiveness. This is
reflected in Chart 3 which shows the percentage of domestic and foreign (operating in Malaysia) banks’ assets to
total assets. Chart 3 shows that in the 80’s, domestic banks’ assets grew at a faster rate than foreign banks.
Although the growth rate slowed during late 80’s and early 90’s, it was still above the foreign banks. During the
late 90’s and early 2000’s, domestic banks were hard hit by the Asian financial crisis and that affected the
growth given that asset quality then was not as strong as the foreign banks. Thereafter, to resuscitate the
system, domestic banks underwent the first round of consolidation and were focusing on post-merger integration
which also affected the growth. As a result, domestic banks’ assets as a percent of total assets dropped from
78.4% in 1997 to 74.6% in 2003. However, post-merger integration coupled with transformation as well as help
from strategic partner(s) saw the growth rate accelerated again and domestic banks’ share of total assets grew
at a faster rate than foreign banks, taking the former’s share of total assets to an all-time high of 80.1% as at
Dec 09 despite increasing competition. Chart 4 shows the assets of both domestic and foreign banks which also
clearly show that assets of domestic banks grew at a faster rate vis-à-vis foreign banks during the period.
Hence, we continue to believe that although increasing competition will put pressure on margin and human
capital, domestic banks can still hold their fort and maintain their market share at around the current level.

Chart 3 : % of domestic and foreign banks’ assets to total assets

82 (%) Domestic Foreign (%) 31

29
80
27
78
25

76 23

21
74
19
72
17

70 15
1983 1987 1991 1995 1999 2003 2007

Source : BNM

Chart 4 : Assets of domestic and foreign banks

1200 (RMm) Domestic Foreign

1000

800

600

400

200

0
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Source : BNM

♦ Domestic banks able to compete internationally. Besides being able to compete on the domestic front,
Malaysian banks are also competitive internationally. This is exemplified by: 1) CIMB Group’s ventures in
Indonesia, Thailand, Singapore, China and Vietnam; 2) HL Bank’s ventures (associate stake and JV) in China as
well as new licence in Vietnam; 3) Public Bank’s venture in Hong Kong; and 4) Maybank’s ventures in Indonesia,
Pakistan and Vietnam as well as its various offices and branches around the world.

♦ New licences not direct competition. BNM’s Governor said that these new licences will only be given to
banks that have value proposition in areas where Malaysia did not possess. These banks must have niches in
providing their expertise such as infrastructure finance and green technology. However, they are not allowed to
undertake retail banking business but would focus on international business not carried out by the local banks.

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♦ No change in our positive view on the sector. Thus, despite rising competitiveness, we remain positive
about the prospects of local banks given that their competitive positions are not expected to be eroded.
Moreover, the entry of niche players may benefit the sector in the longer term as expertise and knowhow would
eventually be transferred to the locals, further strengthening their competitiveness internationally.

M&A EXCITEMENTS

♦ Potential excitement but pricing is the main stumbling block. Increasing competition may prompt talks of
M&As to increase competitiveness. This should excite the market given that most banks (except for CIMB, HL
Bank and Public Bank) are trading well below 2x P/B vis-à-vis average P/B of 1.6x and 2x for the first and
second rounds of consolidation, respectively. The offer by HL Bank for the assets and liabilities of EON Cap (now
hanging in the balance) has prompted some excitements and may attract other bidders for the latter. The age
issue of Public Bank’s major shareholder may also evoke speculations while DBS’s interest for a foothold in
Malaysia may also prompt interest in AFG (due to common shareholder). However, given that domestic banks
are already competitive (whereby domestic banks as a whole has gained market share in terms of total assets
and the percentage share is now at all-time high), domestic M&As may not add significant values vis-à-vis
regional M&As (which provide greater opportunities for growth). Moreover, given the different interests involved
(including the interests of strategic partner(s)), pricing would likely be the main stumbling block.

POSITIVE EARNINGS MOMENTUM

♦ Loan growth to pick up. With the backdrop of economic recovery and strong numbers from leading indicators
(loan applications and approvals), we firmly believe that loan growth will accelerate from 7.8% achieved in 2009
to 9% in 2010. We do not expect the gradual normalisation of interest rate to impact loan growth unless the
global economy suffers a double dip.

♦ NIM stabilised and will benefit from interest rate hike, albeit temporary. After the initial negative
impact (in early 2009) from the OPR cuts (in late 2008 and early 2009), banks’ NIMs have stabilised. Despite
competitive pressure, the hike in mortgage rate and BNM’s move to normalise interest rate would help sustain
margins. Moreover, based on our sensitivity analysis, only AMMB and Maybank will suffer marginal earnings
erosion from a hike in interest rate while the rest will benefit, albeit temporary (see Table 2).

Table 2 : Impact on earnings from a 25bps hike in OPR

RMm / FY10 Affin AFG* AMMB* CIMB Grp EON Cap HL Bank* Maybank* Public
Impact on interest income/(expense)
Up to 1 Mth 19.8 12.9 21.7 77.5 34.4 32.1 57.3 102.4
1-3 Mth (14.9) (2.4) (24.4) (41.7) (12.9) (5.3) (37.0) (53.4)
>3-12 Mth (2.0) (2.4) (11.7) (11.2) (6.0) (10.0) (26.1) (10.7)
Total 3.0 8.1 (14.4) 24.6 15.5 16.7 (5.8) 38.3
Less tax 0.8 2.1 (3.7) 6.4 4.0 4.3 (1.5) 10.0
Net 2.2 6.0 (10.6) 18.2 11.5 12.4 (4.3) 28.3

FY10 net profit forecast 411.0 364.3 1202.1 3373.2 373.1 894.2 4292.7 2872.0
After OPR hike 413.2 370.3 1191.4 3391.4 384.5 906.5 4288.4 2900.3
% Change 0.5 1.7 (0.9) 0.5 3.1 1.4 (0.1) 1.0
Source: RHBRI & Companies / *FY11

♦ Non-interest income to continue ascending trend. With rising economic activities, active capital markets
and Government’s transformation efforts (listing of companies under the Government’s coffer and reduction in
GLCs’ stake in listed entities), non-interest income is expected to be on an upward trajectory.

♦ NPLs and LLP to trend lower. Besides being a boon to net interest and non-interest income, the economic
recovery would be positive to NPLs. This means that post the festive season, NPLs are likely to trend down from
Mar/Apr 10 onwards. This augurs well for the sector as improving asset quality would translate into declining
LLP and higher profits.

♦ Overheads to stay high and rising but a necessary evil. Overheads are expected to be on a rising trend
given the need to expand business and protect market share (both domestically and overseas) as well as
continuous investment in infrastructure and human capital. We believe this is a necessary evil to expand
income.

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♦ Earnings growth momentum to pick up steam. Rising net interest and non-interest incomes as well as
declining LLP would be more than sufficient to offset rising overheads. Thus, we firmly believe that the sector’s
earnings growth momentum will pick up steam.

REGULATORY CHANGES

♦ FRS 139 and Basel II IRB approach. The adoption of FRS 139 in 2010 (effective interest rate calculation
rather than actual interest rate for that particular year and impairment test on recoverable collateral value
rather than provision based on GP3 as well as treatment in the balance sheet) and Basel II internal ratings
based (IRB) approach in 2010 or 2012 (trade-off between lower credit risk vis-à-vis higher/introduction of
market and operation risks) could have implications on banks’ earnings and capital ratios. Due to the lack of
detailed information and guidelines, we are unable to assess the impact of these two regulatory adoptions.
However, feedbacks from banks indicated that both will have either neutral or positive impact on earnings and
capital ratios.

♦ Basel III. The impact of Basel III on banks would be significant given that the initial consultative paper
suggests more stringent qualifications for Tier-1 capital and higher minimum ratios. If adopted, banks may need
more high quality capital in the form of equity i.e. may need to undertake cash call or limit dividend payment. It
will also impact banks’ ability to grow assets (or loans) and indirectly weigh down on economic recovery. Thus,
we expect the final standard to be watered down vis-à-vis the concept paper and will likely allow banks more
time to phase in the changes.

CAPITAL MANAGEMENT

♦ Banks are well capitalised and have excess capital. Capital ratios of the industry are well above the
minimum levels and are at or near their historical peaks. This implies that the sector is well capitalised and has
excess capital. Thus, banks have the ability to pay higher dividends (to enhance ROEs) in 2010 when the
economic recovery gains traction, pending the final outcome of Basel III.

Chart 5 : Both the capital ratios remained at all-time high levels

15.0 (%) (%) 13.5
RW CAR (LHS) Core capital ratio (RHS)
14.5 13.0
12.5
14.0
12.0
13.5 11.5
13.0 11.0
10.5
12.5
10.0
12.0 9.5
11.5 9.0
8.5
11.0
8.0
10.5 7.5
10.0 7.0
92 98 99 00 01 02 03 04 05 06 07 08 09
Source : BNM

VALUATIONS

♦ Valuations – still room for upside. Despite share price appreciations and significant share price
outperformances, most banking stocks are trading near at/or one standard deviation (SD) below their post-Asian
financial crisis average rolling PER and trailing P/B valuations except for Affin (P/B more than 1SD above) CIMB
Group (P/B more than 1SD above), HL Bank (both more than 1SD above), and Public Bank (both more than 1SD
above). Maybank is the only stock with both P/B and PER valuations below mean (near one standard deviation
below). Meanwhile, both AMMB and EON Cap’s P/B and PER valuations are near their means. Moreover, all
banks are still trading at below the previous peak in 2007 (both P/B and PER). This implies that amidst positive
sentiment and ample liquidity, there is still abundant room for valuations to expand.

FOREIGN SHAREHOLDING

♦ Based on available information, we gathered that most banks’ foreign shareholdings are slightly above their
historical lows. However, all banks are still trading at well below peak levels hit in 07-08 or since some major
events (M&As) took place. This also implies that when foreigners have a better understanding of the country’s
economic transformation and action plan on the latter are put in place, there is ample room for increase

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participation from foreign funds. With the sector being the lynchpin of the economy, any foreign funds inflows
would initially target the sector.

RISKS

♦ The risks include: 1) slower-than-expected loan growth; 2) deterioration in asset quality; and 3) changes in
market conditions that may adversely affect investment portfolio.

CHANGES TO FORECASTS

♦ No changes to our earnings forecasts for the banks.

VALUATIONS AND RECOMMENDATION

♦ Overall, we continue to believe that the sector (being the lynchpin of the economy) will take the lead in taking
the market to higher ground. This will be underpinned by: 1) earnings growth gaining momentum from net
interest income (loan growth, stable to expansion in NIM and growing Islamic income), non-interest income
(from higher transactional income and the revival of the capital markets) and lower LLP (from improving asset
quality); 2) potential M&As would excite the market given that most banks are trading at below 2x P/B; 3) more
aggressive capital management or higher dividend given the excess capital positions, barring Basel III; 4) both
PER and P/B valuations are still below their recent peaks; and 5) foreign shareholdings are still relatively low and
well below peaks.

♦ Moreover, most banks have their unique story: 1) AFG – organic growth plus absence of impairment on CLOs as
well as potential write back of impairment and LLP; 2) AMMB – ANZ value proposition gradually enhancing
profitability; 3) CIMB Group – growing regional universal bank with strong growth from Indonesia; 4) EON Cap –
consistent and improvement in earnings and asset quality, the positive impact from the potential internal
restructuring and a takeover target; 5) Maybank – sharp improvement in earnings post regional acquisitions
with ROE returning to pre-acquisition levels but valuations still well below pre-acquisition levels; and 6) Public
Bank – above industry loan growth and asset quality with relatively higher dividend yield. Thus, we are
maintaining our Overweight rating on the sector. Top pick is now Maybank due to its relatively cheap
valuations vis-à-vis historical levels. For exposure to big cap and highly liquid stocks, we also like CIMB, AMMB
and Public Bank. AFG, EON Cap and RCE Cap are also rated as Outperform while Affin and HL Bank are Market
Perform.

Table 3. Valuation Bases

Fair Value
Company (RM/share) Valuation Methodology
Affin 3.03 11x CY10 EPS, 5x discount to reflect its low profitability and market capitalisation
AFG 3.27 15x CY10 EPS, 1x discount to reflect relatively lower liquidity and market capitalisation
AMMB 6.13 Benchmark 16x CY10 EPS
CIMB Group 16.24 17x CY10 EPS, 1x premium to benchmark to reflect its growing status as a regional
universal bank and in position to benefit from the current window of opportunities arising
from western banks pulling back their resources in the region
EON Cap 8.07 15x CY10 EPS, 1x discount to benchmark to reflect its relatively small market capitalisation
and lower liquidity
HL Bank 9.05 16x CY10 EPS, 1x discount to benchmark to reflect its relatively lower liquidity
Maybank 8.96 Benchmark 16x FY11 EPS
Public 13.12 Benchmark 16x CY10 EPS
RCE 1.08 11x CY10 EPS, 5x discount to reflect its non-deposit taking status and small market
capitalisation
Source: RHBRI

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Chart 6. Sector prospective PER comparison Chart 7. Sector prospective P/Book comparison
18.0 (x) CY09 CY10 (x) CY09 CY10
3.5
17.0

16.0 3.0

15.0
2.5
14.0
2.0
13.0

12.0 1.5

11.0 1.0
10.0
0.5
9.0

8.0 -
CIM B AFG M aybank PB B-F PB B-L HLB EONC Sector Sector AM M B Affin RHB C PBB-F P BB-L CIM B HLB Secto r M aybank Sector AFG RHBC AM M B EONC Affin
Grp (ex-M ay) (ex-M ay Grp (ex-M ay) (ex-M ay
& P BB) & PB B)

Source: RHBRI Source: RHBRI

Chart 8: Maybank Technical View Point

♦ The share price of Maybank broke out from an
eight-month old rangebound consolidation trend in
early Mac 2010, when it pierced through a
resistance level of RM6.86.

♦ The breakout was deemed positive because it

coincided with a bullish cut by the 10-day SMA
across the 40-day SMA near RM6.77.

♦ The stock reached a high of RM7.65, but triggered

mild profit-taking pressure and dragged it back to
the RM7.32 support level.

♦ It struggled back to above the 10-day SMA

recently, before closing at RM7.46 on Tuesday, with
a negative candle on the chart.

♦ Technically, it could settle for a mild consolidation

soon, to the 10-day SMA near RM7.37 and the
support level of RM7.32.

♦ Nonetheless, so long as it can sustain at above the

40-day SMA of RM7.06, its medium-term breakout
signal from the RM6.26 – RM6.86 region will
remain intact.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law.
The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may
differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not
to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein
in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated
persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
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investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

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the actions of third parties in this respect.

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