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PP 7767/09/2010(025354)

Malaysia Corporate Highlights


RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
9 July 2010
MARKET DATELINE

Banking Recom : Overweight


(Maintained)
BNM Raises OPR By 25bps To 2.75%

Table 1: Sector Valuations


PER (x) EPS gwth (%) P/BV (x) ROE (%) Net Div Yld (%)
Price FV Rec FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11
Maybank 7.56 9.66 OP 14.7 12.5 35.7 18.1 2.0 1.8 14.0 15.2 2.9 3.5
CIMB 7.05 8.40 OP 14.8 12.5 20.2 17.9 2.3 2.1 16.1 17.4 1.3 1.3
Public Bank - L 11.92 13.75 OP 14.5 13.0 11.8 11.8 3.3 2.9 24.2 23.8 3.8 4.1
AMMB^ 5.02 6.60 OP 12.6 11.0 14.8 14.6 1.4 1.3 11.9 12.3 2.8 3.2
AFG^ 2.93 3.40 OP 12.0 11.0 25.2 9.1 1.4 1.3 12.2 12.0 2.2 2.2
Affin 2.99 3.55 OP 10.9 10.1 10.5 7.6 0.9 0.9 8.6 9.0 2.1 2.1
EON Cap 6.89 7.92 MP 12.8 11.3 9.4 13.2 1.2 1.1 10.0 10.4 1.5 1.5
HLB 8.61 9.20 MP 14.5 14.4 (4.7) 0.2 2.1 2.0 14.8 13.4 2.1 2.1
RHB Cap* 5.89 NR NR 9.5 8.4 10.7 12.9 1.3 1.2 14.6 14.8 3.1 3.3
Sector Wt. Avg 14.0 12.2 19.5 14.4 2.2 2.0 16.3 16.9 2.6 2.8
*Not under coverage ^FY10-11 refers to FY11-12

♦ Overnight Policy Rate raised by another 25bps to 2.75%. BNM Chart 1. Industry NPL
yesterday raised the Overnight Policy Rate (OPR) by another 25bps to
2.75% as part of its move to normalise interest rates. While we had
expected another 25bps hike in 2H2010, we had anticipated this to take
place at the Sep policy meeting. BNM has now raised the OPR by a total
of 75bps this year following earlier OPR hikes in Mar and May (each time
by 25bps) and with that, we think BNM is likely to keep the OPR
unchanged for the rest of the year.
♦ Generally positive for banks ... Typically, banks with higher variable
rate loans to total loans would benefit more given that a higher proportion
of assets would be re-priced faster. In addition, the higher the LD ratio,
the higher the positive impact given that a larger amount of assets will be Chart 2. Industry LLC
re-priced with liabilities. Apart from the above, the percentage of current 95
(%)

account and savings account (CASA) as a percentage of deposits (CASA 90

ratio) is another determining factor. Banks with a higher CASA ratio would 85

80

benefit more as CASA rates, unlike fixed deposit rates, are not expected 75

to be adjusted by the same magnitude as the hike in OPR. 70


65

♦ … while loan growth unlikely to be adversely impacted. Although


60

55

higher interest rate would have an immediate short-term positive impact 50

on margins and earnings, it may slow loan growth and impact NPLs. 45

40

However, we are of the view that this hike in OPR is not a sign of 35

tightening but merely a move to normalise the interest rate. Moreover,


Jan-99 Ja n-01 Jan-03 Ja n-05 Jan-07 Ja n-09

the economic recovery would mitigate the potential impact on slowing


loan expansion and impact on asset quality.
♦ Forecasts. Assuming that the hike in OPR will result in a parallel shift in
lending rate and money market deposit rate but only half the increase in
CASA rates, our sensitivity analysis suggests that the full-year impact of a
25bps hike in OPR could boost our net profit forecasts for the banks by up
to 3% (see Table 2. For a more in-depth analysis, please see our sector
report dated 5 Mar 2010). By our estimates, most of the banks (except
for AMMB and Maybank) should be beneficiaries from a rate hike and this
would also help cushion competitive pressures on NIMs. Although we had
only factored in a 50bps interest rate hike in 2010, our sensitivity analysis
suggests that an additional 25bps increase, while positive, would not be
too significant on earnings. Thus, we are keeping our forecasts for the
banks unchanged.
♦ Investment case. In our view, the banking sector represents the best
proxy to the economic recovery and we continue to believe that the sector
can help take the lead in lifting the market to higher grounds. We expect
this to be underpinned by factors such as: 1) earnings growth gaining
momentum; 2) valuations remain decent relative to the market and David Chong, CFA
historical levels; and 3) relatively low foreign shareholding levels. (603) 9280 2186
Overweight stance maintained. david.chong@rhb.com.my

Please read important disclosures at the end of this report.


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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 411.0 377.5 1,201.4 3,373.2 373.1 894.2 4,292.7 2,872.0
After OPR hike 413.2 383.5 1,190.8 3,391.6 384.7 906.7 4,288.3 2,900.7
% Change 0.5 1.6 (0.9) 0.5 3.1 1.4 (0.1) 1.0
Source: RHBRI & Companies / *FY11

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
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information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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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.

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securities, subject to the duties of confidentiality, will be made available upon request.

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