Maybank IB Research

PP16832/01/2012 (029059)

Sector Update

29 June 2011

Banking
Neutral (unchanged)

Domestic stimuli abound, but some headwinds ahead

Maintain Neutral. While the outlook for the sector is promising with sufficient domestic stimuli to drive earnings, we see some headwinds in the horizon on the external front. Domestically, key risks to bank earnings include prolonged irrational pricing in the market and the potential for more monetary policy tightening and prudential measures ahead amid rising inflation and persistently high household loan growth. Coupled with the fact that valuations appear about fair, we maintain our Neutral call on, with AMMB, CIMB and BIMB being our picks. Stable net profit growth of 12.6% and 12.1% in 2011 and 2012 respectively for our basket of bank stocks. Operating profit growth forecast of 8.9% and 12.6% respectively is premised on domestic loan growth of 12.4% and 11.5%. Competition for both loans and funds remains stiff but we anticipate some NIM stabilization into 2H11, aided by interest rate hikes. We have built in a 5-8 bps NIM recovery in 2012, after an expected 6-10 bps compression this year. Monetary policy forecasts unchanged. We see the OPR hitting the pre-crisis level of 3.50% this year via another two 25 bps hikes each in July and September. At the same time, we do not rule out another 100 bps rise in the SRR on 11 July, also placing it back at the pre-crisis level of 4%. Against our revised CPI growth forecast of 3.4% this year and 3.3% in 2012, real returns on deposits will be marginally positive. Upside from ETP while M&A theme likely to prevail. ETP projects provide for potential upside surprise to our loan growth numbers as well as support to debt/equity market activity. With RM170b worth of projects confirmed, 20% of financing through bank loans would add RM34b to non-household loan disbursements. Much awaited is the 2nd Financial Sector Masterplan, to be unveiled in 3Q11, which is likely to maintain focus on sector liberalization, which in turn, could expedite sector consolidation, as well as further expansion abroad for incremental growth. The M&A theme, as such, is likely to prevail. Valuations fair. At our target prices, the average sector PER of 13.6x would be a 16% premium to its 5-year average of 11.7x. Stripping out the global financial crisis effect, the sector traded at an average PER of 13.6x as well, between 2007 and 2008. While 2012 ROEs of Malaysian banks of 17% are higher than the regional average of 13.6% ex-China, this is reflected in the 35% premium that the sector already trades at (P/BV of 2.2x) relative to the region (1.5x), in our view.
Mkt cap (RMm) 66,479 66,746 46,692 20,078 19,683 20,415 2,080 TP (RM) NR 9.60 14.10 9.40 7.50 14.10 2.40 PER (x) CY11E 14.2 16.0 13.8 12.5 13.1 14.9 11.1 PER (x) CY12E 12.7 14.1 12.2 11.0 11.6 12.8 9.9 12.0 P/B (x) CY11E 2.1 2.6 3.1 1.8 1.7 2.2 1.1 2.1 P/B (x) CY12E 1.9 2.4 2.7 1.5 1.6 2.0 1.0 1.9 ROAE (%) ROAE (%) CY11E CY12E 15.2 15.4 17.0 17.7 23.9 23.5 15.1 15.0 14.0 14.1 15.5 10.7 15.9 16.4 10.6 16.1 Div yld FY11E 4.0 3.1 5.1 3.2 2.8 1.9 1.3 3.1 Div yld FY12E 4.5 3.5 5.7 3.6 3.4 3.6 1.5 3.7

Desmond Chng, ACA desmond.chng@maybank-ib.com (603) 2297 8680

Banking Sector Peer Valuation Summary

Stock Maybank * CIMB Public Bank RHB Cap AMMB Rec NR BUY HOLD HOLD BUY Shr px (RM) 8.89 8.98 13.22 9.16 6.53 12.92 1.95

HL Bank HOLD BIMB BUY Simple average 242,173 13.7 NR = Not Rated; * Consensus estimates; Source: Maybank IB

Banking

Promising outlook but headwinds ahead

What Malaysia really has going for it in contrast to other regional countries is a committed development plan in the form of the Economic Transformation Programme (ETP), with clear delivery targets. This really is the key driver for the economy and bank earnings, particularly amid a more opaque outlook on the external front. Coupled with expectations of higher growth emanating from overseas operations, we forecast stable cumulative net recurring profit growth of 12.6% and 12.1% for 2011 and 2012 respectively, for the basket of bank stocks in our coverage. Furthermore, M&A is likely to remain topical, since further liberalization of the financial services sector would probably be a prevalent theme in the 2nd Financial Sector Masterplan, which then implies greater urgency for local financial institutions to expand in size or expand abroad for incremental growth. Economic headwinds on the external front however cloud the outlook while key risks to bank earnings on the local front include: Prolonged irrational product pricing in the market and thus ongoing net interest margin (NIM) compression, and Potentially more monetary policy tightening and prudential measures amid rising inflation and persistently high household loan growth.

In short, while the outlook for the sector is stable, promising with sufficient domestic impetus to drive earnings, we see some headwinds in the horizon. Coupled with the fact that valuations appear about fair at this stage, we maintain our Neutral call on the Banking sector.

Where we see earnings

GDP growth to maintain steady pace. Our stable outlook for the banking sector into 2012 is largely premised on our expectation that the country will continue to plot economic growth at a steady pace of 5.1% in 2011 and 5.5% in 2012, with slightly faster growth in 2012 aided by investments under the ETP. Loan growth to remain firm. To this end, we expect industry loan growth to remain firm as well, at 12.4% for 2011 and 11.5% for 2012. Where we do see a change is to the composition of this growth, whereby we expect household loans to slow as inflationary pressures and higher interest rates moderate loan demand, while non-household (business and government) loans gather momentum on the back of the ETP implementation. Consequently, we forecast household loan growth to moderate to 10.7% in 2012 from 12.4% in 2011, but for nonhousehold loan growth to remain steady at 12.4%-12.6%.

29 June 2011 Page 2 of 16

Banking Estimated industry loan growth

(RM m) Total loans 2009 2010 2011E 2012E Absolute chg 2010 2011E 2012E % chg 2010 2011E 2012E Sources: BNM, Maybank IB Banking system 783,401 883,607 985,222 1,088,670 100,206 112,632 125,584 12.8% 12.4% 11.5% Household 432,218 489,189 540,554 583,798 56,971 64,035 70,823 13.2% 12.4% 10.7% Non-households 351,183 394,418 444,668 504,872 43,235 48,596 54,761 12.3% 12.4% 12.6%

Operating profit growth of 8.9% for 2011 and 12.6% for 2012. At the operating level, we project cumulative earnings growth of 8.9% in 2011 and 12.6% in 2012 for banks within our coverage. Sustained loan growth aside, a contributory factor to our forecast of faster momentum in 2012 is expectation of a marginal recovery in NIMs. Marginal NIM recovery in 2012. Imputed into our forecasts is an average 6-10 bps compression in NIMs this year, amid ongoing stiff competition for both loans and deposits. While the recent hike in interest rates (+25 bps in the Overnight Policy Rate (OPR) on May 5) should have a marginally positive impact on NIMs, this is likely to be offset by ongoing price pressure, we believe. We nevertheless do anticipate some stabilization of NIMs into 2012, aided in part by our expectation of two further OPR hikes this year, in July and September respectively, and have thus built in a 5-8 bps NIM recovery in 2012.
Operating Profit (Annualized)
Maybank Growth CIMB Growth Public Bk Growth RHB Cap Growth AMMB Growth HL Bank ^ Growth Total Growth 2009 5,710 11.1% 4,952 36.8% 4,015 1.7% 2,099 8.7% 1,972 16.2% 1,842 -1.3% 20,590 13.1% 2010 6,570 15.1% 5,285 6.7% 4,738 18.0% 2,411 14.8% 2,283 15.7% 2,021 9.7% 23,307 13.2% 2011E 7,159 9.0% 5,851 10.7% 4,961 4.7% 2,621 8.7% 2,528 10.8% 2,266 12.1% 25,387 8.9% 2012E 8,074 12.8% 6,725 14.9% 5,666 14.2% 2,950 12.6% 2,770 9.6% 2,392 5.6% 28,577 12.6% 2013E 8,966 11.1% 7,603 13.1% 6,354 12.1% 3,231 9.5% 3,021 9.0% 2,554 6.7% 31,728 11.0% 3-yr CAGR 10.9%

12.9%

10.3%

10.3%

9.8%

8.1%

10.8%

^ Historical numbers are based on proforma including EON Capital. Forecasts are for the enlarged group. Sources: Companies, Maybank IB

29 June 2011 Page 3 of 16

Banking

Recurring net profit growth of 12.6% and 12.1% for 2011 and 2012 respectively. We expect bottomline growth to be faster in 2011, bolstered by lower credit charge rates this year. For 2012, we have modeled in a 4-15 bps uptick in gross NPL ratios, on expectations that household NPLs may rise amid inflationary pressure.
Recurring Net Profit (Annualized)
2009 Maybank Growth CIMB Growth Public Bk Growth RHB Cap Growth AMMB Growth HL Bank Growth Total Growth 3,110 8.7% 2,958 46.6% 2,532 -3.1% 1,184 11.8% 1,093 19.8% 1,303 19.5% 12,181 15.4% 2010 4,130 32.8% 3,648 23.3% 3,053 20.6% 1,517 28.1% 1,300 18.9% 1,458 11.9% 15,106 24.0% 2011E 4,693 13.6% 4,182 14.6% 3,372 10.4% 1,606 5.9% 1,517 16.7% 1,640 12.5% 17,010 12.6% 2012E 5,219 11.2% 4,735 13.2% 3,835 13.7% 1,831 14.0% 1,707 12.5% 1,744 6.3% 19,071 12.1% 2013E 5,768 10.5% 5,208 10.0% 4,248 10.8% 2,039 11.4% 1,894 10.9% 1,877 7.6% 21,034 10.3% 3-yr CAGR 11.8%

12.6%

11.6%

10.4%

12.7%

8.8%

11.6%

^ Historical numbers are based on proforma including EON Capital. Forecasts are for the enlarged group. Sources: Companies, Maybank IB

Supportive upside from the ETP

Loan growth could surprise on the upside. As mentioned before, business loan demand should pick up some of the slack in household loan demand once big-ticket public-private initiatives under the ETP start moving, for which commitments to-date total RM170b. A simplistic assumption would be that new annual non-household loans are about RM43b per annum (as per the level in 2010). Our forecasts assume non-household loan disbursements of RM49b in 2011 and RM55b in 2012, which implies RM6b of loan disbursements under the ETP in 2011 and RM12b in 2012. Todate, RM170b worth of projects have been confirmed and if we assume 20% of financing through bank loans, this would add RM34b to non-household loan disbursements. Given that we have theoretically factored in just about RM18b in 2011 and 2012, there is room for positive surprise.
Tracking the ETP
Key Variables Entry Point Projects (EPPs) EPP Investments (RMb) GNI Increase (RMb) Job Creation (m) Source: PEMANDU 29 June 2011 Page 4 of 16 Target 2011-2020 131 794.5 1,072 3.3 Announced / Confirmed as at 13 June 2011 % of Target 65 49.6 169.8 21.4 220.2 20.5 0.362 11.0

Banking

Supportive of investment banking activity. Equity and debt capital markets would undoubtedly be beneficiaries of the ETP, for just as we have assumed 20% of financing to be through bank loans, we would expect the balance to be sourced through equity/debt raising exercises. We would thus expect the large investment houses such as CIMB Investment Bank, Maybank Investment Bank, AmInvestment Bank and RHB Investment Bank to be prime beneficiaries of these activities. Capital market support from EPP1 as well. Entry Point Project (EPP) 1 of the Financial Services National Key Economic Area (NKEA) targets the expansion of Bursa Malaysias market capitalization at a CAGR of 15% to RM3.9 trillion by 2020 from RM1 trillion in 2010. To this end, we expect capital market activity to be bolstered by: Further stake divestments by GLICs and GLIFs. By our estimates, Government-linked investment corporations (GLIC) and funds (GLIF) held a total 26% of Malaysian equities as at end2010, with top shareholders being the EPF (9.9%), Khazanah Nasional (8%) and PNB (and its related funds) (7.5%). In 2010, we estimate Khazanah to have sold down RM2.56b worth of its holdings (2009: RM884m). We see further divestments in the near future, particularly of Khazanahs shareholdings in listed entities. More product offerings in the pipeline, to enhance the attractiveness to investors. These include exchange traded funds (ETFs), commodity derivatives and Real Estate Investment Trusts (REITs). GLCs own over RM12b in properties, of which 20-30% are said to be suitable for REITs.

Khazanahs PLC shareholding as at 31 May 2011

Listed companies Khazanah's stake Market cap @ 21 June 2011 (RM'm) 1,895 63,098 22,650 42,195 13,807 1,822 353 11,496 4,746 6,985 1,767 36,794 Khazanah's holding worth (RM'm) 810 18,050 12,240 16,582 3,967 785 159 8,868 3,292 3,772 569 13,091

(%) Proton CIMB Group PLUS Axiata Telekom TimedotCom Time Engineering UEM Land MAS Malaysia Airports Pos Malaysia Tenaga Nasional 42.74% 28.61% 54.04% 39.30% 28.73% 43.12% 45.00% 77.14% 69.37% 54.00% 32.21% 35.58%

Total Sources: Khazanah, Maybank IB

207,606

81,555

29 June 2011 Page 5 of 16

Banking

The Financial Sector Blueprint M&A themes

It has been a decade since the 10-year Financial Sector Masterplan (FSMP) was introduced in 2001 and the journey continues with the expected unveiling of the 2nd Financial Sector Masterplan (FSMP2) in 3Q 2011. Liberalization of the domestic financial sector was a key emphasis in the FSMP and we expect it to be an ongoing theme in FSMP2, thus keeping the M&A theme in play. Previous liberalization measures. One of the primary thrusts of the FSMP was the liberalization of the financial sector, and this was further augmented in 2009 with the introduction of the following measures: The proposed issue of up to five new licences for foreign commercial banks, two for Islamic banks with a paid-up capital of at least USD1b and two new family takaful licences; An increase in foreign equity limits in domestic insurance/takaful, investment banks and Islamic banks to 70% (from 49%), and Greater operational flexibility for locally-incorporated foreign commercial banks, mainly in branch openings.

Takaful licences have been issued. Given strong applications for the family takaful licences, Bank Negara had in Sep 2010 awarded four new licences instead of two, to: American International Assurance (70%) and Alliance Bank (30%) AMMB Holdings (70%) and Friends Provident Group (30%) ING Management (60%), Public Bank (20%) and Public Islamic Bank (20%) The Great Eastern Life Assurance Company (70%) and Koperasi Angkatan Tentera Malaysia (30%)

Commercial banking licences have been awarded. The five licences have since been awarded to BNP Paribas, Mizuho Corporate Bank, National Bank of Abu Dhabi, PT Bank Mandiri and Sumitomo Mitsui Banking Corporation. This is on top of a licence issued to Industrial & Commercial Bank of China in 2009 and another in 2010 to a locally incorporated company of Bank of Baroda (40%), Indian Overseas Bank (35%) and Andhra Bank (25%).
Commercial banks in Malaysia
Local commercial banks Affin Bank Bhd Alliance Bank Malaysia Bhd AmBank (M) Bhd CIMB Bank Bhd Hong Leong Bank Bhd Malayan Banking Bhd Public Bank Bhd RHB Bank Bhd Foreign commercial banks Bangkok Bank Bhd Bank of America Malaysia Bhd Bank of China (Malaysia) Bhd Bank of Tokyo-Mitsubishi UFJ (Malaysia) Bhd Citibank Bhd Deutsche Bank (Malaysia) Bhd HSBC Bank Malaysia Bhd Industrial & Commercial Bank of China J.P. Morgan Chase Bank Bhd OCBC Bank (Malaysia) Bhd Standard Chartered Bank Malaysia Bhd The Bank of Nova Scotia Bhd The Royal Bank of Scotland Bhd United Overseas Bank (Malaysia) Bhd Source: BNM 29 June 2011 Page 6 of 16

Banking

Islamic banking liberalization has been very rapid. From just two Islamic banks in 2001 (Bank Islam and Bank Muamalat), there are now 22, of which 11 are foreign six are Islamic banks and five are international Islamic banks that are involved in non-RM transactions. The recipients (with a paid-up capital of at least USD1b) of the two Islamic banking licences are expected to be announced this year.
Islamic banks in Malaysia
Local Islamic banks Affin Islamic Bank Bhd Alliance Islamic Bank Bhd AmIslamic Bank Bhd Bank Islam Malaysia Bhd Bank Muamalat Malaysia Bhd CIMB Islamic Bank Bhd Hong Leong Islamic Bank Bhd Maybank Islamic Bhd Public Islamic Bank Bhd RHB Islamic Bank Bhd International Islamic Banks Al Rajhi Banking & Investment Corporation Deutsche Bank Aktiengesellschaft PT Bank Syariah Unicorn International Islamic Bank Elaf Bank Source: BNM Foreign Islamic banks Al Rajhi Banking & Investment Corporation Asian Finance Bank Bhd HSBC Amanah Malaysia Bhd Kuwait Finance House (Malaysia) Bhd OCBC Al-Amin Bank Bhd Standard Chartered Saadiq Bhd

Liberalizing stock broking and wealth/asset management. EPP 1 talks about accelerating the liberalization of the stock broking industry to strengthen the intermediary base. EPP 7, meanwhile, expands on the need to attract the global top 10 wealth management institutions to set up operations in Malaysia. One of the action plans under EPP 8 is to encourage foreign fund management companies to set up operations in Malaysia with at least six employees and to match foreign capital on a one-to-one basis within the first three years. In return, the total GLIC mandates to external fund managers has risen from 5% to 15% of assets under management (AuM); each mandate being sufficiently attractive in size at RM1b to RM2b. Expect more M&As? Liberalization provides fodder for M&As especially since this would result in increased competition in an already competitive landscape. In an otherwise lackluster operating environment this year, the Hong Leong Bank-EON merger has created excitement and value creation. Admittedly, that the Maybank/CIMB and RHB Capital merger has fallen through is a major dampener. Affin and AFG stand out for their lack of scale. With an asset size less than half that of its nearest rival, Affin Holdings and Alliance Financial Group (AFG) may find it tough going in the future. We would thus not rule out the absorption of either one into a larger entity. We would also not rule out the entry of new strategic shareholders to replace either Bank of East Asia (23 HK) which holds a 23.5% stake in Affin Holdings, and/or Langkah Bahagia, which has a 14.8% stake in AFG.

29 June 2011 Page 7 of 16

Banking Total assets of the financial institutions (end-Mar 2011)

(RM m) 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 48,748 0 Maybank CIMB Public HL Bank RHBC AMMB Affin 36,072 AFG 144,840 133,136 108,236 272,311 229,136 380,342

Source: Companies

Possible increase in ANZs stake? We expect foreign shareholding liberalization in local banks to be few and far between, especially since Bank Negara Governor Tan Sri Zeti has emphasized that strategic foreign participation in local banks will stay at 30% and that domestic banks will still be largely locally owned to ensure that they maintain a financial inclusion policy. We nevertheless do not rule out an increase in ANZs stake in AMMB Holdings to 49% from 23.8% presently. Strict adherence to section 46 of BAFIA? One of the recommendations of the FSMP back then had been for strict adherence to Section 46 of the Banking and Financial Institution Act (BAFIA), which limits the shareholding of a banking institution to not more than 20% for corporations and 10% for individuals. We do not rule out renewed drive under FSMP2 to pursue this objective. Shareholders potentially affected by this ruling include Tan Sri Teh Hong Piow (23.5% effective interest in Public Bank) and Tan Sri Quek Leng Chan (64.6% effective interest in Hong Leong Bank). M&A in the Islamic banking space? With stepped-up competition in the Islamic banking space, particularly if licences to the two mega banks are granted, we foresee it increasingly difficult for standalone units such as Bank Islam and Bank Muamalat to compete over the longer term. Given that foreign shareholding limits for Islamic institutions have been liberalized to 70%, we see potential interest from both domestic and foreign entities for these two entities. Bank Islam is the third largest Islamic bank in the country by asset size and its shareholders are BIMB Holdings (51%), Dubai Financial Group (30.5%) and Lembaga Tabung Haji (18.5%). Bank Muamalats shareholders are DRB-Hicom (70%) and Khazanah Nasional (30%). Changes at investment banks (IBs)? Competing with limited talent pool makes it tough going for stand-alone IBs, in our view, and compounding matters is that there is not much value to M&As among IBs either. In any case, of the 7 stand-alone IBs, Kenanga and ECM Libra are expected to merge while MIMB is likely to be absorbed by Hong Leong, in our view. We would not rule out Kenanga-ECM Libra being on the prowl for a commercial bank to complement its investment banking activities. As for HwangDBS, a tie-up with Alliance Investment Bank may make commercial sense over the longer term, given that DBS ultimate parent company is Temasek Holdings.
29 June 2011 Page 8 of 16

Banking Investment banks (IBs) in Malaysia

Bank-backed IBs Affin Investment Bank Bhd Alliance Investment Bank Bhd AmInvestment Bank Bhd CIMB Investment Bank Bhd Hong Leong Investment Bank Bhd Maybank Investment Bank Bhd Public Investment Bank Bhd RHB Investment Bank Bhd Source: BNM Stand-alone IBs ECM Libra Investment Bank Bhd HwangDBS Investment Bank Bhd KAF Investment Bank Bhd Kenanga Investment Bank Bhd MIDF Amanah Investment Bank Bhd MIMB Investment Bank Bhd OSK Investment Bank Bhd

Substantial shareholders in domestic banks

Shareholders Affin Holdings Lembaga Tabung Angkatan Tentera The Bank of East Asia Boustead Holdings AMMB Holdings ANZ Banking Group Amcorp Group EPF Alliance Financial Group Langkah Bahagia Temasek Holdings EPF Shg Shareholders CIMB Holdings Khazanah Nasional EPF Mitsubishi UFJ Hong Leong Bank Tan Sri Quek Leng Chan EPF Shg Shareholders Public Bank Tan Sri Dato' Sri Teh Hong Piow EPF Shg

35.7% 23.5% 20.7%

28.6% 11.6% 8.8%

23.5% 12.2%

23.8% 16.8% 13.0%

64.6% 11.4%

RHB Capital EPF Abu Dhabi Commercial Bank

44.7% 25.0%

14.8% 14.2% 13.7%

Maybank AmanahRaya Trustees EPF PNB

45.0% 10.6% 6.0%

Source: Companies, Bursa Malaysia, Maybank IB

Looking abroad for earnings growth

Looking abroad for growth. With Malaysia being a fairly mature market, banks are increasingly pushing abroad for incremental earnings growth and this is a trend that is likely to persist. In fact, a common thread running through the ETP and Bank Negaras Financial Stability and Payment Systems Report 2010 is the need to facilitate the push by local financial institutions beyond Malaysian shores for incremental growth. To this end, the Central Bank will proactively seek to open up opportunities abroad through bilateral and multilateral agreements. As at the end of 2010, six of the domestic banking groups had operations in 19 countries, with overseas operations contributing RM250b in total assets and almost RM2b in profits. Faster overseas loan growth. For the financial institutions within our coverage, we expect overseas loans to grow at a faster pace of 18.2% in 2011, 14.4% in 2012 versus 12.4% and 11.5% respectively for domestic loan growth. We expect the proportion of overseas to total loans to rise to 23% in 2012 versus 22% in 2009. Maybank and CIMB at the forefront. Maybanks LEAP30 transformation programme targets 40% of pretax profit from international operations by 2015. Overseas contributions accounted for 25% of group pretax in 9MFYE6/11 and are poised to climb with the acquisition of Kim Eng Holdings.
29 June 2011 Page 9 of 16

Banking

CIMB continues to benefit from strong growth out of CIMB Niaga, for which we forecast CIMB Niagas earnings to grow at a 3-year CAGR of 16% per annum. With CIMB Thai on a stronger footing after a cleanup last year, we expect stronger contributions ahead.
Maybanks pretax by geography (9MFYE6/11)
Others,7% Singapore,4%

CIMBs pretax by geography (1Q11)

Singapore,2% Others,4% Thailand,3%

Indonesia,14% Malaysia,75%

Indonesia,28% Malaysia,63%

Sources: Company, Maybank IB

Sources: Company, Maybank IB

Also noteworthy are Public Bank... Public Bank expects overseas operations to fare better this year, on the back of more aggressive lending from (i) 73%-owned Hong Kong-based Public Financial Group (from 8-9% growth in 2010) and (ii) Cambodian Public Bank, whose balance sheet has improved in liquidity. Efforts will also be placed on driving the groups commercial banking operations in Hong Kong (which has 30 branches in the territory). Overseas operations accounted for 7% of group pretax profit in 2010 and the aim is to raise this to 15% over the medium term. and, Hong Leong Bank. 20%-owned Bank of Chengdu contributes to just about 10% of Hong Leong Banks earnings (post-merger). Nevertheless, fundamentals of this mainland China bank are impeccable with (i) strong asset quality (gross NPL ratio of 0.7%), (ii) a very liquid balance sheet (loan/deposit ratio of 55%) and (iii) attractive ROEs (18% in 2010). Gross loans of the bank have expanded at a rapid CAGR of 33% from 2006-2010, and are expected to maintain an average growth rate of 20% per annum over the next few years. More to follow. Pending completion at this stage are RHB Capitals and Affins proposed purchase of an 80% stake each in PT Bank Mestika Dharma and PT Bank Ina Perdana respectively, both being Indonesian banks. As the domestic market matures and as liberalization contributes to increasing competition in the local industry, we have no doubt that this push abroad will be a prevalent theme, particularly among the larger and more well-capitalized banks. An eye on Thailand. Maybank, CIMB and RHB Capital have expressed interest in expanding further in Thailand and are on the lookout for potential acquisitions. The two possibilities here, in our opinion, could be Bank of Ayudhya, in which GE Capital has a 32.9% stake, and TMB Bank, which is 25.2% owned by ING. Assuming a P/BV of 2x, GEs stake could cost about RM6.6b, while INGs stake would be cheaper at RM2.5b.

29 June 2011 Page 10 of 16

Banking

Valuations are fair

Valuations fair. That we are neutral on the sector is very much premised on our view that present valuations are fair, with most stocks in our coverage trading close to our target prices. At our target prices, the basket would trade at a prospective 2012 P/BV of 2.2x (17% ROE), 2.1x ex-Public Bank (16% ROE). It would also trade at a prospective 2012 PER of 13.6x.
Cumulative valuations of banks in our coverage
PER (x) At current prices 2011 2012 At current prices (excl Public Bank) 2011 2012 At target prices 2011 2012 At target prices (excl Public Bank) 2011 2012 Sources: Maybank IB 13.9 12.2 P/BV (x) 2.21 1.98 ROAE (%) 16.8 17.0

13.9 12.3

2.04 1.85

15.4 15.7

15.4 13.6

2.44 2.20

16.8 17.0

15.5 13.7

2.28 2.07

15.4 15.7

Current 2012 P/BV versus ROAEs

ROE(%) 26% 24% 22% 20% 18% 16% 14% 12% 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 P/BV(x) RHBCap,15.0% AMMB,14.1% Maybk,15.4% HLBank,16.4% CIMB,17.7% Public,23.5%

Source: Maybank IB

The P/BV for the sector has averaged 1.8x over the past five years for an ROE of 14.8%. On an extrapolated basis, 17% ROE would yield a P/BV average of 2.1x. At our target prices, the average sector PER of 13.6x would be just about a 6% discount to our market PER target of 14.5x, and a 16% premium to the five-year average of 11.7x. Stripping out the global financial crisis effect, the sector traded at an average PER of 13.6x as well between 2007 and 2008.

29 June 2011 Page 11 of 16

Banking Rolling 1-year forward PER band (x)

(x) 18.0 16.0 +1 Std Dev = 14.2x 14.0 12.0 10.0 8.0 6.0 Mean = 11.8x -1 Std Dev = 9.5x

Dec-06

May-07

Nov-09

Oct-07

Jan-09

Mar-08

Jun-09

Aug-08

Source: Maybank IB

A premium to the region. While a premium to its regional peers is justified in view of much higher ROEs generated by Malaysian banks of 17% for 2012 versus a regional average of 13.6% ex-China, this is very much imputed into the 35% premium that the sector trades at on a P/BV basis of 2.2x relative to the regional average of 1.5x, in our view.
Regional valuations
Country China Hong Kong Taiwan South Korea Singapore Malaysia Thailand Philippines Indonesia Average 2011 PE (x) 9.6 12.9 16.5 5.6 11.7 13.9 9.2 15.4 18.0 12.5 2012 PE (x) 8.1 11.1 14.1 6.2 10.5 12.2 8.2 12.9 15.3 11.0 11.3 2011 P/BV (x) 1.8 1.5 1.5 0.7 1.3 2.2 1.4 1.9 3.0 1.7 1.7 2012 P/BV (x) 1.6 1.4 1.4 0.6 1.3 2.0 1.3 1.7 2.6 1.5 1.5 2011 Yield (%) 3.2 3.5 2.9 3.6 4.0 3.6 4.6 2.4 2.0 3.3 3.3 2012 Yield (%) 3.8 4.1 3.4 3.6 4.3 4.2 5.1 2.6 2.4 3.7 3.7 2011 ROE (%) 20.5 11.7 9.7 15.0 11.6 16.8 15.8 13.1 19.9 14.9 14.2 2012 ROE (%) 20.8 12.6 10.1 11.3 12.1 17.0 16.0 13.9 19.5 14.8 14.0

Avg ex-China 12.9 Source: Bloomberg, Maybank IB

Current 2012 P/BV versus ROAEs

ROE(%) 23% 21% 19% 17% 15% Philippines,14% 13% 11% 9% 7% 5% 0.5 1.0 1.5 2.0 2.5 3.0 P/BV(x) SouthKorea,11% Taiwan,10% Singapore,12% HongKong,13% Thailand,16% Malaysia,17% China,21% Indonesia,20%

Sources: Bloomberg, Maybank IB

29 June 2011 Page 12 of 16

Sep-10

Feb-11

Jul-06

Apr-10

Banking

Further monetary policy moves cannot be ruled out

Inflation continues to exert pressure, especially amid the ongoing dismantling of tariffs and subsidies. Our CPI forecasts were raised recently to 3.4% for 2011 and 3.3% in 2012 to reflect the impact of the recent hikes in the subsidised prices of sugar, diesel and gas, as well as the increase in power tariffs,. Presently, we expect the monthly inflation rate to surge to as high as 4% YoY in Jun-Jul before easing slightly to 3.7%-3.8% YoY in Aug-Nov and further to 3.5% in Dec. Monetary policy forecasts unchanged. We see the OPR hitting the pre-crisis level of 3.50% this year via another two 25 bps hikes in July and September respectively. At the same time, we expect another 100 bps rise in the SRR in July, placing it back at the pre-crisis level of 4%.
We expect a further 50 bps OPR increase and 100 bps SRR hike
Jan 11 SRR Inc (bps) OPR Inc (bps) BLR Inc (bps) 1.00% 2.75% 6.30% Apr 11 2.00% 100 2.75% 6.30% May 11 3.00% 100 3.00% 25 6.60% 30 Jul 11 4.00% 100 3.25% 25 6.85% 25 Sep 11 4.00% 3.50% 25 7.10% 25 80 75 300 Cum

Sources: BNM, Maybank IB

Risk of higher inflation and tighter-than-expected monetary policy. Amid the ongoing dismantling of tariffs and subsidies, we remain cautious of inflation remaining persistently high, especially since this could potentially be compounded by high liquidity flows, as denoted by recent upticks in money supply (M3) growth, which crossed the 10% mark for the first time since end-2008 at 10.4% YoY in April.
M3 vs CPI growth (Jan 08 Apr 11)
M3 YoY growth (%) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 (2.0) (4.0) CPI YoY growth (%)

Sources: BNM, Maybank IB

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Maintaining real rate of return on deposits. With the CPI running at 3.2% in April against average 3-month fixed deposit rates of 2.74%, real returns on deposits were -0.5% during the month. Against our CPI growth forecast of 3.3% in 2012 and an OPR of 3.5%, real returns on deposits would a marginally positive 0.2%. Typically, the real rate of return on deposits has averaged 0.5% since January 2003 and so it remains to be seen if higher interest rates are warranted for higher real rates of return.
Real rate of return on deposits (3M Fixed Deposit Rate CPI growth)
6.0 4.0 2.0 0.0 Jan03 2.0 4.0 6.0 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11

Sources: BNM, Maybank IB

Nor can further prudential measures

Rising household debt still an issue. Household debt to GDP stood at 75.9% end-2010 versus just 63.5% in 2002. Bank Negara remains vigilant but measures todate have not had much of an impact. These include (i) the introduction in November 2010 of a lower 70% loan-tovalue cap on third property purchases, and (ii) recent credit card restrictions in March which include raising the minimum income eligibility for new credit card holders to RM24k per annum and imposing a maximum credit limit of two times the monthly income of cardholders earnings RM36k per annum and less. The former led to an initial four-month contraction in housing loan approvals but approvals have since bounced back with a vengeance. In the case of the latter, the impact is still too early to assess but credit card loans continue to run at double digits (12% YoY in April).
Housing loan approvals (Jan 10 Apr 11)
(RM'm) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

Apr10

Feb10

Sep10

Dec10

Feb11

Mar10

Sources: BNM, Maybank IB 29 June 2011 Page 14 of 16

May10

Mar11

Aug10

Nov10

Apr11

Jun10

Jul10

Oct10

Jan10

Jan11

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Household loan growth remains elevated, and has been growing at more than 13% YoY for about 10 months now. Household loans now make up 55% of total loans as opposed to just 22% in Jan 2000.
Household loan growth (Jan 09 Apr 11)
16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

Sources: BNM, Maybank IB

Personal lending has risen. Housing and car loans have typically accounted for the bulk of household loans and they still do at 48% and 27% respectively. Nevertheless, what have noticeably been on the rise are loans for personal use and credit card loans, which now account for 14.7% on aggregate of total household loans (end-Apr 2011) as opposed to 12.2% end-2005.
YoY change in residential, HP, personal & CC loans (Jan 09 Apr 11)
HP loans 25.0% Mortgages Personal use Credit cards

20.0%

15.0%

10.0%

5.0%

0.0% Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

Source: BNM, Maybank IB

Do not rule out further prudential measures. With mortgage growth still elevated at over 13% over the past 6 months, we do not rule out further prudential measures to rein in residential property lending. Nor do we rule out further policy measures to rein in personal lending, where growth has picked up momentum over the past four months and averaged 14.3% YoY in April 2011.

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Definition of Ratings
Maybank Investment Bank Research uses the following rating system: BUY HOLD SELL Total return is expected to be above 10% in the next 12 months Total return is expected to be between -5% to 10% in the next 12 months Total return is expected to be below -5% in the next 12 months

Applicability of Ratings
The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear):

Adex = Advertising Expenditure BV = Book Value CAGR = Compounded Annual Growth Rate Capex = Capital Expenditure CY = Calendar Year DCF = Discounted Cashflow DPS = Dividend Per Share EBIT = Earnings Before Interest And Tax EBITDA = EBIT, Depreciation And Amortisation EPS = Earnings Per Share EV = Enterprise Value FCF = Free Cashflow FV = Fair Value FY = Financial Year FYE = Financial Year End MoM = Month-On-Month NAV = Net Asset Value NTA = Net Tangible Asset P = Price P.A. = Per Annum PAT = Profit After Tax PBT = Profit Before Tax PE = Price Earnings PEG = PE Ratio To Growth PER = PE Ratio QoQ = Quarter-On-Quarter ROA = Return On Asset ROE = Return On Equity ROSF = Return On Shareholders Funds WACC = Weighted Average Cost Of Capital YoY = Year-On-Year YTD = Year-To-Date

Disclaimer
This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each securitys price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Bhd and consequently no representation is made as to the accuracy or completeness of this report by Maybank Investment Bank Bhd and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Maybank Investment Bank Bhd, its affiliates and related companies and their officers, directors, associates, connected parties and/or employees may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and project and statements that an event or result may, will, can, should, could or might occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forwardlooking statements. Maybank Investment Bank Bhd expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. This report is prepared for the use of Maybank Investment Bank Bhd's clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of Maybank Investment Bank Bhd and Maybank Investment Bank Bhd accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Published / Printed by

Maybank Investment Bank Berhad (15938-H) (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, Menara Maybank, 100 Jalan Tun Perak, 50050 Kuala Lumpur Tel: (603) 2059 1888; Fax: (603) 2078 4194 Stockbroking Business: Level 8, Tower C, Dataran Maybank, No.1, Jalan Maarof 59000 Kuala Lumpur Tel: (603) 2297 8888; Fax: (603) 2282 5136 http://www.maybank-ib.com

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