PP 7767/09/2010(025354)

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

Sector Upda te
26 July 2010
MARKET DATELINE

Banking
Recom : Overweight
Revisiting FRS139 (Maintained)

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 7.69 9.66 OP 15.0 12.7 35.7 18.1 2.0 1.8 14.0 15.2 2.8 3.4
CIMB 7.26 8.40 OP 15.2 12.9 20.2 17.9 2.4 2.1 16.1 17.4 1.3 1.3
Public Bank - L 12.16 13.75 OP 14.8 13.3 11.8 11.8 3.4 3.0 24.2 23.8 3.7 4.0
AMMB 5.12 6.60 OP 12.8 11.2 14.8 14.6 1.5 1.3 11.9 12.3 2.7 3.1
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 3.00 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 6.90 7.92 MP 12.8 11.3 9.4 13.2 1.2 1.1 10.0 10.4 1.4 1.4
HLB 8.82 9.20 MP 14.8 14.8 (4.7) 0.2 2.2 2.0 14.8 13.4 2.0 2.0
RHB Cap* 6.25 NR NR 10.1 8.9 10.7 12.9 1.4 1.3 14.6 14.8 2.9 3.1
Sector Wt. Avg 14.3 12.5 19.5 14.4 2.3 2.0 16.3 16.9 2.5 2.8
*Not under coverage

♦ Singaporean banks adopted FRS39 back in 2005 and with the economy
having gone through a full economic cycle during this period, we have, Chart 1. Industry NPL
thus, turned to the recent experience of the banks there to serve as a
rough guide on the potential impact ahead of FRS139 on the local banks.
♦ Current accounting for loan losses still procyclical. Generally,
despite the switch to the “incurred loss” model, the experience of the
banks in Singapore appears to suggest that the current loan loss model is
procyclical. This would help lend support to our view that credit cost
should remain relatively benign if economic conditions hold up.
♦ Portfolio allowance ratio run down during economic growth.
Similarly, portfolio allowances (or collective allowances, CA) for Singapore
banks were low during the growth cycle and picked up only during the Chart 2. Industry LLC
downturn. In Malaysia, the adoption of FRS139 has resulted in the banks 95
(%)

(except for Public Bank) maintaining a higher level of CA as compared to 90

85
BNM’s required minimum of 1.5%. However, this suggests that as 80

economic conditions and historical default and loss rates improve, these 75

banks may be able to write back the excess provisions and/or grow loan
70
65

base without having to provide for further collective allowances (i.e. run 60

55
down the collective allowance coverage). 50

♦ Banks with higher proportion of corporate loans could be harder

45

40

hit during a downturn. Banks with higher exposures to the SME and 35
Jan-99 Ja n-01 Jan-03 Ja n-05 Jan-07 Ja n-09

corporate segments could now also be harder hit with impairment

allowances when credit conditions deteriorate, as compared to banks that
have a higher exposure to the retail segment. This is because the
corporate sector has, historically, had a higher default rate (vs. household
segment) and loans to businesses and corporates are typically given out
on a clean basis. In mitigation, we believe the banks have taken the
opportunity to beef up provisioning levels as the implementation of
FRS139 has allowed banks to restate opening balances.
♦ Loss loss provisioning: IASB developing an alternative model. To
address the issue of procyclicality, IASB plans to move towards a more
forward-looking provisioning model to help banks build up their reserves
over time, resulting in higher reserves being held when entering periods
of deteriorating credit quality. The implementation of the expected loss
method may lead to higher provisioning levels required. The availability of
data may also pose an operational challenge as to determine expected
losses, banks must now forecast expected credit losses and the timing of
such losses over the life of the loan.
♦ Investment case. We are maintaining our Overweight rating on the
sector. We like Maybank, CIMB, AMMB and Public Bank for an David Chong, CFA
exposure to large cap banking stocks. Affin and AFG are also rated as (603) 9280 2186
Outperform while EON Cap and HL Bank are both rated Market Perform. david.chong@rhb.com.my

Please read important disclosures at the end of this report. Page 1 of 9

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 26 July 2010

♦ Heading into the reporting season, this report takes a recap of the impact from the implementation of FRS139
on the five banks that had adopted the accounting standard in 1QCY10. Two banks, i.e. AMMB and AFG, will be
adopting the standard in the upcoming quarter.

We have also looked at the recent experience of the banks in Singapore to serve as a rough guide on the
potential impact ahead of FRS139 on the local banks. This is given that the banks there adopted FRS39
(equivalent to the local FRS139) in 2005 and the economy has already gone through an economic cycle. In
addition, given that impairment losses are now fully recognised upfront as compared to on a staggered basis
under the previous GP3 requirements, this report attempts to compare whether banks with higher exposure to
corporate loans (which are typically clean loans) are more adversely impacted by the economic cycle as
compared to banks with a higher exposure to the retail segment, where loans tend to be collaterised.

This report ends with a brief introduction to the impairment model that the International Accounting Standards
Board (IASB) is developing to replace the current “incurred loss” model in IAS39/FRS139.

A Recap On The Impact Of FRS139 In 1Q10 Results

♦ Impact – higher impaired loan ratios due to inclusion of “performing loans” ... Prior to the adoption of
FRS139, loans were classified as non-performing when principal or interest or both are past due for three
months or more. Upon the adoption of FRS139, loans are now classified as impaired when principal or interest or
both are past due for three (3) months or more or where loans in arrears for less than three months exhibit
indications of credit weaknesses. Thus, although not strictly comparable with past ratios, asset quality ratios
generally deteriorated given the more stringent classification (and inclusion of IIS) with the adoption of FRS139.

Table 1: Gross Impaired Loans Ratio Generally Higher With Adoption Of FRS139 Due To Stricter Recognition
Requirements
Affin CIMB EON Cap Public Bank RHB
Gross NPL/Impaired Loans Ratio
- As at 31 Dec 2009 3.7% 5.0% 3.8% 1.0% 4.7%
- As at 1 Jan 2010 (restated for FRS139) 4.7% 7.7% 4.3% 1.3% 6.5%
Source: Companies, RHBRI estimates

♦ ... but credit cost generally lower. Apart from the above, the adoption of FRS139 resulted in individual and
portfolio allowances replacing the previous specific and general provisions. The banks were allowed to restate
the opening balances for these allowances with the differences (compared to previous specific and general
provision balances) accounted for in opening retained earnings. The result of this generally varied across the
different banks (Table 2). 1Q10 credit charge was also generally lower yoy and qoq (Table 3) due to, we believe,
improving economic conditions and, to an extent, the “clean-up” exercise due to the adoption of FRS139.

Table 2: Impact To Retained Earnings Varied Among Banks Following Recognition Of Individual And Portfolio Allowances
Affin CIMB EON Cap Public Bank RHB
RMm RMm RMm RMm RMm
As at 31 Dec 2009
- Specific provision 358.0 4,905.3 592.1 223.0 1,757.1
- General provision 343.3 1,826.6 487.8 2,051.7 954.8
- Total 701.3 6,731.9 1,079.9 2,274.7 2,711.9

As at 1 Jan 2010 (restated for FRS139)

- Individual allowance 261.5 5,215.4 386.6 233.7 1,351.2
- Portfolio allowance 477.4 4,078.3 784.7 2,019.3 1,614.4
- Total 738.9 9,293.7 1,171.3 2,253.0 2,965.6

Charge/(write back) to retained profits 37.4 2,561.8 91.4 (21.7) 253.7

Source: Companies, RHBRI estimates

Page 2 of 9

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 26 July 2010

Table 3: Credit Cost Generally Lower Due To Improving Economic Conditions

Affin CIMB EON Cap Public Bank RHB
bps bps bps bps bps
Individual allowance (net)/Avg loans (annualised)
- 1Q10 (15) (8) (70) 4 (4)
- 4Q09 126 67 18 35 130
- 1Q09 25 65 43 29 114

Total loan impairment allowances/Avg loans

(annualised)
- 1Q10 21 40 50 40 47
- 4Q09 151 56 38 52 65
- 1Q09 40 84 46 51 111
Source: Companies, RHBRI estimates

♦ Time series and cross sectional comparisons now less meaningful. In our view, the adoption of FRS139
has now rendered time series and cross sectional comparisons less meaningful. As highlighted above, a bank’s
impaired loans ratio would not be strictly comparable to its historical NPL ratios due to the changes in
recognition requirements. In addition, impaired loans and individual assessment allowances are now linked to
loans that are individually significant, as compared to the past where NPLs and specific provisions are for both
significant and non-significant loans.

In the same vein, comparison among banks in terms of impaired loans ratios are now hampered by factors such
as: 1) differences in trigger events adopted by different banks used in determining whether a loan is impaired;
and 2) threshold level, which varies from bank to bank, for the determination of whether a loan is significant or
not.

Going Forward – The Singapore Experience

♦ The banks in Singapore adopted FRS39 back in 2005. With the Singapore economy having gone through a full
economic cycle during this period, we have, thus, turned to the recent experience of the banks there to serve as
a rough guide on the potential impact ahead of FRS139 on the local banks.

♦ Current accounting for loan losses still procyclical. Despite the switch to the current accounting practice for
the recognition of loan losses (also known as the “incurred loss” model), it has been suggested that the current
method is still procyclical. This means that changes in the amount of recognised loan losses tend to follow the
economy through a cycle of growth and recession. Chart 1 below tracks the collective quarterly specific
allowances made by the three Singapore banks, i.e. DBS, OCBC and UOB, since 2005 and appear to support the
procyclical claim. In fact, while the largest writeback coincided with the peak quarterly GDP growth, there
appears to be a lagged impact in terms of the recognition of provisioning during a downturn with quarterly
specific allowances only peaking two quarters after GDP growth hit a trough.

The trend noted above would help lend support to our view that credit cost should remain relatively benign if
economic conditions hold up. The adoption of FRS139 allowed the banks to beef up provisioning levels without
the corresponding charge to profits (restatement taken to retained profits). Thus, there could be further
writebacks of impairment allowances ahead in tandem with better economic conditions and as some impaired
loans are restructured, leading to lower-than-expected impairment allowances. We note that for banks that beat
our estimates during the last reporting season, the key variance was lower-than-expected impairment
allowances/loan loss provisions.

Page 3 of 9

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 26 July 2010

Chart 1 : Incurred Loss Model Appears Procyclical Chart 2 : Portfolio Allow./Loan On Downtrend For DBS ...
(S$'m) (S$m)
20% 400 200 1.4%

150
15% 300 1.2%
100
1.0%
10% 200 50

0 0.8%
5% 100

1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
-50 0.6%
0% 0 -100
1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 0.4%
-150
-5% -100
0.2%
-200
-10% -200 -250 0.0%
SP (S'pore operations only) (RHS) S'pore GDP Growth (LHS) Portfolio allowances (P&L) (LHS) Portfolio allowance/net loans (RHS)

Source: DBS, OCBC, UOB Source: Company data

Chart 3 : ... as well as OCBC ... Chart 4 : ... and UOB

(S$m) (S$m)
35 2.0% 350 2.5%
1.8%
30 300
1.6%
250 2.0%
25 1.4%

20 1.2% 200
1.0% 1.5%
150
15 0.8%
0.6% 100
10 1.0%
0.4% 50
5
0.2%
0 0.5%
0 0.0%
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
-50
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10

-100 0.0%
Portfolio allowances (P&L) (LHS) Portfolio allowance/net loans (RHS) Portfolio allowances (P&L) (LHS) Portfolio allowance/net loans (RHS)

Source: Company data Source: Company data

♦ Portfolio allowance ratio run down during economic growth. Similarly, portfolio allowances (or collective
allowances, CA) were low during the growth cycle and picked up only during the downturn. Consequently, the
portfolio allowance/net loans ratio trended down over time. Note that in Singapore, the Monetary Authority of
Singapore allowed banks without a sufficiently robust loss estimation process or loan loss data of sufficient
quality over a full credit cycle to adopt a transitional arrangement. Under this arrangement, a bank would need
to maintain CA of at least 1% of loans, net of collaterals and individual impairment provisions.

Under the transitional arrangement as prescribed by BNM, banking institutions are required to maintain
collective impairment allowances of at least 1.5% of outstanding loans, net of individual allowances. This
transitional provision is intended to reduce duplicative costs to banking institutions associated with impending
changes that are currently being worked out by the IASB, while aligning provision levels more closely to
expected loss considerations (see below for further details).

From Table 4 below, except for Public Bank, the other banks have maintained a higher ratio based on their
respective assessment of the level of provisioning required. However, this suggests that as economic conditions
and historical default and loss rates improve, these banks may be able to write back the excess provisions
and/or grow loan base without having to provide for further collective allowances (i.e. run down the collective
allowance coverage). Assuming managements’ FY10 loan growth targets are maintained going forward, we
estimate the “excess” CA may be sufficient to allow CIMB, EON Cap and RHB to grow their respective loan book
over the next three years without having to provide for further CA (2-3 years for Affin). Together with lower IA,
these could provide further leverage to earnings. On the flip side, however, the “expected loss” loan provisioning
model requires entities to include estimated future credit losses and this could raise the level of provisioning
required when implemented.

Public Bank, on the other hand, appears to be penalised for its strong asset quality as it would need to set aside
RM1.50 in CA for every RM100 increase in net loans. During its recent analyst briefing, management had said
that the CA in its books was in excess of the 75-77bps CA required if strictly following FRS139, which suggests
excess CA of around RM1bn. In order to write back this excess allowance, BNM’s approval is required but

Page 4 of 9

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 26 July 2010

management has yet to decide whether to pursue the matter further. However, with the excess allowances,
Public Bank should be less impacted by future changes to the accounting standard on loan loss provisions.

Table 4: Collective Allowance Ratios For Banks

Affin CIMB EON Cap Public Bank RHB

Gross loans @ 31 Dec RMm 23,198.2 148,905.0 33,112.6 137,610.4 69,635.0

Individual impairment allowances RMm (261.5) (5,215.4) (386.6) (233.7) (1,351.2)
Net loans RMm 22,936.8 143,689.6 32,726.0 137,376.7 68,283.8
Collective impairment allowances (CA) RMm (458.2) (4,078.3) (784.7) (2,019.3) (1,614.4)
CA/Net loans 2.0% 2.8%* 2.4% 1.5% 2.4%

CA req based on min 1.5% of net loans RMm (344.1) (2,155.3)* (490.9) (2,060.7) (1,024.3)
“Excess” CA RMm 114.2 1,923.0* 293.8 (41.4) 590.1
*Does not take into account term loans exempted by BNM from collective impairment provisions.
Source: Companies, RHBRI estimates

♦ Banks with higher proportion of corporate loans could now be harder hit during a downturn. Banks
with higher exposures to the SME and corporate segments could now also be harder hit with impairment
allowances when credit conditions deteriorate, as compared to banks that have a higher exposure to the retail
segment. Firstly, the corporate sector has, historically, had a higher rate of default as compared to the
household segment. Loans to SMEs and corporate are also typically of larger value then loans to individuals and
hence, tend to cross the significance threshold and would be assessed individually. Secondly, loans to businesses
and corporates are typically given out on a clean basis. Thus, earnings for these banks could take a larger hit
when credit conditions deteriorate, as compared to banks with a larger proportion of retail customers. This is
because FRS139 requires the entire shortfall between the present value of estimated future cash flows and the
carrying amount to be recognised immediately, as compared to the previous guideline of staggered provisioning
based on the number of months in arrears. Mitigating this impact is that the total absolute provisioning required
may now be lower as compared to previously as the estimated future cash flows from the impaired loans are
now taken into account (previously, provisioning made on the shortfall between outstanding balance and
realisable collateral value).

Table 5 : Loan Composition By Type Of Customers As At End-Mar ‘10

Maybank CIMB Grp PBB* RHB AMMB HLB EONC Affin AFG
% % % % % % % % %
Loan composition
- Individuals 50.1 46.9 62.2 42.4 61.0 67.3 60.1 42.6 56.8
- SMEs 13.9 14.8 18.0 15.4 10.9 8.9 20.9 27.9 20.5
- Corporates & others 36.0 38.3 19.8 42.2 28.1 23.8 19.0 29.5 22.7
*As at end-Jun ‘10
Source : Companies

♦ Singapore banks with higher proportion of retail loans appeared to weather the economic downturn
better. Charts 6-8 appear to suggest that with a higher proportion of retail loans, this helped OCBC weather the
economic cycle better than DBS. A larger proportion of OCBC’s NPLs were on a secured basis as compared to
DBS and this perhaps led to lower credit cost for OCBC over the period.

♦ But improvement in economic conditions could see banks with larger corporate exposure benefit
more. On the flipside, banks with a larger exposure to the corporate loan segment could stand to benefit more
during an upcycle. As highlighted above, there could be impairment writebacks as corporates return to stronger
footing. In addition, banks with a higher proportion of corporate loans could mean better investment banking
relationships, resulting in stronger fee-based income when economic conditions are better.

Page 5 of 9

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 26 July 2010

Chart 5 : Malaysia HH NPL Ratios Lower vs. Business Chart 6 : : Mortgage & Personal Loans/Total Loans
16% 50%

14% 45%

12%
40%
10%
35%
8%

6% 30%

4% 25%

2%
20%
0% 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
2003 2004 2005 2006 2007 2008 2009
DBS OCBC UOB
HH NPL Ratio Business Sector NPL Ratio

Source: BNM Source: Company data

Chart 7 : Secured NPLs/Total NPLs Ratio Chart 8 : Specific Allowance/Avg Loans (Annualised)
80% (bps)
140
70%
120
60%
100
50% 80
40% 60
30% 40
20
20%
-
10%
(20) 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
0% (40)
1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
(60)
DBS OCBC UOB DBS OCBC UOB

Source: Company data Source: Company data

Chart 9 : Malaysia HH Assets & Debt Service Ability Rising Chart 10 : Composition Of HH Financial Assets
(x) (x)
2.8 60

2.7 50
2.6
40
2.5
30
2.4
20
2.3

2.2 10

2.1 0
2005 2006 2007 2008 2009
HH Financial Assets to Total HH Debt Ratio (LHS)
Debt Service Ratio (RHS)

Source: BNM Source: EPF, SC, BNM

Chart 11 : Composition of HH Debt Chart 12 : Business Sector Gearing & Interest Coverage
(x) (x)
0.56 7.0

0.54 6.0

0.52 5.0

0.50 4.0

0.48 3.0

0.46 2.0

0.44 1.0

0.42 0.0
2005 2006 2007 2008 2009
Debt/Equity Ratio (LHS) Interest Coverage Ratio (RHS)

Source: BNM, Treasury Housing Loans Division Source: BNM

Page 6 of 9

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 26 July 2010

Loss Loss Provisioning: An Alternative Model

♦ IASB’s exposure draft on loan loss provisioning moving towards expected loss model. In Nov 2009,
the IASB published an exposure draft (ED) on Financial Instruments: Amortised Cost and Impairment in
response to calls to implement forward-looking provisioning standards as one of the measures to address
procyclicality. While largely a restatement of the principles in IAS39, the ED also proposed a new approach to
impairment assessments where impairment losses are recognised over the life of the financial asset, by including
expected losses in the computation of the effective interest rate when the asset is first recognised. The effective
date is expected to be three years from the issue of the final standard (likely to apply for periods commencing
on or after 1 Jan 2014).

♦ Incurred loss model – a recap. Briefly, under the present incurred loss model, loans may be classified as
impaired only when there is objective evidence that a loan or portfolio of loans would not be repaid in full. Thus,
credit losses are caused by events and current accounting standards do not permit the recognition of credit
losses based on events that are expected to occur in the future to be included in provisions until the loss
creating event occurs. IAS39 also does not permit the practice of recording “general provisions”. Instead,
provisions for loan losses should cover estimated loan losses that have been identified for individual loans, as
well as estimated losses for loans in a bank’s portfolio that have likely been incurred, but have not yet been
individually identified (“incurred but not reported”). Consequently, this tends to lead to greater losses in an
economic downturn and more volatile results (as per Chart 1).

♦ Expected loss model – a brief introduction. Under the expected loss model, no loss event is required and
hence, changes in economic conditions on their own may lead to changes in estimates that are recognised as
gains and losses. Briefly, the new proposals by IASB will require banking institutions to:

1. Determine the expected credit losses on a financial asset when that asset is first obtained;

2. Recognise the contractual interest revenue, less the initial expected credit losses, over the life of the asset;

3. Build up a provision over the life of the asset for the expected credit losses;

4. Reassess the expected credit loss at each period; and

5. Recognise immediately the effects of any changes in credit loss expectations.

Table 6 : Comparison Of The Current Incurred Loss Method And Proposed Expected Loss Method
Incurred Loss Method
• Interest revenue for financial assets is recognised on the
basis of expected cash flows, excluding expected credit
losses.
• Impairment is recognised only when a loss event occurs.
• Losses that are expected to arise from future events are not
recognised.
• Interest revenue can be viewed as “overstated” in periods
before a loss event occurs.
Source: BNM
Expected Loss Method
• Interest revenue for financial assets is recognised on the
basis of expected cash flows, including expected credit
losses.
• Expected credit losses are continuously reestimated without
reference to loss events.
• Impairment is recognised from an adverse change in credit
loss expectations and can be reversed by subsequent
favourable changes.
• Interest revenue reflects the total net return expected at
inception.

♦ Implications. The move towards forward-looking provisioning would help banking institutions build up its
reserves over time, resulting in higher reserves being held when entering periods of deteriorating credit quality.
Thus, a through-the-cycle provisioning method should lead to lower spikes in provisioning during an economic
downturn. On the flipside, the implementation of the expected loss method may lead to higher provisioning
levels required and changes in expectations of credit losses would have an immediate and direct impact on
earnings. The availability of data may also pose an operational challenge as to determine expected losses, banks
must now forecast expected credit losses and the timing of such losses over the life of the loan. This is as
compared to the current practice for CA, where: (1) a trigger event has occurred; and (2) historical default and
loss data, which is typically more recent and covers a shorter period, e.g. two years, is used in the calculation of
allowances required.

Page 7 of 9

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 26 July 2010

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.

Forecasts

♦ No changes to our earnings forecasts for the banks.

Valuations and Recommendations

♦ Banking sector the best proxy to the economic recovery. In our view, the banking sector represents the
best proxy to the economic recovery and we continue to believe that the sector will 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 historical levels; and 3) relatively low
foreign shareholding levels.

♦ Maintain Overweight on the sector. Overall, we maintain our Overweight stance on the sector. For an
exposure to the big cap banking stocks, we like Maybank, CIMB Group, Public Bank and AMMB while AFG and
Affin are our picks within the smaller market capitalisation segment. HL Bank and EON Cap are both rated
Market Perform.

Chart 13 : CIMB Technical View Point

♦ The share price of CIMB hopped onto a steep
uptrend since Mar 2009, and thereafter, trending
smoothly above the UTL.

♦ It hit a fresh all-time high level at RM7.41 in Apr

2010, before encountering a stiff profit-taking
pressure.

♦ The downswing once pressed it to below the

RM6.70 key support level to RM6.58 in May, just off
the one-year plus UTL, but a timely return of
bargain-hunting activities salvaged the uptrend
with a rebound to above RM6.70.

♦ Consequently, the stock trailed the ascending UTL

and the 10-day SMA before closing at RM7.26 on
Friday.

♦ Although the record of a small “shooting star”

candle on the dot of the UTL last week may lead to
mild profit-taking pullback early this week, we
expect buying support to be equally strong.

♦ The medium-term outlook is slowly turning

positive, with the 10-day SMA ticking upward
together with the 40-day SMA.

♦ Going forward, should it continue to trend along the

UTL and the 10-day SMA, we expect a retest of
RM7.41 soon. Breaking the hurdle will bring the
stock into an uncharted territory, bullishly.

Page 8 of 9

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 26 July 2010

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
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
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,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
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
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.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for
the actions of third parties in this respect.

Page 9 of 9

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com