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PP 7767/09/2010(025354)

RHB Research
Corporate Highlights

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

S e cto r Upd at e
2 September 2010
MARKET DATELINE
Recom : Overweight
Banking (Maintained)

2QCY10 Report Card – Lower Impairment Allowances


For Loans Help Beat Forecasts
Table 1: Sector Valuations
PER (x) EPS gwth (%) P/BV (x) ROE (%) Net Div Yld (%)
PriceFY10FV Rec
FY11 FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11
Maybank 8.49 9.86
15.7 OP
13.7 42.6 14.7 2.2 2.0 14.5 15.0 4.9 3.1
CIMB 7.90 8.40
16.5 OP
14.0 20.8 17.2 2.2 2.0 15.2 15.1 1.2 1.2
Public Bank - L 12.14 13.75
14.8 OP
13.2 11.8 11.8 3.4 3.0 24.2 23.8 3.7 4.0
AMMB^ 5.80 6.95
13.8 OP
12.1 20.8 14.1 1.6 1.5 12.5 13.0 2.5 2.9
HLB 8.84 10.70
13.0 OP
12.5 9.1 3.9 2.2 1.9 16.3 15.1 2.0 2.0
Affin 3.08 4.10
9.5 OP
8.9 30.1 6.4 0.9 0.8 9.8 9.6 2.1 2.1
AFG^ 3.10 3.50
12.4 OP
11.3 28.9 9.0 1.5 1.3 12.5 12.3 2.1 2.1
EON Cap 6.98 8.33
11.5 MP
10.1 23.5 14.3 1.2 1.1 11.3 11.6 1.4 1.4
RHB Cap 6.84 10.7 NR NR
9.8 14.3 9.4 1.5 1.4 14.8 14.9 2.5 2.7
Sector Wt. Avg 14.8 13.0 24.2 13.4 2.3 2.1 16.3 16.3 3.0 2.6
*Not under coverage. Forecasts based on IBES estimates ^FY10-11 valuations refer to those of FY11-12

♦ Earnings momentum gathered steam … 2QCY10 earnings gathered


Chart 1. Industry NPL
(RMm) Gross NPL (LHS) Gross NPL ratio (RHS) Net NPL ratio (RHS) (%)

further momentum, with five of the eight banking stocks that we cover 69,000
1

reporting quarterly numbers that beat our as well as consensus 64,000 1

59,000 1
expectations. The most common variance was due to lower-than- 54,000
1
expected impairment allowances for loans (Affin, AFG, AMMB and HL 49,000
9
Bank). Other causes for the stronger-than-expected results were: 1) 44,000
7
strong non-interest income contribution (AMMB); 2) overheads that were 39,000
5
well controlled (EON Cap); and 3) lower-than-expected effective tax rate 34,000

29,000 3
(HL Bank).
24,000 1
Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10

♦ … bringing 2Q net profit to another high. Following from the above, Chart 2. Industry LLC
2QCY10 reporting season resulted in another quarter of record aggregate 100
(%)

95

profit (+5.3% qoq; +33.5% yoy) being reported for the domestic banking 90

system. Not surprisingly, the bulk of the trends noted during the quarter
85

80

were, thus, positive, i.e.: 1) loan growth gathered further momentum; 2)


75

70

NIM expansion (+6bps qoq; +9bps yoy); 3) absolute overhead level was 65

60

broadly stable qoq. Consequently, CIR fell to 47.2% from 48.4% in 55

50

1QCY10 on an enlarged income base; and 4) lower loan loss provisions (- 45

40

0.9% qoq; -51.1% yoy). 35


9 0 1 2 3 4 5 6 7 8 9 0
-9 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -1
n n n n n n n n n n n n
Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja

♦ Asset quality. Absolute gross NPLs/impaired loans as at end-Jun ’10


rose 1.6% as compared to end-Mar ’10, largely due to the adoption of
FRS139 by AMMB while Public Bank adopted more stringent criteria for
the classification of impaired loans. Aggregate gross and net
NPLs/impaired loans ratio stood at 3.86% (end-Mar ’10: 3.94%) and
2.38% (end-Mar ‘10: 2.31%) respectively.

♦ Risks. The risks include: 1) slower-than-expected loan growth; 2)


deterioration in asset quality; and 3) changes in market conditions that
adversely affect investments portfolio.

♦ Forecasts. Except for Public Bank, Maybank and CIMB, our earnings
forecasts for the other banks were revised upwards to take into account
the stronger-than-expected set of results.

♦ Investment case. We are maintaining our Overweight rating on the David Chong, CFA
sector. We like Maybank, CIMB, AMMB and Public Bank for an (603) 9280 2186
exposure to large cap banking stocks. HL Bank, Affin and AFG are also david.chong@rhb.com.my
rated as Outperform while EON Cap is rated Market Perform.

Please read important disclosures at the end of this report.


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2QCY10 RESULTS REVIEW

♦ Earnings momentum gathered steam … 2QCY10 earnings gathered further momentum, with five of the
eight banking stocks that we cover reporting quarterly numbers that beat our as well as consensus expectations
(1QCY10: two above our and consensus expectations while the rest were in line). The most common variance
was due to lower-than-expected impairment allowances for loans (Affin, AFG, AMMB and HL Bank). Other causes
for the stronger-than-expected results were: 1) strong non-interest income contribution (AMMB); 2) overheads
that were well controlled (EON Cap); and 3) lower-than-expected effective tax rate (HL Bank). While Maybank’s
results were in line with our and consensus expectations, Maybank surprised with a higher-than-expected final
net DPS of 33 sen. We believe this was made possible by the dividend reinvestment plan it has in place.

♦ … bringing 2Q net profit to another high. Following from the above, 2QCY10 reporting season resulted in
another quarter of record aggregate profit (+5.3% qoq; +33.5% yoy) being reported for the domestic banking
system. Not surprisingly, the bulk of the trends noted during the quarter were, thus, positive, i.e.: 1) loan
growth gathered further momentum; 2) NIM expansion (+6bps qoq; +9bps yoy); 3) Absolute overhead level
was broadly stable qoq. Consequently, CIR fell to 47.2% from 48.4% in 1QCY10 on an enlarged income base;
and 4) lower loan loss provisions (-0.9% qoq; -51.1% yoy).

Non-interest income, however, was down marginally qoq and yoy. In addition, although the gross impaired loan
ratio fell to 3.86% from 3.94%, this was largely due to a bigger loan base. Absolute gross impaired loans rose
1.6% qoq (+18.8% yoy) with another two banks, AMMB and AFG, adopting FRS139 during the quarter while
annualised net impaired loan formation increased by another 22bps qoq to 138bps.

Chart 3 : Quarterly Net Profit At A New High … Chart 4 : … With All Banks Reporting Higher Sequential
Net Profit Except For Affin, Maybank and RHB Cap
(RMbn) (%) (RMm)
Net profit (RMbn - LHS) 2Q09 3Q09 4Q09 1Q10 2Q10
4.0 1,200
qoq (%) (RHS) 70
3.5 1,000

50
800
3.0

30 600
2.5
400
10
2.0
200
1.5 -10
0

Maybank

RHB Cap
EON Cap

Public
Alliance
Affin

CIMB
AMMB

HL Bank
1.0 -30 Grp

1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10


(CY)

Source: Companies Source: Companies

Net Interest Income Up On Enlarged Loan Base And NIM Expansion

♦ Net interest income up qoq and yoy ... Aggregate net interest income in 2QCY10 rose 4.7% qoq and 13.3%
yoy (1QCY10: flat qoq; +13.3% yoy) on the back of continued loan growth (+3.9% qoq; +13.3% yoy), higher
Islamic income (+5.8% qoq; +11.6% yoy) and NIM expansion (+6bps qoq; +9bp yoy).

Chart 5 : Net Interest Income : +4.7% QoQ; +13.3% YoY Chart 6 : Net Interest Income By Banks
(RMm)
Net interest income (RMbn - LHS) qoq (% - RHS) (%) 2Q09 3Q09 4Q09 1Q10 2Q10
(RMbn) 2,500
8.5
8.0 9
2,000
7.5
7
7.0 1,500
6.5 5

6.0 1,000
3
5.5
5.0 1 500
4.5
-1
4.0 0
CIMB Grp

Maybank

RHB Cap
EON Cap

Public
Alliance
Affin

HL Bank
AMMB

3.5 -3
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
(CY)

Source: Companies Source: Companies

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♦ … as aggregate loan growth still healthy ... As mentioned above, aggregate loan base rose from RM756.5bn
to reach RM786bn. Among the segments that grew faster than industry include purchase of non-residential
property (+5.8% qoq), personal use and credit cards (+4.7% and +4.3% qoq respectively, but from a lower
base) as well as loans for working capital (+4.4% qoq). Banks that reported below industry growth (qoq) were
HL Bank (+3.2% qoq, mainly driven by working capital loans), AMMB (+1.7% qoq, reflecting management’s
focus in growing profitable assets and corporate segment) and Alliance (+0.7% qoq, as focus shifted away from
personal loans).

For banks at the other end of the spectrum, Affin’s loan growth was driven by loans for HP (+6.5% qoq;
+20.1% yoy) and purchase of non-residential properties (+17.4% qoq; +55.1% yoy) while RHB’s key growth
drivers were purchase of securities (+22% qoq; +56.5% yoy), residential properties (+4.2% qoq; +15.6% yoy)
and others (+10.3% qoq; >100% yoy). As for EON, its consumer loan book continued to grow strongly.

Looking ahead, Jul’s banking system loan growth remained at a healthy +11.9% yoy while loan applications
reached a new high for the banking system. All these were achieved notwithstanding the three OPR hikes that
had taken place thus far, which suggests that demand for loans have not been dampened. In terms of
applications by purpose, the growth was underpinned by applications for the purchase of residential and non-
residential properties, construction and working capital purposes. We think the strong loan application pipeline
should be supportinve of loan growth ahead. For the banking system, we project 2010 loan growth of between
10% and 11%.

Chart 7 : Aggregate Loan Growth : +3.9% QoQ Chart 8 : QoQ Loan Growth – Most Banks Above Industry
(RMbn) (%) 6%
Gross loan (RMbn - LHS) qoq (% - RHS)
800 8.0
5%
700
6.0
4%
600
4.0
500 3%

400 2.0 2%

300
0.0 1%
200
0%
-2.0
100

Public Bank
Alliance

Industry

Affin
Maybank

EON
CIMB
HL Bank
AMMB

RHB
0 -4.0
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
(CY)
Source: Companies * For banks with foreign operations, loan growth refers to
Malaysia operations only.
Source: BNM, Companies
Chart 9 : Loans : Purchase Of Residential Properties Chart 10 : Strong QoQ Loan Growth Performers For
Residential Properties
RMm Purchase of residential properties (LHS) QoQ chg CIMB EON Public Bank RHB
250,000 3.5%
QoQ chg (RHS)
9%
3.0%
200,000 8%
2.5% 7%

150,000 2.0% 6%
5%
100,000 1.5%
4%
1.0% 3%
50,000
0.5% 2%
1%
0 0.0%
0%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
(CY) 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Source: BNM Source: Companies

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Chart 11 : Loans : Purchase Of Non-Residential Properties Chart 12 : Strong QoQ Loan Growth Performers For Non-
Residential Properties
RMm Purchase of non-residential properties (LHS) EON AMMB CIMB Affin Public Bank
90,000 7.0%
QoQ chg
QoQ chg (RHS)
30%
80,000
6.0%
70,000
25%
5.0%
60,000 20%

50,000 4.0% 15%


40,000 3.0% 10%
30,000 5%
2.0%
20,000 0%
1.0%
10,000 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
-5%
0 0.0%
-10%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
(CY) -15%

Source: BNM Source: Companies

Chart 13 : Loans : Purchase Of Transport Vehicles Chart 14 : Strong QoQ Loan Growth Performers For
Transport Vehicles
RMm Purchase of transport vehicles (LHS) QoQ chg Affin CIMB Public Bank RHB
4.0%
QoQ chg (RHS) 7%
120,100
3.5%
6%
100,100 3.0%
5%
80,100 2.5%
4%
2.0%
60,100 3%
1.5%
40,100 2%
1.0%
1%
20,100
0.5%
0%
100 0.0% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
-1%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
(CY) -2%

Source: BNM Source: Companies

Chart 15 : Loans : Working Capital Chart 16 : Strong QoQ Loan Growth Performers For
Working Capital
RMm QoQ chg HL Bank AMMB Maybank Public Bank
225,000 Working capital (LHS) QoQ chg (RHS) 6.0%
15%
220,000 5.0%
215,000 4.0% 10%
210,000
3.0%
205,000 5%
2.0%
200,000
1.0%
195,000 0%
0.0%
190,000 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
185,000 -1.0% -5%

180,000 -2.0%
-10%
175,000 -3.0%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
(CY) -15%

Source: BNM Source: Companies

♦ … while NIM expanded on OPR hikes. Except for RHB Cap, most of the other banks appear to have benefited
from the two OPR hikes that took place in 1H2010 given that assets tend to be repriced faster than liabilities.
The extent, however, varied with NIM (excluding Islamic income) expanding between +1bp qoq (Alliance and
CIMB) and +15bps qoq (Maybank). AMMB, which has the highest proportion of fixed rate loans among the banks
at 57.6%, also saw NIM expand by 2bps qoq. Nevertheless, management believes NIM has likely peaked for the
group. Overall, aggregate NIM expanded by 6bps qoq (+9bps yoy) with average yields on assets rising 14bps
qoq (-9bps yoy) while average funding cost rose by 9bps qoq (-17bps yoy).

Having raised the OPR to 2.75% from 2% at the start of the year, we think BNM could be done with its interest
rate hike for this year. That said, we would not discount altogether the possibility of another 25bps increase in
today’s meeting in a move to normalise monetary conditions, but this will likely be data dependent, in our view.

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Further out, we believe BNM would likely continue with its policy normalisation. This could see the OPR raised by
another 50-75bps in early 2011, bringing the rate to a more normal level of 3.25-3.5% by mid-2011.

Chart 17 : NIM Up QoQ And YoY On OPR Hikes Chart 18 : NIM – Most Banks Higher QoQ
(%) (%)
2Q09 3Q09 4Q09 1Q10 2Q10
2.80 3.50
3.30
2.70 3.10
2.90
2.60 2.70
2.50
2.50
2.30
2.10
2.40
1.90

2.30 1.70
1.50

CIMB Grp
Alliance
2.20

Affin

Maybank

RHB Cap
AMMB

HL Bank
EON Cap

Public
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10

Source: Companies Source: Companies

Chart 19 : Asset Yields Improved On Quicker Repricing ... Chart 20 : … Largely Across The Board
(%)
(%)
6.00 2Q09 3Q09 4Q09 1Q10 2Q10
5.7

5.50 5.2

5.00 4.7

4.2
4.50

3.7
4.00
3.2

Maybank

RHB Cap
CIMB Grp

EON Cap

Public
Alliance
Affin

AMMB

HL Bank
3.50
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
(CY)

Source: Companies Source: Companies

Chart 21 : Cost Of Funds Trended Up Slightly Chart 22 : Maybank And HL Bank Registered Lower QoQ
Cost Of Funds
(%) (%)
2Q09 3Q09 4Q09 1Q10 2Q10
3.30 2.6

3.10
2.4
2.90
2.2
2.70
2.50 2.0

2.30
1.8
2.10
1.6
1.90
1.70 1.4
CIMB Grp
Alliance
Affin

Maybank

RHB Cap
AMMB

HL Bank
EON Cap

Public

1.50
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
(CY)

Source: Companies Source: Companies

♦ Non-interest income down marginally. Aggregate non-interest income came in at RM3.42bn (-1.8% qoq; -
1.2% yoy). Although AMMB 1QFY11 non-interest income surprised on the upside, nevertheless, this was not
sufficient to offset the drop in Maybank’s non-interest income. The decline in Maybank’s non-interest income was
not too surprising given that the previous quarter received a boost from lumpy items such as unrealised gains
from the revaluation of derivatives.

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Chart 15 : Non Interest Income Softened Slightly ... Chart 16 : … Mainly Due To Weaker Contribution From
Maybank
(RMbn) (%) (RMm) 2Q09 3Q09 4Q09 1Q10 2Q10
Non-interest income (RMbn - LHS) qoq (% - RHS)
1,350
3.5 50
40 1,150
3.0 30
950
20
2.5 10 750

0 550
2.0 -10
350
-20
1.5 -30 150

-40 -50

Maybank

RHB Cap
EON Cap

Public
Alliance
Affin

CIMB
AMMB

HL Bank
Grp
1.0 -50
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
(CY)

Source: Companies Source: Companies

Chart 17 : Operating Income At Another High Chart 18 : CIMB Grp And Public Bank Driving Industry
QoQ Operating Income Growth
(RMbn) (%) (RMm) 2Q09 3Q09 4Q09 1Q10 2Q10
12.0 Operating income (RMbn - LHS) qoq (% - RHS) 20 3,500
11.5
11.0 15 3,000
10.5
10
10.0 2,500
9.5 5 2,000
9.0
8.5 0 1,500
8.0
7.5 -5 1,000
7.0
-10 500
6.5
6.0 -15 0
5.5

Maybank

RHB Cap
EON Cap

Public
Alliance
Affin

CIMB
AMMB

HL Bank
5.0 -20

Grp
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
(CY)

Source: Companies Source: Companies

♦ Overhead expenses well controlled leading to CIR improving to 47.2%. Overheads remained stable qoq
(+9.4% yoy), suggesting that the banks have been keeping a tight rein on costs. Coupled with the stronger
growth in income base, aggregate cost to income ratio (CIR) improved to 47.2% from 48.4% in the previous
quarter. Banks that witnessed significant improvements in CIR were Alliance (45.3% in 2QCY10 from 52.3% in
1QCY10 due to lower personnel and establishment costs) and AMMB (44.3% in 2QCY10 from 51.2% in 1QCY10
with generally lower overheads all round, except for establishment cost).

Further out, the issuance of new banking licences could result in cost pressures as banks compete to attract and
retain talent. Continuous investment in infrastructure and human capital may also be required in order to
expand the business and to protect market share.

Chart 19 : Overhead Expenses Remain Under Control Chart 20 : Overheads For Individual Banks
(RMbn) (%) (RMm) 2Q09 3Q09 4Q09 1Q10 2Q10
Overheads (RMbn - LHS) qoq (% - RHS)
5.5 15 1,800
13 1,600
5.0
11 1,400
4.5 9 1,200

7 1,000
4.0
800
5
3.5 600
3
400
3.0 1
200
-1
2.5 0
-3
CIMB Grp
Alliance
Affin

Maybank

RHB Cap
HL Bank
AMMB

EON Cap

Public

2.0 -5
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
(CY)

Source: Companies Source: Companies

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Chart 21 : CIR Fell Further To 47.2% From 48.4% Chart 22 : Except For Maybank And Affin, CIR For Other
Banks Trended Down QoQ
(%)
(%) Cost/income ratio (% - LHS) qoq (% - RHS) (%) 2Q09 3Q09 4Q09 1Q10 2Q10
88
52 25
78
50 20

68
15
48
10 58
46
5 48

44
0 38

42 -5 28

CIMB Grp
Alliance
Affin

Maybank

RHB Cap
AMMB

HL Bank
EON Cap

Public
40 -10
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
(CY)

Source: Companies Source: Companies

Chart 23 : Pre-Provision Profit Touches New High ... Chart 24 : … Helped By CIMB, AMMB and Public Bank
(RMbn) Pre-provision profit (RMbn - LHS) (%) (RMm)
2Q09 3Q09 4Q09 1Q10 2Q10
6.5 qoq (% - RHS) 30 1,800

6.0 1,600
20
1,400
5.5
10 1,200
5.0 1,000
0
4.5 800
-10 600
4.0
400
-20
3.5 200

3.0 -30 0

CIMB Grp

Maybank

RHB Cap
EON Cap

Public
Alliance
Affin

AMMB

HL Bank
2.5 -40
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
(CY)

Source: Companies Source: Companies

♦ Impairment allowance on loans down marginally. As mentioned above, this line item was the main source
of earnings surprise for majority of the banks that reported results that exceeded expectations. Aggregate loan
loss provision (LLP) or allowance for impairment of loans was down 0.9% qoq (-51.1% yoy). Notable qoq
improvements were reported by AMMB, Alliance and HL Bank while Affin would have reported a net writeback of
allowance if not for the RM30m provision for a legal suit. These positives were offset by higher LLP for Maybank
(partly due to preemptive provisioning) and Public Bank (absence of one-off recovery in 1QCY10). Generally, the
banks appeared optimistic that LLP would continue to remain low ahead.

Chart 25 : LLP Broadly Stable QoQ Chart 26 : LLP of AMMB, Alliance and HL Bank Displayed
Significant Improvement QoQ
(RMbn) (%) (RMm) 2Q09 3Q09 4Q09 1Q10 2Q10
2.0 Loan loss provision (RMbn - LHS) qoq (% - RHS) 120 900
1.9
100 800
1.8
1.7 700
80
1.6 600
1.5 60
500
1.4 40 400
1.3
1.2 20 300
1.1 0 200
1.0
100
0.9 -20
0.8 0
-40
CIMB Grp
Alliance
Affin

Maybank

RHB Cap
AMMB

HL Bank
EON Cap

Public

0.7 -100
0.6 -60 -200
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
(CY)

Source: Companies Source: Companies

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♦ NPLs rise due to FRS139. Absolute gross NPLs/impaired loans as at end-Jun ’10 rose 1.6% as compared to
end-Mar ’10, largely due to the adoption of FRS139 by AMMB while Public Bank adopted more stringent criteria
for the classification of impaired loans. However, aggregate gross and net NPLs/impaired loans ratio stood at
3.86% (end-Mar ’10: 3.94%) and 2.38% (end-Mar ‘10: 2.31%) respectively.

Only HL Bank and Maybank have yet to adopt FRS139, although they would do so in the next quarterly results.
Maybank’s management had guided for higher impaired loans once FRS139 is adopted (in line with the
experience by the other banks) but believes that any further provisioning required under the new standard was
unlikely to be significant. As for HL Bank, management estimates the gross impaired loan ratio could rise to
2.4% from 1.9% currently, but did not provide guidance on provisioning. While all banks would have adopted
FRS139 for the period ended 30 Sep, we do highlight that comparison among banks in terms of impaired loans
ratios may still be 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.

Chart 27 : Aggregate Net NPL Up With AMMB And Alliance Chart 28 : … Leading To Deterioration In Ratios For These
Adopting FRS139 … Banks
(%) (%-Point) (%)
2Q09 3Q09 4Q09 1Q10 2Q10
8 Net NPL (% - LHS) %-Point change (RHS) 0.8 5.0

0.6 4.5
7
0.4 4.0

6 3.5
0.2
3.0
5 0.0
2.5
-0.2
4 2.0
-0.4
1.5
3 -0.6
1.0
-0.8
2 0.5
-1.0
0.0
1 -1.2

Maybank
Alliance
Affin

CIMB

RHB Cap
HL Bank
AMMB

EON Cap

Public
Grp
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
(CY)

Source: Companies Source: Companies

Chart 31 : Annualised Net NPL Formation Higher QoQ ... Chart 32 : … Except For Alliance, EON, HL Bank And RHB
(bps) Annualised net NPL formation (bps) (bps) (bps)
300 150 2Q09 3Q09 4Q09 1Q10 2Q10
Qoq bps change (RHS) 300

250 100 250

200
200 50
150
150 0
100

100 (50) 50

0
50 (100)

RHB Cap
EON Cap
Alliance
Affin

Maybank
CIMB
AMMB

HL Bank

Public
Grp

0 (150)
1Q06 1Q07 1Q08 1Q09 1Q10

Source: Companies Source: Companies

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Chart 33 : PBT Improved QoQ ... Chart 34 : … Except For Affin, Maybank and RHB
RMbn (%) (RMm)
PBT (RMbn - LHS)
1700 2Q09 3Q09 4Q09 1Q10 2Q10
5.5 qoq (%) (RHS) 120
1500
5.0 100
1300
4.5 80
1100
60
4.0 900
40
3.5 700
20
500
3.0
0
300
2.5 -20
100
2.0 -40 -100

Affin

Public
Alliance

HL Bank

Maybank
AMMB

CIMB Grp

EON Cap

RHB Cap
1.5 -60
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
(CY)

Source: Companies Source: Companies

RISKS

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

VALUATIONS AND RECOMMENDATION

♦ Banking sector the best proxy to the economic recovery. We continue to hold the view that the banking
sector represents the best proxy to the economic recovery and 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. YTD, except for EON Cap and HL Bank, the other banks have performed at least
in line or better than the FBM KLCI.

Chart 35 : Total Returns For Aug: KLCI vs. Banks Chart 36 : Total Returns YTD: KLCI vs. Banks
12.0% 35.0%

10.0% 30.0%

8.0% 25.0%

20.0%
6.0%
15.0%
4.0%
10.0%
2.0%
5.0%
0.0%
0.0%
Affin

Public
AFG

AMMB

HL Bank

Maybank
EON Cap

RHB Cap
FBM KLCI

CIMB

Bank

Affin

Public
AMMB

HL Bank

Maybank
AFG

EON Cap

RHB Cap
FBM KLCI

CIMB

Bank
-2.0%

-4.0%

Source: Bloomberg Source: Bloomberg

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Chart 37 : Total Returns For Aug: KLFin vs. Banks Chart 38 : Total Returns YTD: KLFin vs. Banks
12.0% 35.0%

10.0% 30.0%

25.0%
8.0%
20.0%
6.0%
15.0%
4.0%
10.0%
2.0%
5.0%
0.0% 0.0%
Affin

Public
Finance

AFG

AMMB

HL Bank

Maybank
EON Cap

RHB Cap
CIMB

Bank

Affin

Public
Finance

AMMB
AFG

HL Bank

Maybank
EON Cap

RHB Cap
CIMB

Bank
FBM

-2.0%

FBM
-4.0%

Source: Bloomberg Source: Bloomberg

♦ BNM’s recent banking statistics help reinforce positive stance. Apart from the strong set of recent
quarterly numbers, our positive stance on the banking sector is further reinforced by Jul’s banking statistics,
which we highlighted above. In our view, the enlarged loan base from the growth thus far should be felt in
2H2010 while the strong loan application pipeline would be supportive of loan growth ahead. This would be
further aided by the three OPR hikes that have taken place thus far.

♦ Maintain Overweight on the sector. Thus, 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 HL Bank,
AFG and Affin are our picks within the mid-smaller market capitalisation segment.

Table 2 : Valuation Bases


Fair Value
Company (RM/share) Valuation Methodology
Affin 4.10 12x CY11 EPS, 3x discount to reflect its smaller market capitalisation
AFG 3.50 13x CY11 EPS, 2x discount to reflect its smaller market capitalisation
AMMB 6.95 Benchmark 15x CY11 EPS
CIMB Group 8.40 Benchmark 15x CY11 EPS
EON Cap 8.33 13x CY11 EPS, 2x discount to reflect its smaller market capitalisation
HL Bank 10.70 Benchmark 15x CY11 EPS
Maybank 9.86 Benchmark 15x CY11 EPS
Public 13.75 Benchmark 15x CY11 EPS
Source: RHBRI

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Table 3 : Key Earnings Data
Maybank CIMB Grp PBB - L AMMB HLB EONC Affin AFG
Pre-provision Profit (RMm)

FY09a 6,437 4,875 4,000 1,986 1,147 585 670 377


FY10F 7,039 5,521 4,465 2,187 1,222 736 730 610
FY11F 7,632 6,241 4,871 2,375 1,269 799 794 664

Net Profit (RMm)


FY09a 3,818 2,807 2,517 1,009 988 341 372 301
FY10F 4,381 3,520 2,872 1,264 1,027 421 484 389
FY11F 4,925 4,124 3,212 1,442 1,051 481 514 423

Net Profit Growth (%)


FY09a 75.1 43.8 (2.5) 17.2 9.1 155.0 27.0 31.6
FY10F 14.7 25.4 14.1 25.3 3.9 23.5 30.1 28.9
FY11F 12.4 17.2 11.8 14.1 2.3 14.3 6.4 9.0

Adjusted Net Interest Margins (%)


FY09a 2.87 3.43 2.38 3.11 2.00 2.65 2.72 2.82
FY10F 2.86 3.41 2.36 2.98 1.98 2.67 2.64 2.94
FY11F 2.86 3.38 2.35 2.99 1.94 2.59 2.60 2.96

Non-Interest Income As % of Total Income


FY09a 36.1 35.1 22.6 31.3 24.1 19.9 23.9 7.4
FY10F 35.4 33.8 22.1 34.3 24.3 20.1 23.4 19.6
FY11F 34.7 33.5 21.7 34.4 24.4 20.4 23.0 19.8

Cost-to-Income Ratio (%)


FY09a 49.9 54.0 34.5 49.0 44.4 58.9 47.4 59.5
FY10F 49.1 53.3 33.4 47.6 44.1 53.5 46.5 47.1
FY11F 48.6 51.4 32.8 47.0 44.3 52.7 45.6 46.2

Loan-to-Deposit Ratio (%)


FY09a 86.8 79.5 79.2 94.0 54.1 92.9 78.7 87.4
FY10F 86.9 75.3 82.1 92.5 54.2 92.0 82.7 87.8
FY11F 87.9 75.0 83.6 91.7 54.2 92.1 82.8 87.1

Loan Growth (%)


FY09a 10.2 20.9 18.8 12.0 8.5 8.3 12.9 10.0
FY10F 10.0 10.3 14.0 7.6 7.1 14.8 16.0 8.5
FY11F 8.0 9.4 10.0 7.0 7.0 9.1 10.1 7.2

Gross NPL Ratio (%)


FY09a 2.9 5.0 1.0 2.8 1.9 3.8 3.7 3.8
FY10F 2.9 7.0 0.9 3.5 1.8 3.8 3.5 3.5
FY11F 2.7 6.5 0.9 3.3 1.7 3.3 3.3 3.3

Net NPL Ratio (%)


FY09a 1.1 1.8 0.8 1.5 1.2 2.3 2.2 1.8
FY10F 1.3 4.1 0.8 2.8 1.2 2.9 3.0 2.0
FY11F 1.2 4.0 0.7 2.7 1.1 2.5 2.9 1.9

Loan Loss Cover (%)


FY09a 124.5 90.8 172.4 99.5 117.4 78.5 81.5 94.4
FY10F 118.9 78.2 181.0 96.6 119.0 81.3 66.4 87.9
FY11F 122.5 76.2 191.6 98.3 125.0 89.9 65.5 90.2

RWCAR (%)
FY09a 14.7 14.4 14.2 15.8 15.5 14.4 13.8 15.7
FY10F 14.9 15.2 14.5 17.1 9.7 14.8 13.6 14.8
FY11F 15.0 14.9 14.3 17.1 10.2 15.0 13.3 15.6
Source : RHBRI – for companies with FYE Mar & Jun, FY09, FY10F and FY11F refers to FY10, FY11 and FY12 respectively

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Table 4 : Valuation Summary
Maybank CIMB Grp PBB - L AMMB HLB EONC Affin AFG
Bloomberg Ticker MAY MK CIMB MK PBK MK AMM MK HLBK MK EON MK AHB MK AFG MK
Recommendation OP OP OP OP OP MP OP OP

EPS (sen)
FY09a 53.9 39.8 73.3 34.7 68.1 49.2 24.9 19.5
FY10F 61.9 48.0 82.0 41.9 70.8 60.8 32.4 25.1
FY11F 69.6 56.3 91.7 47.8 72.5 69.4 34.4 27.3

EPS growth (% y-o-y)


FY09a 42.6 37.5 (4.7) 9.8 9.1 155.0 27.0 30.6
FY10F 14.7 20.8 11.8 20.8 3.9 23.5 30.1 28.9
FY11F 12.4 17.2 11.8 14.1 2.3 14.3 6.4 9.0

PER (x)
FY09a 15.7 19.6 16.6 16.7 13.0 14.2 12.4 15.9
FY10F 13.7 16.2 14.8 13.8 12.5 11.5 9.5 12.4
FY11F 12.2 13.9 13.2 12.1 12.2 10.1 8.9 11.3

BVPS (RM/s)
FY09a 3.94 2.88 3.12 3.20 4.07 5.13 3.17 1.90
FY10F 4.29 3.54 3.60 3.52 4.54 5.66 3.43 2.11
FY11F 4.70 3.92 4.04 3.85 5.03 6.28 3.71 2.34

P / BV (x)
FY09a 2.2 2.7 3.9 1.8 2.2 1.4 1.0 1.6
FY10F 2.0 2.2 3.4 1.6 1.9 1.2 0.9 1.5
FY11F 1.8 2.0 3.0 1.5 1.8 1.1 0.8 1.3

ROE (%)
FY09a 14.5 15.0 24.5 11.6 16.3 10.1 8.1 10.6
FY10F 15.0 15.2 24.2 12.5 15.1 11.3 9.8 12.5
FY11F 15.5 15.1 23.8 13.0 13.9 11.6 9.6 12.3

ROE / PBV (x)


FY09a 6.7 5.5 6.3 6.4 7.5 7.4 8.4 6.5
FY10F 7.6 6.9 7.2 7.6 7.8 9.1 10.9 8.5
FY11F 8.6 7.6 7.9 8.6 7.9 10.5 11.6 9.3

ROA (%)
FY09a 1.2 1.3 1.2 1.1 1.2 0.8 1.0 1.0
FY10F 1.2 1.4 1.3 1.3 1.2 0.9 1.1 1.2
FY11F 1.3 1.4 1.3 1.3 1.1 0.9 1.1 1.2

Net DPS (sen)


FY09a 41.3 9.3 41.3 9.4 18.0 0.0 6.4 6.4
FY10F 26.3 9.3 45.0 14.8 18.0 10.0 6.4 6.4
FY11F 29.3 9.3 48.8 16.8 18.0 10.0 6.4 6.4

Net dividend yield (%)


FY09a 4.9 1.2 3.4 1.6 2.0 0.0 2.1 2.1
FY10F 3.1 1.2 3.7 2.5 2.0 1.4 2.1 2.1
FY11F 3.4 1.2 4.0 2.9 2.0 1.4 2.1 2.1
For companies with FYE Mar & Jun, FY09, FY10F and FY11F refers to FY10, FY11 and FY12 respectively
Source : RHBRI

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Chart 39 : AMMB Technical View Point
♦ The share price of AMMB hit an intraday high of
RM5.36 in Jan 2010, before reversing its uptrend
momentum and fell into a consolidation mode.

♦ As it slipped to below the resistance level of


RM5.30, it plunged to a low of RM4.51 in Feb,
before eventually stabilising at above the RM4.84
support level.

♦ But, since early Jun, the stock moved higher, along


the supportive 10-day and 40-day SMAs and
penetrated the tough resistance level of RM5.30 in
mid-Aug.

♦ After congesting near the RM5.50 level in the


recent sessions, the stock launched another rally
with four consecutive bullish candles on the chart.
It hit a high of RM5.86, before closing at RM5.80
yesterday.

♦ Technically, with the upbeat momentum readings,


and the steady support near the 10-day SMA closer
to the technical level of RM5.50, the stock could
advance further towards the RM5.94 level in the
near term.

♦ Should it manage to remove the tough RM5.94


level, it could head towards the RM6.50 level next.

♦ Strong support can be expected near the RM5.30 –


RM5.50 region.

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 KLCI benchmark by greater than five percentage points over the next 6-12 months.

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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 KLCI benchmark (+/- five percentage points) over the next 6-12 months.

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

Industry/Sector Ratings

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

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

Underweight = Industry expected to underperform the 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.

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