PP 7767/09/2010(025354)

5 March 2010

Malaysia Corporate Highlights

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

Sector Upda te
5 March 2010
MARKET DATELINE

Recom : Overweight
Banking (Maintained)

BNM Begins Normalising Interest Rate - OPR

Increased By 25bps
Table 1. Sector Comparison
Bank Price FV PER (x) CAGR P/Book (x) ROE (%)
(RM/s) (RM/s) Rec CY09 CY10 CY11 (%) CY09 CY10 CY11 FY09 FY10 FY11
Public Bank – F 11.20 13.12 OP 14.5 14.9 13.1 10.6 3.9 3.4 2.9 27.3 24.5 24.2
Public Bank – L 11.22 13.12 OP 14.6 14.9 13.1 10.6 3.9 3.4 3.0 27.3 24.5 24.2
Maybank 7.01 8.96 OP 16.0 15.4 12.5 21.7 2.0 1.7 1.8 9.9 12.1 12.8
CIMB Grp 13.58 16.24 OP 24.9 17.3 14.4 18.1 2.8 2.4 2.2 11.9 15.0 16.1
AMMB 4.89 6.13 OP 15.4 12.9 10.9 13.7 1.6 1.3 1.2 11.6 11.8 12.1
EON Capital 6.96 8.07 OP 36.1 14.1 12.9 11.2 1.5 1.4 1.2 4.2 10.1 10.0
Affin Holdings 2.80 3.03 MP 13.8 10.8 9.8 8.4 0.9 0.9 0.8 6.8 8.1 8.6
Hong Leong Bank 8.60 8.48 UP 16.5 15.1 15.2 1.5 2.5 2.2 2.0 16.7 14.8 13.4
AFG 2.78 3.27 OP 16.1 17.1 12.7 21.5 1.6 1.5 1.4 16.8 8.6 9.1
RHB Capital * 5.51 NR NR 11.3 9.9 9.4 7.8 1.5 1.4 1.3 13.3 12.3 13.0
Sector Wt. Avg. ^ 16.5 14.4 12.1 2.2 1.9 1.8 13.2 13.0 13.3
Sector Wt. Avg. (Ex-Maybank) 16.1 13.6 12.0 2.2 1.9 1.8 15.5 15.0 15.2
Sector Wt. Avg. (Ex-Maybank & PBB) 16.9 13.1 11.5 1.9 1.6 1.5 11.6 11.5 11.8
Source : RHB Research Institute, I/B/E/S Estimates * Not under our coverage

♦ Overnight Policy rate raised by 25bps as part of BNM’s efforts to Chart 1. Industry NPL
normalise interest rate.
(RMm) Gross NPL(LHS) Gross NPLratio (RHS) Net NPLratio (RHS) (%)
17.0
69,000.0

15.0

♦
64,000.0

Banks with higher variable rate loan and high LD ratio would 59,000.0 13.0

benefit because more assets will be re-priced higher relative to liabilities. 54,000.0
11.0

49,000.0

♦
9.0

Interest rate sensitivity gap suggests positive impact on NIM and 44,000.0
7.0

earnings. This study incorporates variable rate loan and LD ratios of

39,000.0

5.0
34,000.0

various banks. As most banks have positive gap (i.e. more assets than 29,000.0 3.0

liabilities that will be re-priced faster), they will benefit albeit temporary 24,000.0 1.0

as liabilities re-pricing will catch up.

Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09

Chart 2. Industry LLC

♦ Banks with high percentage of CASA to total deposits will also 95
(%)

benefit. This is because the magnitude of hike in interest rate of current 90

85

accounts and savings accounts is normally significantly lower than the 80

change in OPR. Thus, banks with high CASA ratio would have more 75

70

liabilities being re-priced by smaller magnitude. 65

60

♦ EON Cap, AFG, HL Bank and Public Bank (in order of impact) will
55

50

benefit the most while AMMB will be a loser. This is due to high 45

variable rate loan (AFG & HL Bank), high LD ratio (AFG & EON Cap), high
40

35

percentage of positive gap (EON Cap & Public Bank) and high CASA ratio
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

(AFG & HL Bank). AMMB suffers from low variable rate loan and CASA
ratio (but partly offset by high LD ratio).

♦ Slightly positive. This is due to the immediate positive impact on NIM

and earnings (albeit temporary) while economic recovery will mitigate
potential impact on loan growth and NPLs. Thus, there is no change to
our 9% loan growth projection in 2010 and stance on improving NPLs.

♦ Investment case. Given the slightly positive impact earnings, we are

maintaining our Overweight rating on the sector. This is premised on
earnings growth gaining momentum, potential M&As would excite
investors, higher dividend (barring Basel III), both PER and P/B
valuations are still below their recent peaks and foreign shareholdings are
still relatively low and well below peaks. Moreover, most banks have their
unique story to sustain investors’ interests. Top pick is Maybank. We
also like CIMB, AMMB and Public Bank for big cap exposure. AFG,
Low Yee Huap, CFA
EON Cap and RCE Cap are also rated as Outperform while Affin is Market
(603) 92802175
Perform and HL Bank is rated Underperform.
low.yee.huap@rhb.com.my

Please read important disclosures at the end of this report.

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♦ Higher OPR. BNM has began normalising interest rate by raising its Overnight Policy Rate (OPR) by 25bps from
2% to 2.25%. As part of its normalisation efforts (rather than tightening), our house view is that BNM will
pause in the 13th May policy meeting and resume with another 25bps hike in the 8 Jul policy meeting.
Thereafter, it is likely to maintain the OPR for the rest of the year. In general, when there is a hike in interest
rate, bank’s margin will expand in the short term given that interest-rate sensitive assets will re-price faster
than interest-rate sensitive liabilities. Thereafter, liabilities re-pricing will catch up and mitigate the initial
impact.

♦ Banks with higher variable rate and high LD ratio will benefit more. Banks with higher variable rate
loans to total loans would benefit more given that more assets will be re-priced vis-à-vis liabilities as well as
total assets. From Chart 3, it shows that the biggest winner would be AFG followed by HL Bank and CIMB Grp.
The biggest loser will be AMMB followed by Affin and EON Cap. As for LD ratio, the higher the ratio, the higher
the positive impact given that larger amount of assets will be re-priced with liabilities. Chart 4 suggests that
AMMB will benefit the most followed by EON Cap and AFG. HL Bank will be the largest loser followed by Affin
and RHB Cap. However, it would be impossible to determine the impact from these two ratios as it will depend
on the timing of assets and liabilities re-pricing. Thus, to have a better analysis of the impact, the interest rate
sensitivity gap method is preferred as it would have incorporated the timing of assets and liabilities re-pricing
and would have reflected banks’ variable rate loans and LD positions. In general, the higher the percentage of
variable rate loans to total loans means larger amount of assets will be in the shorter-time bucket. As for LD, a
higher ratio means the positive gap (assets minus liabilities) will be larger.

Chart 3 : Percentage of variable rate loans to total loans

90 (%)
80
70
60
50
40
30
20
10
0
Affin

AFG
AMMB

Public

Maybank

HL Bank
EON Cap

RHB Cap

CIMB Grp

Source : Companies

Chart 4 : LD ratio
120 (%)

110

100

90

80

70

60

50
Affin

AFG

AMMB
Public
HL Bank

Industry

Maybank
RHB Cap

CIMB Grp

EON Cap

Source : Companies

♦ Interest rate sensitivity gap study suggests positive impact on NIM and earnings. Generally, those
banks with positive gap (especially in the shorter-time bucket) will benefit as margin expands when there is an
interest rate hike given that there are more assets that will be re-priced within a short period of time vis-à-vis
liabilities. The larger the positive gap in the shorter maturity spectrum, the higher the sensitivity given that re-

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 5 March 2010

pricing is almost immediate. In addition, the higher the percentage of positive gap to assets (in the up to one-
month bucket), the larger the positive impact. Table 2 suggests that the highest positive impact will be felt by
EON Cap followed by Public Bank and Affin. On the other end of the spectrum, Maybank seems to have negative
impact while AFG and CIMB Grp would benefit the least. However, subsequent explanations will show that this
is not the case for Maybank and AFG as there is another important factor that comes into play, i.e. percentage of
CASA to total deposits.

Table 2 : Interest rate sensitivity by maturity

RMm / As at Dec 09 Affin AFG AMMB CIMB Grp EON Cap HL Bank Maybank* Public*
Assets
Up to 1 Mth 18,894.4 17521.2 41,156.0 90,338.4 26,567.8 43,991.1 69,671.2 107,747.8
1-3 Mth 3,237.3 2441.8 2,467.2 16,883.4 1,681.1 6,253.6 18,475.9 10,008.1
>3-12 Mth 4,145.8 2486.6 1,860.8 12,427.0 1,443.8 3,363.9 16,087.4 10,456.5
1-5 yr 7,909.9 5802.7 13,244.3 34,862.8 5,620.6 12,105.3 27,988.9 23,792.6
> 5 yr 2,655.8 1544.8 25,701.5 42,456.6 8,989.4 3,268.2 53,302.0 4,999.7
Subtotal 36,843.3 29797.1 84,429.7 196,968.2 44,302.6 68,982.1 185,525.3 157,004.7

Liabilities
Up to 1 Mth 12,954.6 16715.7 35,793.8 84,840.2 15,412.0 37,763.6 78,025.6 79,098.6
1-3 Mth 10,381.3 3588.0 14,173.8 36,904.2 7,855.8 8,810.1 36,259.0 35,625.0
>3-12 Mth 6,537.1 5346.3 15,921.1 25,873.6 8,690.5 15,391.8 47,359.0 23,315.2
1-5 yr 396.5 2058.7 5,254.8 17,045.2 2,351.1 2,040.9 42,466.6 4,391.2
> 5 yr 0.0 0.0 2,892.3 5,910.1 1,160.0 0.0 7,626.7 3,973.6
Subtotal 30,269.6 27708.7 74,035.9 170,573.3 35,469.4 64,006.4 211,736.9 146,403.7

On Balance Sheet Gap

Up to 1 Mth 5,939.8 805.4 5,362.2 5,498.2 11,155.7 6,227.5 (8,354.3) 28,649.2
As % of assets 16.1 2.7 6.4 2.8 25.2 9.0 (4.5) 18.2
1-3 Mth (7,143.9) (1146.2) (11,706.7) (20,020.8) (6,174.8) (2,556.5) (17,783.1) (25,616.9)
>3-12 Mth (2,391.3) (2859.7) (14,060.3) (13,446.5) (7,246.7) (12,027.9) (31,271.7) (12,858.7)
1-5 yr 7,513.4 3744.0 7,989.4 17,817.6 3,269.5 10,064.4 (14,477.8) 19,401.3
> 5 yr 2,655.8 1544.8 22,809.2 36,546.4 7,829.4 3,268.2 45,675.3 1,026.1
Total 6,573.7 2088.4 10,393.8 26,395.0 8,833.1 4,975.7 (26,211.6) 10,601.0
Source: Companies / * Only Bank to reflect sensitivity to domestic rates

♦ Banks with higher CASA will also benefit more. Another determining factor is the percentage of current
account and savings account (CASA) as a percentage of deposits (CASA ratio). Given that CASA, unlike fixed
deposits, are not expected to be adjusted by the same magnitude as the hike in OPR, banks with higher CASA
ratio will benefit more as a larger percentage of their liabilities will be increased by a smaller quantum than the
hike in OPR. Chart 5 shows the percentage of CASA to total deposits. AFG has the highest percentage (or
highest percentage of liabilities that will be re-priced by a smaller magnitude) followed by Maybank and CIMB
Grp. On the other hand, AMMB will benefit the least, followed by Affin and EON Cap.

Chart 5 : Percentage of CASA to total deposits

45 (%)
40
35
30
25
20
15
10
5
0
Affin

AFG
AMMB

HL Bank

Maybank
Public
EON Cap

RHB Cap

CIMB Grp

Source : Companies

♦ Combined impact from the above two factors. Table 2 and Chart 3 suggest that EON Cap, HL Bank and
Public Bank would benefit the most. The small positive (or negative in Maybank’s case) impact from the interest

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rate sensitivity gap table on AFG, CIMB Grp and Maybank would be boosted (or mitigated in Maybank’s case) by
the highest, third highest and second highest percentage of CASA to total deposits, respectively. As for Affin
and AMMB, the positive impact from the interest rate sensitivity gap table would be somewhat neutralised by the
second lowest and lowest percentage of CASA to total deposits, respectively.

♦ Earnings sensitivity to interest rate hike. Table 3 shows the impact of a 25bps increase in OPR on earnings
of banks in our universe. In this study, we assumed that the hike in OPR will result in a parallel shift in lending
rate and money market deposit rate but only half the increase in CASA rates. Overall, based on our
assumptions, the 25bps hike in OPR will result in 0.3-3.1% boost to banks’ net profits, except for AMMB which
would suffer a small negative impact of -0.9%. As discussed above, AMMB will suffer because of its low variable
rate loan and low CASA ratio but partly offset by highest LD ratio. However, the negative impact is marginal and
can easily be mitigated by its growing loan book. Moreover, although we have already factored in margin
erosion into our AMMB earnings forecasts, we are still expecting strong earnings growth ahead. From Table 3,
EON Cap (highest percentage of positive gap in the one-month bucket to total assets and second highest LD
ratio) will benefit the most followed by AFG (highest percentage of variable rate loan and CASA ratio), HL Bank
(second highest percentage of variable rate loan) and Public Bank (second highest percentage of positive gap in
the one-month bucket to total assets). As for the other banks, the impact would be 0.5% or less.

Table 3 : Impact on earnings from a 25bps hike in OPR

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

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

♦ Higher rate has non-quantifiable cons but impact should be marginal. Although higher interest rate
would have an immediate short-term positive impact on margins and earnings, it may slow loan growth and
impact NPLs. However, we are of the view that this hike in OPR is not a sign of tightening but is merely a move
to normalise the extremely low interest rate in an economic recovery environment. Moreover, the economic
recovery would mitigate the potential impact on slowing loan expansion and impact on asset quality. While
borrowing cost will increase, the magnitude is small and manageable. Thus, we are maintaining our loan growth
projection of 9% for 2010 and expect asset quality to start improving from Mar/Apr 10 onwards (after the
festive season).

OVERALL IMPACT

♦ Slightly positive. This is because of the immediate (albeit temporary) positive impact on NIM and earnings
while loan growth and NPLs should not be adversely impacted. Thus, this move to normalise interest rate would
not change our positive view on the sector.

RISKS

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

CHANGES TO FORECASTS

♦ No changes to our earnings forecasts for the banks as we have already factored in a 50 bps interest rate hike in
2010.

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VALUATIONS AND RECOMMENDATION

♦ Overall, we continue to believe that the sector (being the lynchpin of the economy) will take the lead in taking
the market to higher ground. This will be underpinned by: 1) earnings growth gaining momentum from net
interest income (loan growth, stable to potential expansion in NIM and growing Islamic income), non-interest
income (from higher transactional income and the revival of the capital markets) and lower LLP (from improving
asset quality); 2) potential M&As would excite the market given that most banks are trading at below our
estimated M&A fair valuations of 2.3-2.5x P/B; 3) more aggressive capital management or higher dividend given
the excess capital positions, barring Basel III; 4) both PER and P/B valuations are still below their recent peaks
and/or less than one standard deviation above post-Asian financial crisis mean; and 5) foreign shareholdings are
still relatively low and well below peaks.

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

Chart 6: EONCap Technical View Point

♦ EONCap broke out of RM4.90 tough resistance level
in Aug 2009, before extending its rally towards the
next tough resistance at RM6.00 in Dec 2009.

♦ On strong follow-through buying momentum, it

pierced through RM6.00 and blasted towards the
multi-year high of RM7.18 in Jan 2010.

♦ However, instant profit-taking pressure has pressed

it down to RM6.51 in Feb, but it rebounded quickly
to stabilise near the current trading range of
between RM6.60 and RM7.18.

♦ Closed at RM6.96, near the 10-day and 40-day

SMAs, the stock may continue to struggle near the
SMAs in the near term.

♦ But, if it manages to sustain at above these SMAs,

it could siege a chance to retry RM7.18, hence
lifting its probability to rally higher to RM7.59 and
RM8.27 all-time high level soon.

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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.

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