PP 7767/09/2010(025354)

31 March 2010

Malaysia Corporate Highlights RHB Research

Institute Sdn Bhd
A member of the
RHB Banking Group
New s Upda te Company No: 233327 -M

31 March 2010
MARKET DATELINE

Hong Leong Bank Share Price

Fair Value
:
:
RM8.64
RM9.05
Revived Offer To Acquire EON Cap At RM7.10 Or 1.4x Recom : Market Peform
(Upgraded)
FY09 P/B
Table 1 : Investment Statistics (HLBANK; Code: 5819) Bloomberg: HLBK MK
Net EPS
FYE PBT Profit EPS Gwth PER Book P/Book C.EPS* Div Div Yld ROE
Jun (RMm) (RMm) (sen) (%) (x) (RM/s) (x) (sen) (sen) (%) (%)
2009 1,132.2 905.3 57.3 22.0 15.1 3.6 2.4 - 24.0 2.8 16.7
( ) (f)
2010 1,144.5 892.7 56.5 -1.4 15.3 4.0 2.1 61.0 24.0 2.8 14.8
2011 (f) 1,203.5 894.2 56.6 0.2 15.3 4.4 2.0 68.0 24.0 2.8 13.4
2012 (f) 1,273.1 945.9 59.9 5.8 14.4 4.8 1.8 75.0 24.0 2.8 12.9
Main Board Listing / Trustee Stock / Non-Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

Issued Capital (m shares) 1,580.1

♦ Revived offer to EON Cap. HL Bank made a new offer to acquire the Market Cap (RMm) 13,652.1
assets and liabilities of EON Cap for RM4,921.8m cash which translates Daily Trading Vol (m shs) 1
into RM7.10 per EON Cap share or 1.4x FY09 P/B (the pricing is exactly 52wk Price Range (RM) 5.25 - 8.80
the same as the previous offer which was rejected by EON Cap). The Major Shareholders: (%)
terms were largely the same as the previous offer except that HL Bank Hong Leong Financial Grp 61.1
reserves the right to withdraw the offer if EON Cap enters into M&A talks EPF 10.7
with third party(s). EON Cap has until 5 Apr to accept or reject the offer.
FYE Jun FY10 FY11 FY12
♦ Financial impact - positive. If EON Cap accepts the offer, HL Bank’s EPS chg (%) - - -
Tier-1 and RWCAR ratios would decline from 15.83% and 16.17% to Var to Cons (%) (3.9) (3.3) (2.0)

6.49% and 6.31% respectively. Assuming it issues RM2.5bn of Hybrid

PE Band Chart
capital at 8% (to bring Tier-1 capital ratio back to 10%), post acquisition,
FY06/11 EPS will be enhanced by 28%. FY11 ROE would also increase PER = 20x
from 13.4% to 17.1% as all its previous excess capital (which has been PER = 15x
PER = 10x
dragging ROE) would be better utilised for higher returns. Note that all
the above calculations ignored any synergistic benefit from the merger.

♦ Good deal for HL Bank. This is due to the cheap acquisition price vis-à-
vis full takeover transactions of above 2x (during second round of
consolidation). Even if we assumed that it undertakes a rights issue at
20% to the current market price, FY06/11 EPS will still be enhanced by Relative Performance To FBM KLCI
11% while ROE will increase by 100bps. It will also revive its dismal
market share in the HP and SME segments as well as propel the bank
from the sixth largest to the fourth largest bank in Malaysia in terms of
FBM KLCI
total assets and could ensure its long-term status as an anchor bank.
Hong Leong Bank
♦ Will trigger BAFIA’s single shareholder limit. If EON Cap accepts the
offer, it will trigger BAFIA’s single shareholder limit (maximum 20% for
institutional stake) unless HL Bank obtains an exemption. Otherwise,
HLFG would have to pair down its 61% stake in HL Bank, possibly through
selling to strategic partners (possibly from China given its close ties). It
may also trigger the clause at HLFG given that HL Co owns 77% of HLFG.
Thus, potential merger between HL Bank and HLFG coupled with new
strategic partner(s) could be in the pipeline to solve the single
shareholding limit in one exercise if the EON Cap deal is successful. Low Yee Huap, CFA
(603) 92802175
♦ Investment case. Given that EON Cap’s “new board” is likely to table low.yee.huap@rhb.com.my
the offer to shareholders, chances of a successful deal is high even
though we believe that the offer price is too low. Coupled with the
positive impact on EPS and ROE as well as potential of further corporate
exercise to address the single shareholding limit, we have raised our fair
value on the stock from RM8.48 (15x CY10 EPS) to RM9.05 (16x) and
upgraded our rating from Underperform to Market Perform.

Please read important disclosures at the end of this report. Page 1 of 3

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 31 March 2010

Table 2. Earnings Forecasts Table 3. Ratio Analysis & Forecast Assumptions

FYE Jun (RMm) FY09 FY10F FY11F FY12F FYE Jun FY10F FY11F FY12F

Net Interest Income 1,529.5 1,550.4 1,629.6 1,699.3 Asset Quality (%)
(+ Islamic Banking) Gross NPL 2.24 2.14 2.02
Non-interest Income 536.6 575.2 597.7 627.6 Net NPL 1.31 1.27 1.22
Operating Income 2,066.0 2,125.6 2,227.3 2,326.9 SP / NPL 42.00 41.00 40.00
GP / Net Loans 1.54 1.54 1.54
Less: Overhead -876.6 -920.4 -966.4 -1,014.7 Loan Loss Coverage 110.19 112.38 115.62
Expenses Core Capital Ratio 16.58 17.01 17.43
Pre-provision 1,189.5 1,205.2 1,260.9 1,312.2 RWCAR 17.27 17.75 18.22
Profit
Margins (%)
Less: Loan Loss -156.7 -180.0 -182.8 -170.7 Yields On Earnings Assets 3.30 3.28 3.23
Provisions Avg. Cost Of Funds 1.67 1.67 1.67
Operating Profit 1,032.8 1,025.2 1,078.1 1,141.5 Interest Spread 1.63 1.61 1.56
Un-adj NIM (ex-Islamic Inc) 1.73 1.70 1.65
Associates 99.5 119.4 125.3 131.6 Adjusted NIM (+Islamic Inc) 1.98 1.96 1.92
Pretax Profit 1,132.2 1,144.5 1,203.5 1,273.1
Profitability (%)
Less: Tax -227.6 -251.8 -309.3 -327.2 ROE 14.4 13.46 12.98
Effective Tax Rate -20.1 -22.0 -25.7 -25.7 ROA 1.06 1.02 1.00
(%) Cost / Income Ratio 43.30 43.39 43.61
Profit After Tax 904.6 892.7 894.2 945.9 Expenses / Avg. Assets 1.12 1.10 1.08
Provisions / Avg. Net Loans 0.50 0.48 0.42
Minorities 0.7 0.0 0.0 0.0
Net Profit 905.3 892.7 894.2 945.9 Liquidity (%)
Source: Company data, RHBRI estimates Loan Deposit Ratio 50.51 50.54 50.58
Net / Gross Loan Growth 4.98 7.07 7.07
Deposit Growth 7.00 7.00 7.00
Source: RHBRI estimates

Table 4. Sector Comparison

Bank Price FV PER (x) CAGR P/Book (x) ROE (%)
(RM/s) (RM/s) Rec CY08 CY09 CY10 (%) CY08 CY09 CY10 FY08 FY09 FY10
Public Bank - F 11.66 13.12 OP 15.1 15.5 13.6 10.6 4.1 3.5 3.1 27.3 24.5 24.2
Public Bank - L 11.62 13.12 OP 15.1 15.5 13.6 10.6 4.1 3.5 3.1 27.3 24.5 24.2
Maybank 7.46 8.96 OP 17.0 16.3 13.3 21.7 2.2 1.8 1.9 9.9 12.1 12.8
CIMB Group 13.98 16.24 OP 25.6 17.8 14.8 18.1 2.9 2.5 2.3 11.9 15.0 16.1
AMMB 4.99 6.13 OP 15.8 13.2 11.1 13.7 1.6 1.4 1.2 11.6 11.8 12.1
EON Capital 7.03 8.07 OP 36.4 14.3 13.1 11.2 1.5 1.4 1.3 4.2 10.1 10.0
Affin Holdings 2.89 3.03 MP 14.2 11.2 10.1 8.4 0.9 0.9 0.9 6.8 8.1 8.6
Hong Leong Bank 8.64 9.05 MP 16.6 15.2 15.3 1.5 2.5 2.3 2.0 16.7 14.8 13.4
RHB Capital * 2.87 3.27 OP 16.7 17.6 13.1 21.5 1.6 1.5 1.4 16.8 8.6 9.1
Sector Wt. Avg. ^ 17.2 15.0 12.6 2.3 2.0 1.8 13.2 13.0 13.3
Sector Wt. Avg. (Ex-Maybank) 16.6 14.0 12.3 2.3 2.0 1.8 15.5 15.0 15.2
Sector Wt. Avg. (Ex-Maybank & PBB) 17.2 15.0 12.6 2.3 2.0 1.8 13.2 13.0 13.3
Source : RHB Research Institute, IBES Estimates
* Not under our coverage. IBES Estimates forecasts are used for companies not covered by RHB Research Institute.

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.

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

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

Industry/Sector Ratings

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

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

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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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