PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

22 July 2010

1 European Bank Stress Tests Said To Describe Three

Scenarios

2 The US Fed Said It Is Prepared To Act As Needed

Tracking The World Economy...

Today’s Highlight

European Bank Stress Tests Said To Describe Three Scenarios

European regulators plan to release three detail scenarios when they publish the results of their stress tests on the
region’s banks on 23 July, according to a template prepared by the Committee of European Banking Supervisors (CEBS)
for the banks and obtained by Bloomberg News. According to the document, banks will publish their estimated Tier 1
capital ratios under a benchmark for 2011, an adverse scenario and a third test that includes sovereign shock. In the
last scenario, banks will publish their estimated losses on sovereign debt they hold in their trading book as well as
additional impairment losses on the banking book that they may suffer after a sovereign debt crisis.

Under accounting rules, banks have to adjust the value of sovereign bonds held in the trading book according to changes
in market prices. For government debt held in the banking book, lenders must write down their value only if there is
serious doubt about a state’s ability to repay its debt in full or make interest payments. Under the third scenario, the
sovereign-shock scenario does not assume a European nation will default. Instead, it will assume that rising government-
bond yields will push up borrowing costs, spurring defaults in the private sector that would lead to losses in lenders’
banking books.

EU regulators are examining the strength of 91 banks to determine if they can survive potential losses from both a
recession and a decline in the value of their government bond holdings. They are using the tests to reassure investors
and give them a better idea about the health of financial institutions that are exposed to the sovereign debt problem in
the region. They are hoping that the tests will do as much as what the US did before to dispel fears about the solvency
of systemically important banks. After the stress test, investors would have better idea how much banks will need to
raise in capital if their Tier 1 ratio, a key measure of financial strength, falls below 6% under the sovereign scenario.
The ECB is hoping that the move will help ease uncertainties and unwillingness among banks in lending to each other.
As it stands, global banks have reduced their lending to banks in Portugal, Ireland, Greece and Spain by US$110bn in
1Q 2010. The gap was filled by the ECB with its lending to the banking systems in these countries rising by €126bn
in 1H 2010, accounting for almost all of an overall increase of €141bn. By the end of June, these four countries accounted
for 42% of the ECB’s total lending of €870bn, up from 33% at the start of the year.

The US Economy

The US Fed Said It Is Prepared To Act If Needed

◆ The US Federal Reserve said that it remains prepared to act if needed to support growth even as it gets
ready to eventually raise interest rates from almost zero and shrink a record balance sheet. While the Fed plans
for the exit, it said that it also recognises that the economic outlook remains unusually uncertain and is prepared
Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

Page 1 of 2
A comprehensive range of market research reports by award-winning economists and analysts are
exclusively available for download from www.rhbinvest.com
 22 July 2010

to take further policy actions as needed to ensure recovery is sustained in a context of price stability. Indeed,
the Fed’s economic outlook is somewhat weaker when it was published in June due partly to financial markets that
have become less supportive of economic growth in recent months, on the back of the sovereign debt problem in
Europe. Besides, many banks still have a large volume of troubled loans on their books, and bank lending
standards remain tight. As a result, the Fed trimmed its forecasts for US growth for 2011 to 3.5-4.2% in June,
down from 3.4-4.5% projected previously, and raised unemployment projection to 8.3-8.7%, up from 8.1-8.5%.
This was reaffirmed by economic data released over the past month, which came in weaker than analysts’
expectations. As it stands, retail sales fell for the second straight month in June, while factory output fell by 0.4%
mom during the month, the most in a year. Similarly, housing sales declined and starts fell to the lowest level in
eight months in June, after the expiration of the tax incentive in April. Also, private employers added fewer workers
to payrolls during the month than economists forecast. Inflation, on the other hand, is running below the Fed’s
long-term preferred rate of about 1.7-2.0% with the core personal consumption expenditures price index, which
excludes food and fuel, rising by 1.3% yoy in May. The Fed indicated that by a number of measures, the underlying
inflation has trended down over the past two years. The above development prompted investors to speculate that
the Fed may increase monetary stimulus in a bid to keep the economy growing.

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.

A comprehensive range of market research reports by award-winning economists and analysts are Page 2 of 2
exclusively available for download from www.rhbinvest.com