You are on page 1of 7

PP 7767/09/2010(025354)

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

Sector Upda te
29 June 2010
MARKET DATELINE

Banking Recom : Overweight


(Maintained)
Valuations Still Decent With Potential For Earnings To
Surprise

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 7.58 9.66 OP 14.8 12.5 35.7 18.1 2.0 1.8 14.0 15.2 2.9 3.5
CIMB 7.06 8.40 OP 14.8 12.5 20.2 17.9 2.3 2.1 16.1 17.4 1.3 1.3
Public Bank - L 11.90 13.75 OP 14.5 13.0 11.8 11.8 3.3 2.9 24.2 23.8 3.8 4.1
AMMB 5.03 6.60 OP 12.6 11.0 14.8 14.6 1.4 1.3 11.9 12.3 2.8 3.2
AFG 2.97 3.40 OP 12.2 11.2 25.2 9.1 1.4 1.3 12.2 12.0 2.2 2.2
Affin 3.04 3.55 OP 11.1 10.3 10.5 7.6 0.9 0.9 8.6 9.0 2.1 2.1
EON Cap 6.93 7.92 MP 12.9 11.4 9.4 13.2 1.2 1.1 10.0 10.4 1.4 1.4
HLB 8.68 9.20 MP 14.6 14.6 (4.7) 0.2 2.2 2.0 14.8 13.4 2.1 2.1
RHB Cap* 5.94 NR NR 9.6 8.5 10.7 12.9 1.3 1.2 14.6 14.8 3.0 3.3
RCE 0.635 1.12 OP 5.9 5.6 4.3 4.6 1.1 0.9 17.0 15.3 2.4 2.4
Sector Wt. Avg 14.0 12.3 19.5 14.4 2.2 2.0 16.3 16.9 2.6 2.8
*Not under coverage

♦ Banking sector the best proxy to the economic recovery. In our Chart 1. Industry NPL
view, the banking sector represents the best proxy to the economic
recovery and we continue to believe that the sector can 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.

♦ Earnings growth expected to gain momentum ahead. Looking ahead


to 2H2010, we expect the sector’s earnings growth momentum to pick up
steam on the back of rising net interest and non-interest incomes as well
as declining allowance for impairment for loans and advances. We do not Chart 2. Industry LLC
discount the possibility of earnings surprises ahead and believe the areas 95
(%)

that could surprise on the upside include: 1) interest income; 2) non- 90

interest income; and 3) impairment allowances. 85

80


75
Valuations still compelling relative to market and historical levels. 70

Valuation-wise, we find that the sector is still compelling with the sector 65

60

weighted average FY11 PER of 12.3x as compared to the FBM KLCI’s 2011 55

PER of 13.8x. In addition, only Affin and HL Bank are trading above their 50

45

respective average PER while in terms of P/BV, Affin, CIMB, Public Bank 40

and HL Bank are above their average P/BV levels. More importantly, the
35
Jan-99 Ja n-01 Jan-03 Ja n-05 Jan-07 Ja n-09

historical trading bands of the banks suggest that there is still room for
valuations to expand.

♦ Foreign shareholding levels still well below peaks. With rising


investor interest in banking stocks and with the sharp run-up in share
prices in 2009, foreign shareholding of most banks are now off their lows.
However, the levels are still well below peaks as well as below levels at
the time of the entry of strategic partners.

♦ Competition to remain intense. Competition, we think, will remain


intense. In addition, BNM had also recently announced that five new
commercial banking licences will be issued. While we continue to believe
that increasing competition would put pressure on margins and overheads
(e.g. staff cost), domestic banks would still be able to hold their ground
and maintain their market share at around the current level.

♦ Investment case. We are maintaining our Overweight rating on the


sector. Maybank remains as our top pick for the sector while we also like David Chong, CFA
(603) 9280 2186
CIMB, AMMB and Public Bank for an exposure to large cap banking
david.chong@rhb.com.my
stocks. Affin, AFG and RCE Cap are also rated as Outperform while EON
Cap and HL Bank are both rated Market Perform.

Please read important disclosures at the end of this report.


Page 1 of 7
29 June 2010

2H2010 Outlook

♦ 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. M&A activities could also spark excitement towards the sector.

Key Drivers For Share Price Performance

♦ Earnings growth expected to gain momentum ahead. Looking ahead to 2H2010, we expect the sector’s
earnings growth momentum to pick up steam on the back of rising net interest and non-interest incomes as well
as declining allowance for impairment for loans and advances. We do not discount the possibility of earnings
surprises ahead and believe the areas that could surprise on the upside include: 1) interest income; 2) non-
interest income; and 3) impairment allowances.

♦ … with potential upside surprise from stronger-than-expected loan growth … As mentioned above, a
potential surprise we see could come from stronger-than-expected loan growth and NIM. According to BNM, the
banking system’s applications and approvals for the month of Apr ’10 reached RM53.3bn and RM30.2bn, i.e. the
highest levels achieved thus far this year, and this should be supportive of loan growth ahead. Generally, while
our loan growth assumptions for the larger banks are in line with managements’ targets, our assumptions for
some of the smaller banks (e.g. EON Cap and Affin) are 3-6%-pts lower than targets. Apart from loan growth,
the impact of the two OPR hikes in Mar and May should start to be visible in 2H when the next round of quarterly
results is out. We expect another 25bps hike in OPR during the Sep ‘10 policy meeting and this could provide an
additional boost to NIMs, albeit temporary. Generally, our sensitivity analysis suggests that most of the banks
(except for AMMB and Maybank) should be beneficiaries from a rate hike and this would also help cushion
competitive pressures on NIMs.

♦ … non-interest income … As for non-interest income, we expect transactional income to grow in tandem with
rising economic activities. The revival of the capital markets would be a boon for investment-banking-related
activities (e.g. M&A, IPOs) and thus far, banking groups with higher exposure to such activities have indicated
that they are comfortable with the deal pipeline ahead.

♦ … as well as allowance for impairment. The recent quarterly results also saw some of the banks with
financial year ending 31 Dec adopting FRS139 (effective interest rate calculation rather than actual interest rate
for that particular year and impairment test on recoverable collateral value rather than provision based on GP3
as well as treatment in the balance sheet). The main impact noted were: 1) banks now report impaired loans as
compared to non-performing loans previously. Consequently, while not strictly comparable, asset quality ratios
generally deteriorated for these banks as impaired loans include loans that were previously classified as
performing (i.e. less than 3 months in arrears); and 2) the adoption of FRS139 resulted in a one-off adjustment
to retained earnings. Except for CIMB, this had a positive impact on retained earnings for the other banks. Going
forward, as more banks begin to adopt FRS139, this would help improve comparison among the banks. Another
potential impact is the possibility of further writeback 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 recent reporting season, the key variance
was lower-than-expected impairment allowances/loan loss provisions.

♦ Valuations still compelling relative to market and historical levels. Valuation-wise, we find that the sector
is still compelling with the sector weighted average FY11 PER and P/BV at 12.3x (11.9x ex-Maybank and Public
Bank) and 2x (1.7x ex-Maybank and Public Bank) respectively. This is as compared to the FBM KLCI’s 2011 PER
of 13.8x. Comparing the individual banks’ valuations with historical averages, only Affin and HL Bank are trading
above their respective average PER while in terms of P/BV, Affin, CIMB, Public Bank and HL Bank are above their
average P/BV levels. More importantly, the banks are generally trading at below the previous peak in 2007
and/or one-standard deviation above the mean. This suggests that there is still room for valuations to expand.

♦ Foreign shareholding levels still well below peaks. With rising investor interest in banking stocks and with
the sharp run-up in share prices in 2009, foreign shareholding of most banks are now off their lows. However,
the levels are still well below peaks as well as below levels at the time of the entry of strategic partners.

Page 2 of 7
29 June 2010

Competition

♦ Five new banking licences to be issued. BNM also recently announced that five new commercial banking
licences will be issued to: 1) BNP Paribas, France; 2) Mizuho Corporate Bank (Japan); 3) National Bank of Abu
Dhabi (UAE); 4) PT Bank Mandiri (Indonesia) and 5) Sumitomo Mitsui Banking Corporation (Japan). While this
may raise concerns of further competition, we highlight the following mitigating factors. Firstly, we believe these
new commercial banks are niche banks and hence, would not compete head-on with the domestic institutions.
As announced by BNM previously, the new commercial banking licences are to be issued to foreign players in
specialised areas of business that can serve new areas of growth and underserved economic sectors as well as
to foreign players that can help enhance global interlinkages and facilitate international trade and investment
flows. Secondly, with a market share of around 80%, the domestic banks are currently in a better state of
readiness to compete in a more liberalised environment.

♦ Competition expected to remain intense but pressure on NIMs cushioned by rate hikes. On the whole,
we think competition will remain intense and would continue to put pressure on margins and overheads (e.g.
staff cost). However, this would be cushioned by a rising interest rate environment. In addition, notwithstanding
the new licences issued, we believe the domestic banks would still be able to hold their ground and maintain
their market share at around the current level.

♦ Increasing competition may also continue to prompt talks of M&As. Increasing competition may also
continue to prompt talks of M&As to increase competitiveness. In the immediate term, we think focus would be
on the ongoing offer by HL Bank for the assets and liabilities of EON Cap. The age issue of Public Bank’s major
shareholder may also evoke speculations while DBS’s interest for a foothold in Malaysia may also prompt
interest in AFG (due to common shareholder). However, as mentioned above, the local banks already appear
competitive on the domestic front and hence, domestic M&As may not add significant more value vis-à-vis
regional M&As (which provide greater opportunities for growth). Moreover, given the different interests involved
(including the interests of strategic partner(s)), pricing would likely be the main stumbling block.

Regulatory

♦ Further clarity on Basel III expected end-2010. Finally, further clarity on Basel III is expected to be
forthcoming towards the end of the year. The impact of Basel III on the banks could be significant given that the
initial consultative paper suggests more stringent qualifications for Tier-1 capital and higher minimum ratios. If
adopted, banks may need more high quality capital in the form of equity i.e. may need to undertake cash call
and/or limit dividend payment. It could also impact banks’ ability to grow assets (or loans) and indirectly weigh
down on economic recovery. Thus, we expect the final standard to be watered down vis-à-vis the concept paper
and will likely allow banks more time to phase in the changes.

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 Recommendation

♦ Rolling forward valuations ... We have rolled-forward valuations to CY11 from CY10. Our CY11 sector
benchmark PER now stands at 15x (16x CY10 EPS previously), which is in line with our target market PER.
Generally, we have ascribed a target CY11 PER of 15x for the larger banks while we apply a discount of 2-3x to
our target multiple for the smaller banks to account for their smaller size as well as lower liquidity.

♦ … but Overweight stance on the sector maintained. Overall, we maintain our Overweight stance on the
sector. Maybank remains as our top pick for the sector. For an exposure to other big cap banking stocks, we also
like AMMB, CIMB Group and Public Bank while AFG, Affin and RCE Cap are our picks within the smaller market
capitalisation segment. HL Bank and EON Cap are both rated Market Perform.

Page 3 of 7
29 June 2010
Chart 2: Rolling-Forward PER - Affin Chart 3: Historical P/BV - Affin
(x) (x)
20 PER Post Crisis Avg PER 1.4 P/Book Post Crisis Avg P/Book
+ 1.s.d - 1.s.d + 1.s.d - 1.s.d
+ 2.s.d - 2.s.d + 2.s.d - 2.s.d
1.2

15
1.0

10 0.8

0.6
5

0.4

0 0.2
J-97 J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-10 J-97 J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-10

Source: RHBRI

Chart 4: Rolling-Forward PER - AFG Chart 5: Historical P/BV - AFG


(x) PER Post Crisis Avg PER + 1.s.d 3.0 (x) P/Book Post Crisis Avg P/Book
+ 1.s.d - 1.s.d
- 1.s.d + 2.s.d - 2.s.d + 2.s.d - 2.s.d
30 2.5

25
2.0

20
1.5
15

1.0
10

5 0.5

0
0.0
A-01 A-02 A-03 A-04 A-05 A-06 A-07 A-08 A-09 A-10 A-02 A-03 A-04 A-05 A-06 A-07 A-08 A-09 A-10

Source: RHBRI

Chart 6: Rolling-Forward PER - AMMB Chart 7: Historical P/BV - AMMB


(x) PER Post Crisis Avg PER (x) P/Book Post Crisis Avg P/Book
+ 1.s.d - 1.s.d
+ 1.s.d - 1.s.d 6.0 + 2.s.d - 2.s.d
40 + 2.s.d - 2.s.d

5.0
35

30
4.0
25
3.0
20

15 2.0

10
1.0
5

0 0.0
A-97 A-98 A-99 A-00 A-01 A-02 A-03 A-04 A-05 A-06 A-07 A-08 A-09 A-10 A-97 A-98 A-99 A-00 A-01 A-02 A-03 A-04 A-05 A-06 A-07 A-08 A-09 A-10

Source: RHBRI

Chart 8: Rolling-Forward PER - CIMB Chart 9: Historical P/BV - CIMB


(x) PER Post Crisis Avg PER 3.5 (x) P/Book Post Crisis Avg P/Book
+ 1.s.d - 1.s.d
+ 1.s.d - 1.s.d + 2.s.d - 2.s.d
30 + 2.s.d - 2.s.d 3.0

25
2.5

20
2.0
15

1.5
10

5 1.0

0 0.5
J-97 J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-10 J-97 J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-10

Source: RHBRI

Page 4 of 7
29 June 2010
Chart 10: Rolling-Forward PER - EON Cap Chart 11: Historical P/BV – EON Cap
PER Post Crisis Avg PER 2.5 (x) P/Book Post Crisis Avg P/Book
40 (x)
+ 1.s.d - 1.s.d + 1.s.d - 1.s.d
2.3
+ 2.s.d - 2.s.d + 2.s.d - 2.s.d
35
2.1

30 1.9

25 1.7

20 1.5

15 1.3

1.1
10
0.9
5
0.7
0
0.5
Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Source: RHBRI

Chart 12: : Rolling-Forward PER - HL Bank Chart 13: Historical P/BV – HL Bank
25 (x) PER Post Crisis Avg PER 3.5 (x)
+ 1.s.d - 1.s.d P/Book Post Crisis Avg P/Book
23 + 1.s.d - 1.s.d
+ 2.s.d - 2.s.d
3.0 + 2.s.d - 2.s.d
21
19
2.5
17
15 2.0

13
11 1.5

9
1.0
7
5
0.5
J-97 J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-97 J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09

Source: RHBRI

Chart 14: Rolling-Forward PER - Maybank Chart 15: Historical P/BV – Maybank
45 (x) 5.5 (x)
PER Post Crisis Avg PER P/Book Post Crisis Avg P/Book
+ 1.s.d - 1.s.d 5.0 + 1.s.d - 1.s.d
40 + 2.s.d - 2.s.d + 2.s.d - 2.s.d
4.5
35
4.0
30
3.5
25
3.0
20
2.5
15
2.0
10
1.5
5
1.0

0 0.5
J-97 J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-97 J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09

Source: RHBRI

Chart 16: Rolling-Forward PER - Public Bank Chart 17: Historical P/BV – Public Bank
(x) P/Book Post Crisis Avg P/Book
(x) PER Post Crisis Avg PER + 1.s.d - 1.s.d
19 + 1.s.d - 1.s.d + 2.s.d - 2.s.d
4.5
+ 2.s.d - 2.s.d
17 4.0

15 3.5

3.0
13
2.5
11
2.0
9
1.5

7 1.0

5 0.5
J-97 J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-10 J-97 J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-10

Source: RHBRI

Page 5 of 7
29 June 2010

Table 2 : Valuation Bases


Previous FV New FV
Company (RM/share) (RM/share) Valuation Methodology
Affin 3.58 3.55 12x CY11 EPS, 3x discount to reflect its smaller market capitalisation
AFG 3.47 3.40 13x CY11 EPS, 2x discount to reflect its smaller market capitalisation
AMMB 6.13 6.60 Benchmark 15x CY11 EPS
CIMB Group 8.12 8.40 Benchmark 15x CY11 EPS
EON Cap 8.07 7.92 13x CY11 EPS, 2x discount to reflect its smaller market capitalisation
HL Bank 9.05 9.20 Benchmark 15x CY11 EPS
Maybank 8.96 9.66 Benchmark 15x CY11 EPS
Public 13.12 13.75 Benchmark 15x CY11 EPS
RCE 1.18 1.12 10x CY11 EPS, 5x discount to reflect its non-deposit taking status and small
market capitalisation
Source: RHBRI

Chart 18: AFG Technical View Point


♦ AFG rebounded from the late 2009 correction phase
in Feb 2010, and hit a fresh 2-year high of RM3.18
in Apr.

♦ However, it encountered another round of


consolidation to a low of RM2.63 in May 2010.

♦ The stock showed its resiliency and recovered


steadily back to above the RM2.80 level in recent
weeks.

♦ It staged a steep run-up in mid Jun and crossed


above the RM2.95 level to RM3.04 high, before
giving in to another round of profit-taking activity.

♦ Although it closed yesterday at above RM2.95, the


record of a “doji” candle and the weaker
momentum readings suggest a possible further
weakness ahead.

♦ Should it fall below the RM2.95 level and the 10-


day and 40-day SMAs of RM2.92 and RM2.88, it
could head towards the RM2.80 support level in the
near term.

♦ For the medium-term outlook, it will stay within its


medium-term uptrend if it sustains at above
RM2.80, in our view. Further support is at RM2.59.

Page 6 of 7
29 June 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 7 of 7