Malaysia

PP 7767/09/2010(025354)

Corporate Highlights
Sector Upda te

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

9 July 2010 Recom : Overweight (Maintained)

MARKET DATELINE

Banking
BNM Raises OPR By 25bps To 2.75%

Table 1: Sector Valuations Maybank CIMB Public Bank - L AMMB^ AFG^ Affin EON Cap HLB RHB Cap* Sector Wt. Avg *Not under coverage Price 7.56 7.05 11.92 5.02 2.93 2.99 6.89 8.61 5.89 FV 9.66 8.40 13.75 6.60 3.40 3.55 7.92 9.20 NR Rec OP OP OP OP OP OP MP MP NR

PER (x) FY10 FY11 14.7 12.5 14.8 12.5 14.5 13.0 12.6 11.0 12.0 11.0 10.9 10.1 12.8 11.3 14.5 14.4 9.5 8.4 14.0 12.2

EPS gwth (%) FY10 FY11 35.7 18.1 20.2 17.9 11.8 11.8 14.8 14.6 25.2 9.1 10.5 7.6 9.4 13.2 (4.7) 0.2 10.7 12.9 19.5 14.4

P/BV (x) FY10 FY11 2.0 1.8 2.3 2.1 3.3 2.9 1.4 1.3 1.4 1.3 0.9 0.9 1.2 1.1 2.1 2.0 1.3 1.2 2.2 2.0

ROE (%) Net Div Yld (%) FY10 FY11 FY10 FY11 14.0 15.2 2.9 3.5 16.1 17.4 1.3 1.3 24.2 23.8 3.8 4.1 11.9 12.3 2.8 3.2 12.2 12.0 2.2 2.2 8.6 9.0 2.1 2.1 10.0 10.4 1.5 1.5 14.8 13.4 2.1 2.1 14.6 14.8 3.1 3.3 16.3 16.9 2.6 2.8 ^FY10-11 refers to FY11-12

Overnight Policy Rate raised by another 25bps to 2.75%. BNM yesterday raised the Overnight Policy Rate (OPR) by another 25bps to 2.75% as part of its move to normalise interest rates. While we had expected another 25bps hike in 2H2010, we had anticipated this to take place at the Sep policy meeting. BNM has now raised the OPR by a total of 75bps this year following earlier OPR hikes in Mar and May (each time by 25bps) and with that, we think BNM is likely to keep the OPR unchanged for the rest of the year. Generally positive for banks ... Typically, banks with higher variable rate loans to total loans would benefit more given that a higher proportion of assets would be re-priced faster. In addition, the higher the LD ratio, the higher the positive impact given that a larger amount of assets will be re-priced with liabilities. Apart from the above, the percentage of current account and savings account (CASA) as a percentage of deposits (CASA ratio) is another determining factor. Banks with a higher CASA ratio would benefit more as CASA rates, unlike fixed deposit rates, are not expected to be adjusted by the same magnitude as the hike in OPR. … while loan growth unlikely to be adversely impacted. 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 merely a move to normalise the interest rate. Moreover, the economic recovery would mitigate the potential impact on slowing loan expansion and impact on asset quality. Forecasts. Assuming 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, our sensitivity analysis suggests that the full-year impact of a 25bps hike in OPR could boost our net profit forecasts for the banks by up to 3% (see Table 2. For a more in-depth analysis, please see our sector report dated 5 Mar 2010). By our estimates, 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. Although we had only factored in a 50bps interest rate hike in 2010, our sensitivity analysis suggests that an additional 25bps increase, while positive, would not be too significant on earnings. Thus, we are keeping our forecasts for the banks unchanged. Investment case. In our 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. Overweight stance maintained.

Chart 1. Industry NPL

Chart 2. Industry LLC
(%) 95 90 85 80 75 70 65 60 55 50 45 40 35 Jan-99 Ja n-01 Jan-03 Ja n-05 Jan-07 Ja n-09

David Chong, CFA (603) 9280 2186 david.chong@rhb.com.my

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Table 2 : Impact on earnings from a 25bps hike in OPR RMm / FY10 Affin AFG* AMMB* Impact on interest income/(expense) Up to 1 Mth 19.8 1-3 Mth (14.9) >3-12 Mth (2.0) Total 3.0 Less tax 0.8 Net 2.2 FY10 net profit forecast After OPR hike % Change 411.0 413.2 0.5 12.9 (2.4) (2.4) 8.1 2.1 6.0 377.5 383.5 1.6 21.7 (24.4) (11.7) (14.4) (3.7) (10.6) 1,201.4 1,190.8 (0.9)

CIMB Grp 77.5 (41.7) (11.2) 24.6 6.4 18.2 3,373.2 3,391.6 0.5

EON Cap 34.4 (12.9) (6.0) 15.5 4.0 11.5 373.1 384.7 3.1

HL Bank* 32.1 (5.3) (10.0) 16.7 4.3 12.4 894.2 906.7 1.4

Maybank* 57.3 (37.0) (26.1) (5.8) (1.5) (4.3) 4,292.7 4,288.3 (0.1)

Public 102.4 (53.4) (10.7) 38.3 10.0 28.3 2,872.0 2,900.7 1.0

Source: RHBRI & Companies / *FY11

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. securities, subject to the duties of confidentiality, will be made available upon request. Additional information on recommended

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