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)


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

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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

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