Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore Affin Holdings Berhad 2.30 1,046 2.00 0.9 (27.0) FV Alliance Financial Group 3.65 1,323 NA 6.4 (23.0) NR ... Public Bank

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ed-JS / sa- BC

Illusory earnings growth Earnings recovery in 2016 is inflated after the low base in

2015 from high provisions and costs; weak topline growth; lower NIM still a feature with slower loan growth

Capital raising issues addressed; asset quality remains akey item to monitor

Valuations have reached close to all-time lows for mostbanks but an imminent re-rating is still not in sight; no general improvement seen in the sector at this juncture

Stick with banks with strong fundamentals: Public Bankand Hong Leong Bank remain our top picks for 2016

Earnings recovery in 2016 but little excitement. 2015 plagued Malaysian banks with higher provisions, especially banks with Indonesian operations, while other banks generally saw provisions normalising. In addition, several banks took steps to manage costs structurally via mutual separation schemes, which added c.31% to overall costs in 2015. With these aside, and assuming cost savings start to trickle in, it will not be surprising to see 2016 earnings rebounding strongly by 14% vs 3% contraction in 2015. However, we find it challenging to be bullish on the sector as there is still no general improvement in key trends. Topline growth is limited with NIM compression still a feature while loan growth is expected to moderate to 7-8% in 2016 as business loan approvals have started to taper off. Capital markets are expected to stay muted, thus limiting fee income potential. With these, revenues are forecasted to grow by 7% in 2016. These provide little reason to be excited even though valuations are close to all-time lows. Capital raising issues largely addressed. Banks have raised capital since Basel III was first introduced but more so in 2015 as the deadline to meet Basel III capital requirements gets closer. After the slew of rights issues in 2015, the sector’s average (fully loaded) CET1 ratio is estimated at 11%, while the ‘new-normal’ ROE is 11%. We believe most banks should be done with capital raising, but banks with CET1 below 11% such as AMMB and CIMB may still be under pressure to raise capital, in our view. Another complication has set in especially for banks with a holding company structure. RHBC collapsed its structure but such a solution may not be as efficient for other banking groups. All eyes on asset quality; has not reared its ugly head. Till today, we have yet to see significant signs of asset quality deterioration. Banks have nevertheless cautioned on the possibility of NPL upticks. We believe it is crucial to track credit costs rather than NPL ratios or even absolute NPLs as these will be distorted by slower loan growth, persistent recoveries and write offs. Excluding banks which have aggressively raised provisions in 2015, we have imputed higher credit costs in 2016 overall. Segregating plays; stick with the resilient banks; Public Bank (PBK) and Hong Leong Bank (HLB) remain our top picks. We classify Malaysian banks into three groups to distinguish our preferences: (1) resilient banks with no capital raising or asset quality issues and strong business drivers – PBK and HLB – these are our top picks, (2) banks which have raised capital, with moderate asset quality indicators and looking to re-energise business growth – RHB Capital (RHBC); Maybank (MAY) and CIMB border this category, and (3) banks which may face capital raising risk, have asset quality problems or struggle to find a business direction – Affin Holdings (Affin), AMMB Holdings (AMMB). BIMB Holdings (BIMB) remains a niche play while Hong Leong Financial Group (HLFG) should ride on a potential restructuring theme.

KLCI : 1,669.24

Analyst LIM Sue Lin +65 6682 3711 [email protected]

Lynette CHENG +603 2604 [email protected]

STOCKS

Source: DBS Bank, AllianceDBS

Malaysian Banks: Inflated earnings growth in 2016

17.0

8.2

(1.6) (3.3)

13.5

-40

-30

-20

-10

0

10

20

30

40

CY12 CY13 CY14 CY15F CY16F

%

AMMB AFFIN CIMB HLB MAY

PBK RHBC AFG Sector

Source: Companies, DBS Bank, AllianceDBS

Malaysian Banks: Capital ratios (post capital raising)

15.6%13.5% 13.6% 13.4%

17.8%

15.0% 14.8%

17.8%

11.8%12.2% 11.7%

10.6%

14.8%

12.8%11.4%

15.5%

9.1% 11.5% 11.4% 9.1% 11.3% 10.7% 10.2% 11.1%0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

AMMB Affin AFG CIMB HLB MAY PBK RHBC

Total CAR Tier 1 CET1 Fully loaded (est)


DBS Group Research . Equity 10 Dec 2015

Malaysia Industry Focus

Malaysian BanksRefer to important disclosures at the end of this report

Price Mkt Cap Target Price

Performance (%)

RM US$m RM 3 mth 12 mth Rating

Affin Holdings Berhad 2.30 1,046 2.00 0.9 (27.0) FV Alliance Financial Group 3.65 1,323 NA 6.4 (23.0) NR AMMB Holdings 4.60 3,247 4.80 6.7 (28.6) HOLD CIMB Group Holdings 4.51 9,005 4.80 (4.5) (18.0) HOLD Hong Leong Bank 13.14 5,534 14.80 2.4 (2.9) BUY Maybank 8.41 18,785 9.00 (2.0) (5.4) HOLD Public Bank 18.32 16,564 21.95 2.6 0.9 BUY RHB Capital 6.05 3,667 7.10 5.6 (16.6) BUY BIMB Holdings Berhad 3.86 1,394 3.85 (4.5) (7.9) HOLD Hong Leong Financial Group 13.80 3,402 16.80 0.6 (15.1) BUY

Industry Focus

Malaysian Banks

Page 2

Table of Contents

Deep dive in earnings rebound for 2016 3

Capital raising largely done 7

All eyes on asset quality 9

Valuation and recommendation 11

Appendix 1: 3Q15 earnings summary 14

Appendix 2: Company Guides 18

Affin Holdings 19

AMMB Holdings 25

BIMB Holdings 31

CIMB Holdings 37

Hong Leong Bank 43

Hong Leong Financial Group 49

Maybank 55

Public Bank 61

RHB Capital 67

Industry Focus

Malaysian Banks

Page 3

Strong earnings rebound in 2016, but due to a low base

Little excitement despite 14% earnings growth in 2016. No fundamental improvements are expected to be seen for the Malaysian banks in 2016. Earnings growth of 14% will largely be driven by lower credit costs (from exceptional blips in 2015) and expenses (due to structural changes in 2015). As a result of two consecutive years of earnings contraction in the sector, 2016 is expected to grow by a seemingly high 14%. Meanwhile, on a normalised basis, earnings are expected to grow by 10% in 2016F, mainly supported by lower credit cost after exceptionally higher credit costs recorded in 2015. Note that 2015 was a year where there were several one-off items making a dent on earnings, in particular, CIMB and RHBC’s rationalisation expenses. We expect the sector to end 2015 with a 3% earnings contraction. Stripping these one-off items, 2015 earnings growth would have been flat y-o-y. Malaysian Banks: Inflated earnings growth in 2016

17.0

8.2

(1.6) (3.3)

13.5

-40

-30

-20

-10

0

10

20

30

40


%


PBK RHBC AFG Sector

* No forecasts for AFG

Source: Companies, DBS Bank, AllianceDBS Malaysian Banks: Normalised earnings growth

17%

8%

-2% 0%

10%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%



PBK RHBC AFG Sector

* CY15 exceptional items include CIMB (RM652m costs), RHBC (RM309m costs), AMMB (RM268m gain); No forecasts for AFG


Diving into 2016 P/L indicates revenues will be weak. Revenue in 2016F is expected to grow by 6.5%, pretty much at similar levels in 2015. We expect PBK to record the strongest revenue growth supported by its solid portfolio which focuses on mass market loan growth and non-market related income. Meanwhile, AMMB’s weak revenue growth is attributable to weak net interest income growth as the bank continues to rebalance its loan portfolio to focus on better quality loans. Malaysian Banks: Revenue growth trends

14.5

8.4

2.06.0 6.5

(10)

(5)

-

5

10

15

20

25

30


%


PBK RHBC AFG Sector


Source: Companies, DBS Bank, AllianceDBS NIM compression will remain a feature. We expect NIM compression to be less severe in 2016F (-5bps vs -11bps in 2015). Higher funding costs are expected to pressure NIM more so than loan yields. Competition for loans has largely stayed muted. Loan yield compression across banks are a function of several factors including replacement of lower yielding mortgages and portfolio shift to better quality loans which tend to attract lower pricing. Deposit competition is expected to heat up towards the year end and may spill over into early 2016. Malaysian Banks: Net interest margins

2.46% 2.38%2.25%

2.14% 2.09%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%



PBK RHBC AFG Sector



Industry Focus

Malaysian Banks

Page 4

No impetus in the capital market space. As at Oct-15, net funds raised in the market stood at RM66bn, far from the RM100bn raised in 2014. We do not foresee a revival in capital market activities going into 2016, which should keep non-interest income growth muted. In light of the sluggish capital market, we see better prospects for banks with low market-related income such as PBK, MAY and HLB, as their non-interest income is supported by resilient contribution from asset management (PBK), customer flows (HLB) and transaction banking (MAY). Forex gain or losses could continue to feature in the banks’ earnings if the volatility in RM persists. Malaysian Banks: Net funds raised

27.4

39.6

38.9

23.9

50.4

42.7

41.7

30.2

45.5

57.3

110.

3

87.5

82.4

137.

4

82.1

100.

1

65.6

-

20

40

60

80

100

120

140

160

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

10M

2015

RMbn

Source: BNM, DBS Bank, AllianceDBS Malaysian Banks: New bonds and equities issued vs non-

interest income

-

2 4

6

8

10

12

14

16

18 20

-

20

40

60

80

100

120

140

160

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

10M

2015

New bonds issued New equities issued Non-interest income

RMbn RMbn

*2015 non-interest income represents full year forecast

Source: BNM, Companies, DBS Bank, AllianceDBS

Malaysian Banks: Market-related income proportion

27%

51%

24%

57%

22%25%

33% 34%

0%

10%

20%

30%

40%

50%

60%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

MAY CIMB PBK AMMB RHBC HLB AFG AHB

Recurring income Market-related income % market-related income to NII

RMbn

*We defined market-related non-interest income as fees largely related to capital market flows including advisory fees, investment gains from securities and gains from sale/disposal of assets, brokerage and forex income (50%). **AMMB’s market-related income includes the gain on disposal of AmFraser and revaluation of AmMetlife and AmMetlife Takaful stakes

Source: Companies, DBS Bank, AllianceDBS Malaysian Banks: Non-interest income breakdown

0%

20%

40%

60%

80%

100%

MAY CIMB PBK AMMB RHBC HLB AFG AHB

Fee income IB income Investment income Forex income Others

Source: Companies, DBS Bank, AllianceDBS Lower costs in 2016. Lower expenses is one of the key drivers to earnings growth for the banks in 2016. This comes off from large one-off costs related to its business and staff rationalisation exercises particularly for CIMB and RHBC. Our forecasts have not taken into account HLB’s staff rationalisation exercise which should be booked in its Dec-15 quarter. Stripping these along with AMMB’s one off gain in 1QCY15, cost-to-income ratio in 2015 would be at a normalised level of 49.7%, which otherwise would have risen to 50.4%. We expect 2016F cost-to-income ratio improve to 49.5%, barring other one-off costs.

Industry Focus

Malaysian Banks

Page 5

Malaysian Banks: Cost-to-income ratio trend

44.9%45.6%

46.6%47.2%

48.4%

50.4%49.5%

49.7%

40%

42%

44%

46%

48%

50%

52%

54%

CY10 CY11 CY12 CY13 CY14 CY15F CY16F

*cost-to-income ratio at 49.7% after stripping off CY15 exceptional items; i.e CIMB (RM652m costs), RHBC (RM309m costs), AMMB (RM268m gain)

Source: Companies, DBS Bank, AllianceDBS Credit costs to dip post kitchen sinking in 2015, but on a normalised basis, uptrend is noted. We believe days of high recoveries are at its tail end which explains our elevated credit cost assumption in 2016 compared to the years prior to 2015. 2015 credit costs were significantly higher due to CIMB’s Indonesian operations which started to bleed since 3Q14. High provisions will likely be a feature for CIMB up to 2Q16. Malaysian Banks: Credit cost trends

-0.30%

-0.20%

-0.10%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%


AMMB AFFIN CIMB HLB

MAY PBK RHBC AFG

Sector Sector ex CIMB * No forecasts for AFG

Source: Companies, DBS Bank, AllianceDBS Deposit competition revving up at year-end, may spill over to 1Q16. Towards the end of 2014 and early 2015, numerous deposit campaigns were in the market, offering attractive rates for fixed deposits. For instance, CIMB offered 3.95% effective rate for 3 months deposit under its ‘unfixed’ deposit campaign. Similar trends could prevail towards the end of this

year and early 2016, with MAY starting the race recently with an offer of 3.93% effective rate for 3 months deposit. Most banks are aggressively offering above 4% fixed deposit rates for 12-month tenures. Competition remains rife for a shrinking pool of deposits as core deposits continue to contract m-o-m. Proportion of CASA to total deposits now ranges at 25-26%. Notably, “other deposits” have been largely driven by foreign currency deposits amid the weak RM. Malaysian Banks: Deposit growth

-20%

-10%

0%

10%

20%

30%

40%

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15

CASA Fixed deposits Others Total (ex-others) Total

y-o-y growth (%)

Source: BNM, DBS Bank, AllianceDBS Malaysian Banks: CASA to total deposits

23.0%

23.5%

24.0%

24.5%

25.0%

25.5%

26.0%

26.5%

27.0%

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

Jan-

08A

pr-0

8Ju

l-08

Oct

-08

Jan-

09A

pr-0

9Ju

l-09

Oct

-09

Jan-

10A

pr-1

0Ju

l-10

Oct

-10

Jan-

11A

pr-1

1Ju

l-11

Oct

-11

Jan-

12A

pr-1

2Ju

l-12

Oct

-12

Jan-

13A

pr-1

3Ju

l-13

Oct

-13

Jan-

14A

pr-1

4Ju

l-14

Oct

-14

Jan-

15A

pr-1

5Ju

l-15

Fixed deposits Demand depositsSaving deposits CASA to total deposits

CASA to total deposits (%)Deposits (RM bn)

Source: BNM, DBS Bank, AllianceDBS Business loan approvals have moderated; spelling a bleaker outlook to loan growth in 2016. Business loans growth has supported system loan growth since overtaking retail loan growth in May 2015. Leading indicators are insufficiently compelling to warrant continued growth in business loans as approval trends have been volatile. Retail loan growth remains a drag but PBK and HLB may still see strong mortgage growth from their pipelines built up in previous quarters.

Industry Focus

Malaysian Banks

Page 6

Malaysian Banks: Loan growth breakdown

-8%

-4%

0%

4%

8%

12%

16%

20%

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5Total loan growth Retail loan growth Business loan growth

Oct-15:Total loan growth: 9.1% y-o-yRetail loan growth: 7.4% y-o-yBusiness loan growth: 11.2% y-o-y

Source: DBS Bank, AllianceDBS Malaysian Banks: Loan approval trends

-30%

-20%

-10%

0%

10%

20%

30%

40%

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Retail loan 6 mth M.A Business loan 6 mth M.A Total loan 6 mth M.A


Malaysian Banks: Loan growth

5.4%

3.9% 4.

6%

4.8%

8.5%

8.6%

6.3%

8.6%

12.9

%

7.8%

12.8

%

13.6

%

10.4

%

10.6

%

8.7%

8.0%

8.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

F

2016

F

Gross loans (RM bn) Loan growth yoy


Industry Focus

Malaysian Banks

Page 7

Capital raising largely done

Fully-loaded CET-1 averages at 11% after capital raising in 2015. Drawing comparison with the banks in ASEAN, Malaysian banks have the lowest capital ratios at c.11% CET-1 ratio, even after a spate of capital raising. This compares to Philippine banks at 14% and Singapore at 12% on a fully loaded basis. Note that the Philippine banks report capital ratios on a fully loaded basis with no transition permitted from 2015. On a transitional basis, Thai banks’ CET1 is estimated at 13%, and 17% for the Indonesian banks. The Thai and Indonesian banks do not disclose fully loaded CET ratios, but we estimate it to be 20-30bps lower than the transitional CET1 levels. Capital raising spree since 2014. Malaysian banks started to address capital concerns over the past few years and have aggressively speeded this up since 2014. So far, Affin, PBK, RHBC, HLB and HLFG have resorted to a rights issue, while MAY and CIMB undertook a private placement back in 2012 and early 2014 respectively. With this, we believe the Malaysian banks have largely addressed their capital concerns with only CIMB and AMMB left. These two banks may see capital raising risk given that their CET-1 ratio is the lowest among peers, at c.9%. We believe MAY will be spared from a rights issue, as its dividend reinvestment plan (DRP) is sufficient to keep its capital position intact.

Malaysian Banks: Fully-loaded CET-1 (estimated)

11.5% 11.4%10.7%

10.2%9.1%

11.1%

9.1%

11.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

AHB AFG MAY PBK CIMB RHBC AMMB HLBK

Ind (est) = 10.5%

Source: Companies, DBS Bank, AllianceDBS Malaysian Banks: Lowest capital ratios within the region

(up to 3Q15 without capital raising)

0%

5%

10%

15%

20%

25%

OC

BCU

OB

DBS

AM

MB

Aff

inA

FGC

IMB

HLB

MA

YPB

KRH

BCBC

ABD

MN

BMRI

BNI

BRI

BTN

BTPN

PNBN

BBL

KBA

NK

KTB

SCB

TCA

PTI

SCO

TMB BP

IM

BTBD

OPN

BSE

CB

CET-1 Tier 1 Total CAR

Source: Companies, DBS Bank, AllianceDBS Malaysian banks: Capital raising activities

Bank Capital raising

Date announced

Date Completed

Amount (RMbn)

Purpose of equity raising Rights price (RM)

Disc % from TERP

New shares issued

(m)

% of share cap

HLFG Rights Issue 12-Aug-2015 Dec-15* 1.1 Fund HLB's rights issue as well as strengthen capital

11.60 20% 95 9%

HLB Rights Issue 12-Aug-2015 Dec-15* 3.0 Strengthen capital for growth and Basel III

10.40 23% 288 16%

RHBC Rights Issue 13-Apr-2015 Dec-15* 2.5 Strengthen capital for growth and Basel III

4.82 20% 518 20%

PBK Rights Issue 30-Apr-2014 Aug-14 5.0 Strengthen capital for growth and Basel III

13.80 29% 350 10%

AFFIN Rights Issue 10-Mar-2014 Jul-14 1.3 Acquisition of HwangDBS businesses

2.87 25% 448 30%

CIMB Private Placement

13-Jan-2014 Jan-14 3.6 Strengthen capital for Basel III 7.10 na 500 6%

MAY Private Placement

12-Oct-2012 Oct-12 3.7 Strengthen capital for growth and Basel III

8.88 na 412 5%

HLB

Rights Issue 11-Mar-2011 Sep-11 2.6 Acquisition of EON Capital 8.65 30% 300 19%

* Expected completion date


Industry Focus

Malaysian Banks

Page 8

Malaysian banks: Basel III

01-Jan 2011 2012 2013 2014 2015 2016 2017 2018 2019

Leverage ratio Supervisory monitoring

Parallel run 1 Jan 2013 - 1 Jan 2017. Disclosure starts 1 Jan 2015

Migration to Pillar 1

Min common equity capital ratio 3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5%

Capital conservation buffer 0.625% 1.250% 1.875% 2.5%

Min common equity plus capital conservation buffer

3.5% 4.0% 4.5% 5.125% 5.750% 6.375% 7.0%

Phase-in of deductions from Core Equity Tier-1

20% 40% 60% 80% 100% 100%

Min tier-1 capital 4.0% 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0%

Min total capital 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

Min total capital plus conservation buffer

8.0% 8.0% 8.0% 8.0% 8.625% 9.250% 9.875% 10.5%

Capital instruments that no longer quality as non-core tier-1 capital or tier-2 capital

Phased out over 10 year horizon beginning 2013

Phase-in deductions of regulatory adjustments for investments in capital instruments of unconsolidated financial and insurance/takaful entities

Phased-in over 5 year horizon beginning 2014

Liquidity coverage ratio Observation period begins 60% 70% 80% 90% 100%

Net stable funding ratio Observation period begins Introduced

Source: BNM, DBS Bank, AllianceDBS

Industry Focus

Malaysian Banks

Page 9

All eyes on asset quality

“Normalisation” is an over-used word. Credit cost is a crucial metric to track to get a gauge on asset quality conditions. Although we expect credit cost to remain elevated relative to the years prior to 2015, our credit cost assumption is still conservative given that it remains low within the credit cost cycle in Malaysia. Based on our sensitivity analysis, every 10bps increase in credit cost would reduce net profit by 4-7%. Malaysian Banks: Credit cost trends

1.16

%

1.02

%

1.08

%

1.12

%

0.80

%

0.68

%

0.71

%

0.49

%

0.28

%

0.16

%

0.20

%

0.18

%

0.32

%

0.21

%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

CY

03

CY

04

CY

05

CY

06

CY

07

CY

08

CY

09

CY

10

CY

11

CY

12

CY

13

CY

14

CY

15F

CY

16F

Sector credit cost Sector credit cost ex CIMB


Sensitivity Analysis: 10bps increase in credit cost

FY16 (Current) FY16 (Sensitised) % chg in earnings Credit cost Net profit Credit cost Net profit

AHB 0.28% 479.9 0.38% 445.4 -7%

AMMB 0.04% 1,391.9 0.14% 1,325.1 -5%

CIMB 0.39% 3,767.8 0.49% 3,541.6 -6%

HLB 0.04% 2,263.6 0.14% 2,160.4 -5%

MAY 0.26% 7,594.8 0.36% 7,267.0 -4%

PBK 0.08% 5,264.6 0.18% 5,036.4 -4%

RHBC 0.13% 2,236.6 0.23% 2,106.7 -6%

Source: DBS Bank, AllianceDBS New NPL formation has been picking up but sporadically. Although there has yet to be a significant uptick in NPL, we note that absolute NPL is on the rise for most banks (except PBK). Notable upticks were from CIMB, MAY and Affin, by 24/15/25% respectively. Quarterly movements in new NPLs should be closely monitored.

Malaysian Banks: NPL trends

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Jan-

08A

pr-0

8Ju

l-08

Oct

-08

Jan-

09A

pr-0

9Ju

l-09

Oct

-09

Jan-

10A

pr-1

0Ju

l-10

Oct

-10

Jan-

11A

pr-1

1Ju

l-11

Oct

-11

Jan-

12A

pr-1

2Ju

l-12

Oct

-12

Jan-

13A

pr-1

3Ju

l-13

Oct

-13

Jan-

14A

pr-1

4Ju

l-14

Oct

-14

Jan-

15A

pr-1

5Ju

l-15

Oct

-15

Gross NPL (RMbn) 3-month Gross NPL (%)

RM

Source: BNM, DBS Bank, AllianceDBS CIMB: Absolute NPL on the rise since FY14 driven by CIMB

Niaga

-25%-20%-15%-10%-5%0%5%10%15%20%25%30%

(11,500)

(6,500)

(1,500)

3,500

8,500

13,500

FY11

FY12

FY13

FY14

9M15

RM m

Absolute NPL (LHS) Growth (RHS)

Source: Company, DBS Bank, AllianceDBS MAY: Absolute NPL on the rise since FY14 driven partly by

BII and Malaysian operations

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY11

FY12

FY13

FY14

9M15

RM m

Absolute NPL (LHS) Growth (RHS)

Source: Company, DBS Bank, AllianceDBS

Industry Focus

Malaysian Banks

Page 10

Affin: Absolute NPL increased significantly in 1QFY15 from

its commercial banking arm

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

(600)

(400)

(200)

-

200

400

600

800

1,000

1,200

FY11

FY12

FY13

FY14

9M15

RM m

Absolute NPL (LHS) growth (RHS)

Source: Company, DBS Bank, AllianceDBS Difficult to ascertain a significant turn in the asset quality cycle when no signs are imminent. Banks are undoubtedly cautious despite no apparent deterioration noted yet. We understand that vulnerable sectors such as those with exposure to steel, oil and gas as well as commodities are closely monitored to contain risk. Banks shown as principal bankers of companies in challenging sectors are not necessarily at risk as it is not a direct indication of credit

exposure. Regardless, further deterioration of macroeconomic conditions could pose risks to NPL formation. We currently still expect NPLs to remain fairly stable in 2016. Malaysian Banks: NPL ratios

2.4%2.0%

1.7% 1.8% 1.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%


AMMB AFFIN CIMB

HLB MAY PBK

RHBC AFG Sector ex PBK



Industry Focus

Malaysian Banks

Page 11

Valuation and recommendation

Valuations are at all-time lows. Malaysian banks are currently trading at -2SD of its 10-year mean, the lowest since 2009. At current valuations, we believe most of the negatives are priced in except for a significant upset in asset quality indicators, which in our view, should remain manageable. However, we find it challenging to be bullish on the sector as there is still no general improvement in key trends. Almost all banks are currently trading at or just slightly above -2SD. Malaysian Banks: Rolling forward PBV band

Mean, 1.62

+1SD, 1.82

+2SD, 2.03

-1SD, 1.41

-2SD, 1.21

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

05 06 07 08 09 10 11 12 13 14 15

PBV (X)

Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS New-normal ROEs post capital raising are a notch down. Average ROE levels in 2016 after accounting for capital raising is at 11%. Technically, this would warrant a lower P/BV multiple for the banks’ valuation. All banks, except AMMB and AFG, have raised CET1 capital over the past 2-3 years. CIMB and AMMB are the only two that may see capital raising risk. Assuming that they do raise a rights issue to push its fully loaded CET1 ratio to 11%, sector ROE would further shift down to c. 9%. Malaysian Banks: ROE

15.5% 14.6%12.8%

10.5% 10.7%

0%

5%

10%

15%

20%

25%



PBK RHBC AFG Sector


Malaysian Banks: ROE trends, pre- and post-capital raising

*HLB/RHBC/Affin/PBK pre capital raising period refers to FY15/15/14/13

HLB/RHBC/Affin/PBK post capital raising period refers to FY17F/17F/16F/15F

Source: Companies., DBS Bank, AllianceDBS Valuations may stagnate until a visible improvement is seen in the sector. We do not expect a general improvement in the fundamentals of the Malaysian banking sector. NIM compression remains a feature, and coupled with slower loan growth, net interest income or top line growth will remain muted. Capital markets are still expected to stay sluggish. Although we understand that pipelines are strong, companies have held back plans for corporate activities in an uncertain macro environment. With this, revenue growth would be weak in 2016. It would not be appropriate to track pre-provision profit for 2016 as it will be distorted by lower expenses as banks saw higher costs booked for staff rationalisation exercises in 2015. Pre-provision profit would be artificially boosted in 2016. Similarly, provisions would be lower y-o-y after accounting for kitchen sinking activities, especially for CIMB. These would all distort 2016 earnings growth. Hence, while earnings growth is forecast at 14%, it is nevertheless cosmetic and should not warrant too much excitement. Segregating the banks. We classify Malaysian banks into three groups to distinguish our preferences: (1) resilient banks with no capital raising or asset quality issues and strong business drivers – PBK and HLB – these are our top picks, (2) banks which have raised capital, with moderate asset quality indicators and looking to re-energise business growth – RHBC; MAY and CIMB border this category, and (3) banks which may face capital raising risk, has asset quality problems or struggle to find a business direction – Affin, AMMB. BIMB remains a niche play while HLFG should ride on a potential restructuring theme. Stay safe; PBK and HLB remain our top picks. As we comb through the Malaysian banks under our coverage, we conclude that the only two banks to overweight in a Malaysian portfolio

14.3

%

11.5

%

8.5%

21.2

%

11.1

%

9.3%

6.0%

16.6

%

0%

5%

10%

15%

20%

25%

HLB RHBC AFFIN PBK

Pre capital raising Post capital raising

Industry Focus

Malaysian Banks

Page 12

would be PBK and HLB. Both have strong asset quality attributes and both are expected to see loan growth driven by mortgages from strong pipelines built up in the past few quarters. PBK to remain a champion of growth and asset quality .Little needs to be said on PBK’s solid attributes as its earnings deliveries speak for itself. We expect PBK to consistently defy headwinds and grow above industry average. Its cost-to-income ratio which ranks way below industry average is admirable. Its premium valuation over peers is justifiable in our view. PBK is a BUY with RM21.95 TP. HLB, waiting for the next leap. HLB should start to re-rate now that capital raising issues are a thing of the past. Key risk to HLB’s earnings would be its contribution from its associate Bank of Chengdu. Bank of Chengdu currently contributes 14% of pre-tax profit. HLB’s other strong attribute is its strong liquidity position with the lowest loan-to-deposit ratio among peers. While many would argue that liquidity coverage ratio should be in focus, we believe the analyst fraternity will still fall back on a quantifiable metric such as the loan-to-deposit ratio to form a judgement. HLB is also a BUY with RM14.80 post rights TP. HLFG, hopes of corporate streamlining remains. HLFG, parent company of HLB, is expected to deliver earnings growth similar to HLB as its earnings still mainly hinges on HLB (c.90%). Its insurance business has seen strong growth in the past, but that is expected to moderate as the focus will be on housekeeping and tightened criteria for new policies in the near term. A rising interest rate environment would be positive for HLA. Its investment banking business is expected to stay small and niche. Although small (c.3%), its investment banking unit has been gradually expanding market share in equity and debt issues, as well as in stockbroking. We have a BUY recommendation and RM16.80 post rights TP based on sum-of-parts metric. We believe a corporate streamlining within the group would be imminent as the exercise would eliminate administrative overlaps and reduce regulatory compliance costs. The potential corporate streamlining will allow investors to focus on only two listed operating entities – the banking arm, HLB, and ideally, its insurance arm, HLA to unlock value within HLFG. RHBC to start on a cleaner slate in 2016. Our BUY rating on RHBC is based on a cleaner start to 2016 but a significant re-rating would only be possible once its business growth starts to show a sustainable trend. RHBC should complete its “complicated” right issue by 21 Dec. And by May 2015, it should be ready to unveil its new corporate structure with improved capital levels and having cleaned up its debt. Our RM7.10 TP for RHBC reflects its new corporate structure.

MAY is a HOLD, dividends remain a sweetener. MAY’s revenues have been volatile, skewed largely by forex and insurance. We expect such trends to persist. Stripping off these volatilities, MAY’s revenues may not be as exciting. In FY15, MAY’s astounding loan growth may hit high-teens but this is due to forex translation from its regional operations especially Singapore and Indonesia amid the weak RM. On a constant-currency basis, loan growth would average at 8-9%. Provisions doubled in 3Q15 and we are uncertain if this trend would persist. For conservative reasons, we have assumed a higher credit cost for 2016. MAY’s Indonesian operations may be the wildcard for an upside surprise should it get its act together faster than expected. With muted earnings growth, dividends remain the only sweetener for MAY. Our TP for MAY is RM9.00. CIMB’s valuations have bottomed but there is no catalyst for a re-rating as yet. We also struggle to identify an inflection point for CIMB. While we are inclined to believe that the worst of provisions will be over in 2015, its Indonesian operations could drag earnings by another two quarters before recovering. Restructuring costs is another element to watch in 2015, which may imply lower levels in 2016. Stripping these, CIMB’s revenue growth has limited traction to excite. NIM compression may be steeper than peers, a combination of deposit competition in Malaysia and the change in its business mix in Indonesia. Similar to MAY, CIMB would also book high loan growth in 2015 due to forex translation differences. At sub-10% ROE, we find it difficult to justify a valuation multiple above 1x P/BV. Potential capital raising, although negated by management, could pose further downside risk to valuations. We have HOLD rating with RM4.80 TP for CIMB. AMMB continues to deliver sub-par growth. AMMB is another Malaysian bank which saw its share price plummets significantly in 2015. Plagued by persistent NIM compression and below industry loan growth on account of portfolio rebalancing which has been ongoing for the past 5 years, we see limited upside to share price performance from here. Adding to its woes is the unprecedented penalty imposed by BNM for non-compliance arising from weaknesses in its reporting systems and processes. Furthermore, a new CEO has just been appointed and we believe he will have a daunting task to rebuild the bank’s business. There has been ongoing chatter on possible sell-out by ANZ and Tan Sri Azman Hashim, each holding 23.8% and 13.7% of AMMB. Such newsflow could precipitate possible M&A actions. Watch this space. We currently have a HOLD recommendation and RM4.80 TP.

Industry Focus

Malaysian Banks

Page 13

Affin stays an underdog, our only FULLY VALUED call. Affin’s earnings had consistently disappointed for the first three quarters of 2015. While the acquisition of HwangDBS’ businesses in 2014 lifted Affin’s non-interest income contribution to total income, earnings traction has failed to pick up because of soft capital markets. Provisions and sluggish loan growth have dented its commercial banking business and we see no light at the end of the tunnel for a re-rating. Any further asset quality deterioration could pose downside risks to earnings. We see no catalysts to re-rate its share price in the near term as loan growth is expected to remain sluggish, recoveries to moderate and NIM pressure to persist. Our TP for Affin is RM2.00 and we believe the stock would likely continue to trade below BV.

BIMB’s niche position holds potential but weak consumer sentiment to dampen upside. We see value in BIMB’s niche position as the only listed Shariah-compliant bank on Bursa but the persistently weak consumer sentiment could weigh on BIMB’s prospects. Consumer loans make up just over 60% of BIMB’s loan portfolio, with the bulk being personal and housing loans. BIMB’s loan growth has shown slower growth in FY15 since recording more than 20% loan growth in the past three years. Positively, asset quality has been relatively stable. Capital levels are a tad below industry average and BIMB is looking to raise RM400m Tier 2 capital by mid-Dec to buffer its capital position. We have a HOLD rating on BIMB with a RM3.85 TP.

Malaysian Banks: Sector valuation Banking Group Market

cap Price Target

Price Rating PE (x) CAGR PBV (x) ROE (%) Net div

(%) (US$bn) (RM/s) (RM/s) CY14A CY15F CY16F ^ (%) CY14A CY15F CY16F CY15F CY15F

Affin Holdings

1,059 2.30 2.00 FULLY

VALUED 7.4x 11.7x 9.3x -11.0 0.6x 0.6x 0.6x 4.8% 4.4%

Alliance* 1,339 3.65 NA NA 10.0x 9.3x 8.3x 9.6 1.3x 1.3x 1.2x 12.9% 4.9% AMMB 3,286 4.60 4.80 HOLD 7.7x 7.5x 6.9x 5.7 1.0x 0.9x 0.9x 10.4% 3.8% CIMB Group 9,115 4.51 4.80 HOLD 12.1x 13.6x 10.5x 7.2 1.0x 1.0x 1.0x 7.6% 3.8% Hong Leong 5,602 13.14 14.80 BUY 11.2x 10.2x 9.3x 10.2 1.6x 1.5x 1.3x 15.1% 3.2% Maybank 19,015 8.41 9.00 HOLD 11.4x 11.7x 10.9x 2.3 1.5x 1.4x 1.4x 12.2% 6.3% Public Bank 16,768 18.32 21.95 BUY 15.7x 14.6x 13.1x 9.4 2.5x 2.3x 2.1x 16.6% 2.9% RHB Capital 3,712 6.05 7.10 BUY 7.9x 10.3x 8.5x -4.1 0.9x 0.8x 0.8x 8.0% 0.7%

Weighted average 12.2x 12.3x 10.9x 5.5 1.6x 1.5x 1.4x 12.5% 4.1% Weighted average (ex-Public Bank) 10.8x 11.4x 10.0x 4.0 1.3x 1.2x 1.2x 10.9% 4.6% Simple average 10.4x 11.1x 9.6x 3.7 1.3x 1.2x 1.1x 10.9% 3.7% Simple average (ex-Public Bank) 9.7x 10.6x 9.1x 2.8 1.1x 1.1x 1.0x 10.1% 3.9% BIMB 1,411 3.86 3.85 HOLD 10.8x 11.0x 10.8x 0.0 2.0x 1.8x 1.7x 17.1% 4.5% Hong Leong Financial Group 3,444 13.80 16.80 BUY 8.1x 7.3x 6.6x 1.2 1.2x 1.1x 1.0x 16.1% 2.7%

* Based on Bloomberg consensus

^ Refers to a 2-year EPS CAGR for CY14-16F

Source: Companies, Bloomberg Finance L.P., DBS Bank, AllianceDBS

Industry Focus

Malaysian Banks

Page 14

Appendix 1: 3Q15 Earnings Summary

Industry Focus

Malaysian Banks

Page 15

Malaysian Banks: 2QCY15 results (q-o-q and y-o-y comparison) Alliance Financial Group AMMB CIMB

RMm 2QFY16 2QFY15 1QFY16 y-o-y q-o-q 2QFY16 2QFY15 1QFY16 y-o-y q-o-q 3QFY15 3QFY14 2QFY15 y-o-y q-o-q Net interest income 213 221 208 -4% 3% 432 515 424 -16% 2% 2,416 2,171 2,269 11% 6% Islamic banking income 61 54 59 13% 4% 200 224 207 -11% -3% 386 355 399 9% -3% Non-interest income 92 115 78 -20% 18% 299 385 333 -22% -10% 1,038 1,002 1,165 4% -11% Operating income 366 390 344 -6% 6% 931 1,124 964 -17% -3% 3,840 3,529 3,833 9% 0% Operating expenses (166) (161) (167) 3% -1% (500) (498) (487) 0% 3% (2,261) (2,034) (2,440) 11% -7% Pre-provision profit 200 230 177 -13% 13% 432 626 476 -31% -9% 1,580 1,495 1,393 6% 13% Provisions & Impairments (19) 7 (16) 17% 66 (4) (11) nm nm (529) (348) (539) nm -2% Associates nm nm 4 7 0 -47% 1430% 24 33 29 -28% nm Pre-tax profit 181 237 161 -24% 12% 501 621 482 -19% 4% 1,075 1,179 884 -9% 22% Net profit 135 180 122 -25% 10% 383 446 340 -14% 13% 804 890 640 -10% 26% NIM (%) 2.19 2.29 2.12 (0.10) 0.07 2.15 2.62 2.12 (0.47) 0.03 2.68 2.82 2.64 (0.14) 0.04 Cost-to-income (%) 45.4 41.1 48.6 4.2 (3.2) 53.7 44.3 50.6 9.3 3.1 58.9 57.6 63.65 1.2 (4.8) ROE (%) 11.8 17.0 10.8 (5.2) 1.0 10.3 12.9 9.3 (2.5) 1.1 8.20 9.84 6.6 (1.6) 1.6 ROA (%) 1.0 1.5 0.9 (0.4) 0.1 1.2 1.5 1.0 (0.3) 0.1 0.7 0.9 0.6 (0.2) 0.1 Gross NPL ratio (%) 1.2 1.2 1.0 0.0 0.2 2.0 1.8 1.8 0.2 0.2 3.4 3.3 3.3 0.1 0.1 Loan loss coverage (%) 85.5 88.6 105.4 (3.1) (19.9) 92.6 117.6 103.2 (25.1) (10.6) 76.6 74.2 77.9 2.3 (1.3) LD ratio (%) 85.4 83.7 84.2 1.7 1.1 95.5 99.3 93.6 (3.8) 1.9 93.3 92.4 92.5 0.9 0.8 CET-1(%) 11.7 10.1 11.1 1.6 0.6 10.6 10.3 10.7 0.3 (0.2) 9.3 9.7 9.6 (0.4) (0.3) Tier-1 CAR (%) 11.7 11.1 11.1 0.6 0.6 11.8 11.7 12.0 0.1 (0.2) 10.6 10.4 10.5 0.2 0.1 RWCAR (%) 13.6 13.2 13.0 0.5 0.7 15.6 16.1 16.1 (0.5) (0.4) 13.4 13.9 13.4 (0.5) 0.0 Net loans 37,607 34,114 36,984 10% 2% 85,270 84,742 84,066 1% 1% 290,109 243,606 272,596 19% 6% Deposits 44,055 40,768 43,904 8% 0% 89,280 85,346 89,840 5% -1% 310,810 263,523 294,724 18% 5% Gross NPLs/Impaired Loans 463 413 376 12% 23% 1,697 1,546 1,541 10% 10% 10,172 8,178 9,251 24% 10% Positives NA Stable NIM. Strong recoveries. Stronger net intrest income thanks to NIM uplift and decent

loan growth. Strong CASA growth.

Disappointments NA Sluggish loan growth. Deposit contraction. Uptick in NPL. Provisions and cost remain elevated due to its Indonesian operations. Uptick in NPL ratio.

Prospects NA AMMB is guiding for slow loan growth (2%) and continuous NIM compression (10-12bps further). The bank continues to focus on better quality loans with better risk underwriting.

While there is no guidance for FY16 as yet, CIMB Niaga's outlook remains uncertain while we would not discount the possibility of some stress in its retail portfolio. Management has cut FY15 ROE target to 8.5-9% (ex restructuring costs). Management still aims for a CET1 ratio of 11% by 2018, but we view it as a challenging goal.

Source: Company announcements, DBS Bank, AllianceDBS

Industry Focus

Malaysian Banks

Page 16

Malaysian Banks: 2QCY15 results (q-o-q and y-o-y comparison) (cont’d)

Hong Leong Bank Maybank Public Bank RMm 1QFY16 1QFY15 4QFY15 y-o-y q-o-q 3QFY15 3QFY14 2QFY15 y-o-y q-o-q 3QFY15 3QFY14 2QFY15 y-o-y q-o-q Net interest income 660 715 657 -8% 0% 2,897 2,462 2,680 18% 8% 1,629 1,551 1,560 5% 4% Islamic banking income 115 110 105 4% 9% 1,085 848 967 28% 12% 211 216 209 -2% 1% Non-interest income 249 189 279 32% -11% 1,766 1,228 1,241 44% 42% 631 481 545 31% 16% Operating income 1,023 1,015 1,041 1% -2% 5,747 4,538 4,888 27% 18% 2,471 2,248 2,313 10% 7% Operating expenses (463) (429) (471) 8% -2% (2,601) (2,284) (2,419) 14% 8% (741) (649) (722) 14% 3% Pre-provision profit 560 585 570 -4% -2% 3,146 2,254 2,470 40% 27% 1,730 1,599 1,591 8% 9% Provisions (21) 20 (14) -207% nm (797) (73) (395) nm 102% (117) (47) (60) 148% 93% Associates 85 99 116 -14% -27% 34 45 76 nm -55% 1 0 1 nm nm Pre-tax profit 625 704 673 -11% -7% 2,383 2,226 2,150 7% 11% 1,614 1,552 1,531 4% 5% Net profit 503 548 615 -8% -18% 1,899 1,608 1,585 18% 20% 1,201 1,192 1,197 1% 0% NIM (%) 1.78 2.00 1.78 (0.22) (0.00) 2.54 2.33 2.39 0.22 0.15 2.13 2.26 2.07 (0.13) 0.06 Cost-to-income (%) 45.2 42.3 45.3 2.9 (0.0) 45.3 50.3 49.5 (5.1) (4.2) 30.0 28.9 31.2 1.1 (1.2) ROE (%) 11.6 14.8 15.2 (3.1) (3.5) 13.1 13.0 11.3 0.1 1.8 16.3 19.8 16.7 (3.5) (0.4) ROA (%) 1.1 1.3 1.4 (0.2) (0.3) 1.1 1.1 1.0 0.0 0.2 1.3 1.5 1.3 (0.1) (0.0) Gross NPL ratio (%) 0.8 1.1 0.8 (0.3) (0.0) 1.5 1.6 1.6 (0.1) (0.0) 0.5 0.6 0.5 (0.1) (0.0) Loan loss coverage (%) 131.0 128.7 136.3 2.3 (5.3) 85.4 95.4 83.4 (10.0) 2.0 130.8 117.1 129.2 13.7 1.6 LD ratio (%) 80.1 79.1 79.9 1.0 0.2 96.0 90.6 94.2 5.4 1.8 89.8 87.8 87.0 2.0 2.8 CET-1 (%) 10.5 10.1 10.8 0.4 (0.2) 11.2 11.3 11.7 (0.1) (0.5) 10.2 10.4 10.7 (0.2) (0.5) Tier-1 CAR (%) 11.6 11.5 11.9 0.2 (0.3) 12.8 13.2 13.4 (0.4) (0.5) 11.4 11.9 11.9 (0.5) (0.5) RWCAR (%) 13.7 14.1 14.3 (0.3) (0.6) 15.0 16.1 15.8 (1.0) (0.7) 14.8 15.8 15.4 (1.0) (0.6) Net loans 115,063 102,823 112,124 12% 3% 458,464 380,880 427,015 20% 7% 266,194 235,670 257,007 13% 4% Deposits 143,566 129,919 140,276 11% 2% 477,493 420,225 453,461 14% 5% 296,339 268,374 295,299 10% 0% Gross NPLs/Impaired Loans 967 1,195 948 -19% 2% 7,167 6,373 6,764 12% 6% 1,418 1,542 1,393 -8% 2% Positives Strong loan and deposit growth. Stable NIM and NPL ratio.

Expenses well-contained. Loan-to-deposit ratio remain among the lowest in the indusry.

Strong loan growth. Higher NIM. Strong non-interest income growth from one-off gains and forex gains.

Healthy loan growth. NIM improvement. Stable NPL ratio and non interest income growth.

Disappointments Provisions normalised. Weak contribution from Bank of Chengdu.

Provisions doubled due to lower recoveries and higher collective allowance. Increase in absolute NPL.

Marginal deposit growth.

Prospects Preliminary ROE target of c.12% (inclusive of rights issue) could be tweaked depending on the weakness of Bank of Chengdu's contribution in the coming quarters. NIM pressure expected to continue. While no guidance on cost savings was provided for its MSS, we can expect it to range at 6% assuming 10% reduction in workforce.

FY15F target unchanged with loan and deposit growth guidance at 8-9% and 10-11% respectively. While NIM was still guided to compress at 8-10bps y-o-y, we believe the compression would be lower due to higher loan-to-deposit ratio recorded to date.

PBK is expected to continue to deliver sustainable earnings growth. This would be supported by resilient loan growth, best-in-class cost to income ratio, and unrivalled asset quality. NIM may have a little more room to fall in 2H15, but the quantum should be less than 1H15 as wholesale deposit rates have eased.


Industry Focus

Malaysian Banks

Page 17

Malaysian Banks: 2QCY15 results (q-o-q and y-o-y comparison) (cont’d)

RHB Capital Affin Holdings Banks under coverage - Cumulative RMm 3QFY15 3QFY14 2QFY15 y-o-y q-o-q 3QFY15 3QFY14 2QFY15 y-o-y q-o-q 3QCY15 3QCY14 2QCY15 y-o-y q-o-q Net interest income 844 836 784 1% 8% 248 248 222 0% 12% 9,338 8,718 8,803 7% 6% Islamic banking income 223 196 214 13% 4% 63 55 66 15% -5% 2,343 2,059 2,226 14% 5% Non-interest income 448 615 488 -27% -8% 149 196 158 -24% -6% 4,671 4,211 4,288 11% 9% Operating income 1,514 1,647 1,487 -8% 2% 460 499 447 -8% 3% 16,352 14,988 15,317 9% 7% Operating expenses (1,169) (841) (843) 39% 39% (275) (303) (258) -9% 7% (8,175) (7,198) (7,806) 14% 5% Pre-provision profit 345 806 644 -57% -46% 185 196 189 -5% -2% 8,177 7,790 7,510 5% 9% Provisions (51) (91) 48 -45% nm (30) (13) (12) nm nm (1,498) (548) (999) 173% 50% Associates 0 0 0 nm nm 4 10 11 -61% nm 152 194 233 -22% -35% Pre-tax profit 294 715 692 -59% -57% 149 180 178 -17% -16% 6,821 7,414 6,751 -8% 1% Net profit 194 545 525 -64% -63% 102 134 139 -24% -27% 5,221 5,542 5,161 -6% 1% NIM (%) 2.07 2.15 1.94 (0.08) 0.1 2.10 2.05 1.94 0.05 0.17 2.20 2.31 2.12 (0.11) 0.08 Cost-to-income (%) 77.2 51.1 56.7 26.2 20.5 59.7 60.8 57.7 (1.0) 2.1 51.9 47.1 50.4 4.9 1.5 ROE (%) 3.8 12.0 10.6 (8.2) (6.8) 5.1 7.3 6.9 (2.2) (1.8) 10.0 13.3 10.9 (3.3) (0.9) ROA (%) 0.3 1.1 0.9 (0.8) (0.6) 0.6 0.9 0.9 (0.2) (0.2) 0.9 1.2 1.0 (0.3) (0.1) Gross NPL ratio (%) 1.9 2.3 2.0 (0.3) (0.1) 2.2 1.9 2.0 0.3 0.2 1.7 1.7 1.6 (0.0) 0.1 Loan loss coverage (%) 56.5 66.6 56.4 (10.0) 0.1 61.2 76.6 63.8 (15.4) (2.6) 89.9 95.6 94.4 (5.7) (4.5) LD ratio (%) 93.0 90.4 91.0 2.6 2.0 90.2 79.5 83.8 10.7 6.4 90.4 87.9 88.3 2.6 2.2 CET-1(%) 11.9 10.1 12.0 1.8 (0.2) 12.2 12.4 12.2 (0.2) (0.0) 11.0 10.6 11.1 0.4 (0.1) Tier-1 CAR (%) 12.3 10.5 12.4 1.8 (0.2) 12.2 12.4 12.2 (0.2) (0.0) 11.8 11.6 11.9 0.2 (0.1) RWCAR (%) 15.7 14.6 15.9 1.1 (0.2) 13.5 13.5 13.4 0.0 0.1 14.4 14.7 14.6 (0.2) (0.2) Net loans 147,879 133,913 142,998 10% 3% 41,817 39,037 41,630 7% 0% 1,442,402 1,254,784 1,374,421 15% 5% Deposits 158,968 148,108 157,167 7% 1% 46,362 49,120 49,699 -6% -7% 1,566,872 1,405,382 1,524,371 11% 3% Gross NPLs/Impaired Loans 2,907 3,115 2,960 -7% -2% 937 757 862 24% 9% 25,727 23,118 24,095 11% 7% Positives Improvement in net interest income from stable NIM and

pick-up in loan growth. Improvement in NPL ratio Higher NIM

Disappointments Higher expenses from one-off CTS cost. Sluggish deposit growth.

Muted loan growth. Deposit contraction. Weak non-interest income growth. Increase in NPL ratio.

Prospects RHBC’s target of 10% loan growth would unlikely be met due to the corporate loan repayment in 1Q15. NPL ratio would likely hover at current levels instead of the targeted <1.8%. ROE should fall short of its >11.5% target and after accounting for its staff rationalisation scheme, we forecast FY15F ROE (post rights) of 8%.

We see no catalysts to re-rate share price in the near term as loan growth is expected to remain sluggish, recoveries to moderate and NIM pressure to persist. As one of the smaller players in the industry, the tepid operating environment is expected to be challenging for Affin.


Industry Focus

Malaysian Banks

Page 18

Appendix 2: Company Guides

ASIAN INSIGHTS VICKERS SECURITIES

sa: BC

FULLY VALUEDLast Traded Price: RM2.30 (KLCI : 1,669.24) Price Target : RM 2.00 (13% downside) Potential Catalyst: Synergies from recent acquisition Where we differ: Our TP is below consensus

Analyst Lynette CHENG +603 2604 3907 [email protected] LIM Sue Lin +65 6682 3711 [email protected]

Price Relative

Forecasts and Valuation FY Dec (RM m) 2014A 2015F 2016F 2017F Pre-prov. Profit 779 723 756 784 Net Profit 605 382 480 501 Net Pft (Pre Ex.) 605 382 480 501 EPS (sen) 31.2 19.7 24.7 25.8 EPS Pre Ex. (sen) 31.2 19.7 24.7 25.8 EPS Gth (%) (28) (37) 26 4 EPS Gth Pre Ex (%) (28) (37) 26 4 Diluted EPS (sen) 31.2 19.7 24.7 25.8 PE Pre Ex. (X) 7.4 11.7 9.3 8.9 Net DPS (sen) 15.0 9.8 12.3 12.9 Div Yield (%) 6.5 4.3 5.4 5.6 ROAE Pre Ex. (%) 8.5 4.8 6.0 6.1 ROAE (%) 8.5 4.8 6.0 6.1 ROA (%) 1.0 0.6 0.7 0.7 BV Per Share (sen) 408 413 416 429 P/Book Value (x) 0.6 0.6 0.6 0.5 Earnings Rev (%): - - - Consensus EPS (sen): 22.4 28.8 30.5 Other Broker Recs: B: 1 S: 2 H: 6

Source of all data: Company, AlliancedDBS, Bloomberg Finance L.P

Headwinds aplenty

In a tight spot. We have a FULLY VALUED call on Affin with RM2.00 TP. As one of the smallest bank in the industry, the tepid operating environment is expected to be challenging for Affin. We expect earnings to remain unexciting in the near term. In our view, there are no re-rating catalysts in sight and the stock would likely continue to trade below BV given its weaker fundamentals and lower ROE vs peers.

Limited growth potential. Although the acquisition of HwangDBS’ businesses lifted Affin’s non-interest income contribution to total income, the ability to leverage on this enlarged franchise remains limited given the prevailing soft capital market outlook. Although potential re-rating catalyst could arise should synergy materialises from the enlarged entity’s investment banking franchise, we believe this may take time to trickle down to its earnings.

Weak underlying trends. To recap, Affin’s YTD results have disappointed, dragged by large one-off provisions and weak revenues. Similarly, Affin has seen the highest increase in NPLs vs peers. Loan loss coverage has declined to c.60% while loan to deposit ratio has inched up above 90% in 3Q15, which we believe points to limited room for a marked improvement in earnings.

Valuation: Our RM2.00 TP implies 0.5x FY16 BV and is derived from the Gordon Growth Model. This assumes 6.5% ROE, 10% cost of equity and 3% growth. We expect weak earnings momentum to remain a drag to share price.

Key Risks to Our View:

A significant turnaround. We have imputed a weak set of financial forecasts and ascribed a low valuation multiple to the bank. Its current state with weak asset quality showing has been accounted for. A significant turnaround in its financials and improved asset quality conditions would prove our view wrong.

At A Glance

Issued Capital (m shrs) 1,943 Mkt. Cap (RMm/US$m) 4,469 / 1,046 Major Shareholders LTAT (%) 35.2

Bank of East Asia (%) 23.5 Boustead (%) 20.7 Free Float (%) 13.1 3m Avg. Daily Val (US$m) 0.2 ICB Industry : Financials / Banks


Malaysia Company Guide

Affin Holdings Berhad Edition 1 Version 1 | Bloomberg: AHB MK | Reuters: AFIN.KL Refer to important disclosures at the end of this report

66

86

106

126

146

166

186

206

1.9

2.4

2.9

3.4

3.9

4.4

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Relative IndexRM

Affin Holdings Berhad (LHS) Relative KLCI INDEX (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 20

Company Guide

Affin Holdings Berhad

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Persistent NIM squeeze. NIM is expected to remain under pressure due to deposit competition as banks prepare to meet the Liquidity Coverage Ratio requirement under Basel III. CASA, as the banks’ low-cost funding source should help in managing cost of funds. However, Affin’s CASA ratio stands at c.20%, which is one of the lowest vis-à-vis Malaysian banking peers. This could exert further pressure on cost of funds.

Corporate loan driven. Affin’s loan portfolio is skewed towards corporate loans, with this segment making up slightly more than 50% of total loans. We have penned in loan growth of 5%, which is below the banking system loan growth. There should be opportunities to leverage on working capital financing of ETP projects as they are rolled out. Affin should be able clinch a decent portion of these given its relationship with Lembaga Tabung Angkatan Tentera (LTAT) and Boustead, whom are Affin’s major shareholders. We expect deposit growth to lag loan growth in 2015 but pick up pace in 2016 on par with expected loan growth. This should ease some pressure on its loan-to-deposit ratio flat at c.80%.

Non-interest income boost from acquisition a challenge. Upon acquisition of HwangDBS (completed in 2014), Affin boosted its non-interest income, especially at its stockbroking and asset management segments. Post-acquisition, Affin’s non-interest income to total income ratio increased from 25% in FY13 to 35% in FY14. However, growing non-interest income will be a challenge going forward, given that capital market outlook remains weak.

Integration cost still a feature. As a result of the acquisition of HwangDBS, integration costs weighed on expenses and drove up cost-to-income ratio. We believe integration cost will continue to be featured in Affin’s numbers in the near term. Hence, we assumed cost-to-income ratio to remain elevated.

Credit cost uptick. After enjoying recoveries for several years, we believe provisions would start to normalise going forward. A sharp spike in provision was reported in 1QFY15 which caused a surge in credit cost. Higher credit cost along with challenging topline growth and integration costs remaining a feature in earnings are key dampeners to ROE.

Margin Trends

Gross Loan& Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure

Source: Company, AllianceDBS

1.4%

1.4%

1.5%

1.5%

1.6%

1.6%

1.7%

1.7%

1.8%

1.8%

0

200

400

600

800

1,000

2013A 2014A 2015F 2016F 2017F

RM m

Net Interest Income Net Interest Income Margin

-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0

100

200

300

400

500

600

700

800

2013A 2014A 2015F 2016F 2017F

RM m

Fees & Commissions

Fees & Commissions Growth (%) (YoY) (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

10,000

20,000

30,000

40,000

50,000

2013A 2014A 2015F 2016F 2017F

RM m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

71%

76%

81%

86%

91%

33,219

38,219

43,219

48,219

53,219

58,219

63,219

68,219

2013A 2014A 2015F 2016F 2017F

Loans Deposit Loan-to-Deposit Ratio (RHS)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0

500

1,000

1,500

2,000

2,500

3,000

2013A 2014A 2015F 2016F 2017F

Net Interest Income Non-interest Income

Islamic Banking Income Cost-to-income Ratio


Company Guide


Balance Sheet:

Asset quality at risk. Absolute NPLs were higher for most segments. A predominant rise was noted in the non-residential segment. Its NPL ratio has inched up beyond 2% and we expect this to remain an issue for a while. Based on its 2015 KPIs, Affin targets an NPL ratio of 1.64%, which we view is unlikely to be achieved.

Sufficient capital. Positively, Affin is well capitalised as it has one of the highest capital ratios compared to Malaysian banking peers. This is thanks to its RM1.2bn rights issue completed in July 2014 which was undertaken in tandem with the acquisition of HwangDBS. Affin is eligible to implement a dividend reinvestment plan but has yet to utilise it. Affin has a dividend policy of paying out 50% of earnings.

Share Price Drivers:

No catalyst in sight. At 0.6x BV, Affin is the cheapest bank in the industry. Nevertheless, we believe valuations are fair given its low ROE and persistent challenges to earnings growth. We see no re-rating catalysts for Affin. Potential re-rating catalyst could arise should the partnerships to improve its investment banking business materialise to enhance revenues.

Key Risks:

Limited earnings upside. Earnings were historically driven by loan recoveries, which we believe could begin to taper off. NIM will remain under pressure due to competition.

Unable to extract full synergies from HwangDBS acquisition. Integration costs are likely to remain a feature in FY16. Inability to extract synergies from the acquisition could pose downside risk to earnings.

Company background

Affin Bank’s loan portfolio leans towards corporate and business financing. Affin’s major shareholders Lembaga Tabung Angkatan Tentera (LTAT) and Boustead have fostered strong business alliances with Affin Bank. Bank of East Asia (BEA) has a 23.5% stake in Affin.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2013A 2014A 2015F 2016F 2017F

NPL Ratio Provision Charge-Off Rate

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

2013A 2014A 2015F 2016F 2017F

Tier-1 CAR Total CAR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2013A 2014A 2015F 2016F 2017F

Avg: 10.7x

+1sd: 13.6x

+2sd: 16.4x

‐1sd: 7.9x

‐2sd: 5x4.5

6.5

8.5

10.5

12.5

14.5

16.5


(x)

Avg: 0.79x

+1sd: 0.9x

+2sd: 1.01x

‐1sd: 0.69x

‐2sd: 0.58x

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2


(x)


Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F

Gross Loans Growth (%) 7.9 9.6 5.0 5.0 5.0 Customer Deposits Growth (%) 10.3 6.9 2.0 5.0 5.0 Yld. On Earnings Assets (%) 4.1 4.1 4.1 4.1 4.1 Avg Cost Of Funds (%) 2.5 2.7 2.9 2.8 2.8

Income Statement (RM m)

FY Dec 2013A 2014A 2015F 2016F 2017F

Net Interest Income 917 949 917 964 1,008 Non-Interest Income 388 630 636 687 742

Operating Income 1,526 1,824 1,810 1,928 2,050 Operating Expenses (759) (1,045) (1,087) (1,172) (1,266)

Pre-provision Profit 767 779 723 756 784 Provisions 68 16 (223) (127) (127) Associates 29 30 19 24 25 Exceptionals 0 0 0 0 0

Pre-tax Profit 864 825 520 653 682 Taxation (214) (213) (127) (160) (167) Minority Interests 0 (7) (10) (13) (14) Preference Dividend 0 0 0 0 0

Net Profit 650 605 382 480 501 Net Profit bef Except 650 605 382 480 501 Growth (%)

Net Interest Income Gth 2.2 3.5 (3.4) 5.1 4.6 Net Profit Gth 3.4 (6.9) (36.9) 25.6 4.5

Margins, Costs & Efficiency (%) Spread 1.5 1.4 1.3 1.3 1.3 Net Interest Margin 1.7 1.6 1.5 1.5 1.5 Cost-to-Income Ratio 49.8 57.3 60.0 60.8 61.8

Business Mix (%)

Net Int. Inc / Opg Inc. 60.1 52.1 50.7 50.0 49.2 Non-Int. Inc / Opg inc. 25.4 34.6 35.2 35.7 36.2 Fee Inc / Opg Income 25.4 34.6 35.2 35.7 36.2 Oth Non-Int Inc/Opg Inc 0.0 0.0 0.0 0.0 0.0

Profitability (%)

ROAE Pre Ex. 10.5 8.5 4.8 6.0 6.1 ROAE 10.5 8.5 4.8 6.0 6.1 ROA Pre Ex. 1.1 1.0 0.6 0.7 0.7 ROA 1.1 1.0 0.6 0.7 0.7



Company Guide


Quarterly / Interim Income Statement (RM m)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015

Net Interest Income 248 247 215 222 248 Non-Interest Income 196 162 172 158 149

Operating Income 499 477 449 447 460 Operating Expenses (303) (244) (269) (258) (275)

Pre-Provision Profit 196 233 180 189 185 Provisions (13) 51 (124) (12) (30) Associates 10 14 4 11 4 Exceptionals 0 0 0 0 0

Pretax Profit 180 288 49 178 149 Taxation (44) (77) (14) (35) (45) Minority Interests (2) (2) (5) (3) (2)

Net Profit 134 209 30 139 102

Growth (%)

Net Interest Income Gth 3.5 (0.2) (13.0) 3.3 11.6 Net Profit Gth 16.5 55.7 (85.6) 363.3 (26.5)

Balance Sheet (RM m)

FY Dec 2013A 2014A 2015F 2016F 2017F

Cash/Bank Balance 9,331 7,361 6,471 6,824 7,429 Government Securities 1,545 1,832 1,882 1,986 2,096 Inter Bank Assets 469 384 403 423 444 Total Net Loans & Advs. 36,910 40,492 42,347 44,450 46,648 Investment 9,542 13,453 14,126 14,832 15,574 Associates 0 0 0 0 0 Fixed Assets 167 164 172 181 190 Goodwill 1,010 1,615 1,615 1,615 1,615 Other Assets 978 1,378 1,458 1,543 1,634

Total Assets 59,952 66,678 68,475 71,855 75,629

Customer Deposits 47,354 50,604 51,616 54,197 56,907 Inter Bank Deposits 3,984 5,368 5,905 6,495 7,145 Debts/Borrowings 0 0 0 0 0 Others 1,265 1,761 1,850 1,942 2,039 Minorities 0 41 51 64 78 Shareholders' Funds 6,377 7,932 8,033 8,085 8,335

Total Liab& S/H’s Funds 59,952 66,678 68,475 71,855 75,629



Company Guide


Financial Stability Measures (%)

FY Dec 2013A 2014A 2015F 2016F 2017F Balance Sheet Structure Loan-to-Deposit Ratio 79.1 81.1 83.5 83.5 83.5 Net Loans / Total Assets 61.6 60.7 61.8 61.9 61.7 Investment / Total Assets 15.9 20.2 20.6 20.6 20.6 Cust . Dep./Int. Bear. Liab. 90.5 88.9 88.2 87.7 87.3 Interbank Dep / Int. Bear. 7.6 9.4 10.1 10.5 11.0

Asset Quality NPL / Total Gross Loans 2.0 1.7 2.0 2.0 2.0 NPL / Total Assets 1.2 1.0 1.3 1.3 1.3 Loan Loss Reserve Coverage 74.3 81.7 88.5 90.1 92.7 Provision Charge-Off Rate (0.2) 0.0 0.5 0.3 0.3

Capital Strength Total CAR 14.3 14.9 13.9 13.4 12.9 Tier-1 CAR 11.9 13.7 12.8 12.3 11.9

Source: Company, DBS Bank Target Price & Ratings History


S.No. DateClosing

PriceT arget Price

Rat ing

1: 27 Feb 15 2.93 3.00 HOLD

2: 21 May 15 2.83 3.00 HOLD

3: 02 Jun 15 2.76 2.80 HOLD

4: 18 Aug 15 2.27 2.10 HOLD

5: 04 Sep 15 2.24 2.10 HOLD

6: 21 Oct 15 2.40 2.10 HOLD

7: 30 Nov 15 2.38 2.00 FULLY VALUED

Note : Share price and Target price are adjusted for corporate actions.

12

3

4 5

6

7

2.00

2.20

2.40

2.60

2.80

3.00

3.20

Dec-14 Apr-15 Aug-15 Dec-15

RM

ASIAN INSIGHTS VICKERS SECURITIES www.dbsvickers.com ed: JS / sa: BC

HOLDLast Traded Price: RM4.60 (KLCI : 1,669.24) Price Target : RM4.80 (4% upside) Potential Catalyst: Improving earnings traction Where we differ: Earnings below consensus possibly on higher expense and credit cost assumptions

Analyst LIM Sue Lin +65 6682 3711 [email protected] Lynette CHENG +603 2604 3907 [email protected]

Price Relative

Forecasts and Valuation FY Mar (RM m) 2015A 2016F 2017F 2018F Pre-prov. Profit 2,564 2,001 2,131 2,335 Net Profit 1,919 1,392 1,466 1,586 Net Pft (Pre Ex.) 1,919 1,392 1,466 1,586 EPS (sen) 63.7 46.2 48.6 52.6 EPS Pre Ex. (sen) 63.7 46.2 48.6 52.6 EPS Gth (%) 8 (27) 5 8 EPS Gth Pre Ex (%) 8 (27) 5 8 Diluted EPS (sen) 63.7 46.2 48.6 52.6 PE Pre Ex. (X) 7.2 10.0 9.5 8.7 Net DPS (sen) 27.3 20.8 21.9 23.7 Div Yield (%) 5.9 4.5 4.8 5.1 ROAE Pre Ex. (%) 13.9 9.4 9.5 9.7 ROAE (%) 13.9 9.4 9.5 9.7 ROA (%) 1.5 1.1 1.1 1.1 BV Per Share (sen) 480 501 527 556 P/Book Value (x) 1.0 0.9 0.9 0.8 Earnings Rev (%): - - - Consensus EPS (sen): 46.8 49.7 54.2 Other Broker Recs: B: 4 S: 6 H: 13

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

In trying times

Challenging outlook; HOLD. AMMB remains selective and continues to focus on better quality loans with better risk underwriting. Hence, loan growth is expected to stay muted, and going into an uncertain FYMar16, the bank will remain cautious in growing its balance sheet. We see limited catalysts for the stock with macro headwinds in the way. The new CEO, appointed in Nov 2015, will need to tackle several issues, especially a clearer business direction, to deliver sustainable earnings going forward.

Loan portfolio rebalancing still ongoing. A key segment to AMMB is the auto loan portfolio, which management felt was high risk and not correctly priced. As such, AMMB will likely remain selective in its auto loan portfolio moving forward. AMMB strives to hit a 50:50 mix of retail to non-retail loans. Currently, it is still weighted more on the retail segment.

Conservative forecasts. We have forecasted 2% loan growth and imputed further NIM compression for FY16F. FY17/18F loan growth is kept at 5/7% but there could be downside risks should portfolio rebalancing remain a feature. Further NIM compression is expected as deposit competition continues to drive up cost of funds while lower asset yields reflect its portfolio rebalancing initiatives. We also expect non-interest income growth to be subdued as capital markets are expected to remain quiet. Credit costs are expected to stay low in FY16F but likely to rise subsequently as recoveries taper off. Although asset quality may come under pressure due to the soft macro environment, AMMB aspires to keep it below 2%.

Valuation: AMMB is a HOLD with RM4.80 target price. Our target price is derived from the Gordon Growth Model and assumes 10% ROE, 10% cost of equity, and 4% long- term growth. Valuations are undemanding but share price performance maybe capped in the near term due to earnings weakness.

Key Risks to Our View: Inability to grow balance sheet efficiently. AMMB has been rebalancing its portfolio over the past few years. Such trends, if continued, will limit its earnings momentum. Liberalisation of (general) insurance tariffs, possibly in 2016, could crimp underwriting margins for its general insurance business.

At A Glance

Issued Capital (m shrs) 3,014 Mkt. Cap (RMm/US$m) 13,865 / 3,247 Major Shareholders ANZ (%) 23.8 EPF (%) 16.2

AmCorp Group (%) 13.0 Free Float (%) 41.9 3m Avg. Daily Val (US$m) 5.3 ICB Industry : Financials / Banks



AMMB Holdings Edition 1 Version 1 | Bloomberg: AMM MK | Reuters: AMMB.KL Refer to important disclosures at the end of this report

61

81

101

121

141

161

181

201

221

3.8

4.8

5.8

6.8

7.8

8.8


Relative IndexRM

AMMB Holdings (LHS) Relative KLCI INDEX (RHS)


Company Guide

AMMB Holdings


Earnings Drivers:

Persistent NIM compression. NIM is expected to remain under pressure due to deposit competition as banks prepare to meet the Liquidity Coverage Ratio requirement under Basel III. Current account and savings account (CASA), as the banks’ low-cost funding sources should help them to manage cost of funds. Hence, AMMB is focused on shoring up CASA with a target of ≥ 21% in FY16. Currently, AMMB has one of the lowest CASA ratios amongst its peers at c.20%.

Subdued loan growth. The bank continues to focus on better quality loans with better risk underwriting. AMMB has been rebalancing its portfolio over the past few years with a notable reduction in its auto loan exposure to the vulnerable income group (defined as household income ≤ RM3,000). At the same time, AMMB strives to hit a 50:50 mix of retail to non-retail loans. Currently, it is weighted slightly more on the retail segment.

Near-term drag on underwriting profit due to de-tariffication. AmGeneral Insurance (AmG) is one of the top motor insurers in Malaysia. Due to its large exposure to motor insurance, we expect de-tariffication to drag AMMB’s near-term earnings as insurers compete for market share. However, in our view, pricing should normalise over time. We also note that a strong distribution channel alongside low claims and combined ratio could assist in sustaining market share and profitability.

Banking on previous acquisitions to boost non-interest income. AMMB’s acquisitions and tie-ups were completed in FY15 and delivering on these is a key point for the group going forward. Amongst the acquisitions AMMB embarked on were MBF Cards and Kurnia Insurans as well as a tie-up with Metlife for its life insurance business. Regression in premiums following de-tariffication, however, could cause short-term volatility in underwriting margins for its general insurance business. Cost pressures. AMMB’s cost-to-income ratio hovers below 50%, which is within the industry average. It is also within management’s target to keep it at ≤ 52%, supplemented by an emphasis on cost discipline. Slower revenue growth could pose a risk to this target. AMMB was slapped with a RM53m penalty by Bank Negara Malaysia (BNM), and will look to improve processes for future growth. In addition, the bank will set aside RM25m per annum on average over the next four years for investment in systems, infrastructure and training. Only part of this expense will have a direct impact on P/L as infrastructure costs could be capitalised. Such penalties have not been imposed on other banks prior to this.

Margin Trends

Gross Loan& Growth




Source: Company, DBS Bank

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

0

500

1,000

1,500

2,000

2014A 2015A 2016F 2017F 2018F

RM m


-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0

100

200

300

400

500

600

700

800

900

2014A 2015A 2016F 2017F 2018F

RM m

Fees & Commissions


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

20,000

40,000

60,000

80,000

100,000

2014A 2015A 2016F 2017F 2018F

RM m



81%

86%

91%

96%

101%

106%

77,556

82,556

87,556

92,556

97,556

102,556

107,556

112,556

117,556

122,556

2014A 2015A 2016F 2017F 2018F


42.0%

44.0%

46.0%

48.0%

50.0%

52.0%

54.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2014A 2015A 2016F 2017F 2018F




Company Guide

AMMB Holdings

Balance Sheet:

Gross NPL ratio targeted at below 2%. Asset quality deteriorated as absolute NPLs increased by 10% q-o-q and gross NPL ratio increased to 2.0% correspondingly. The incremental NPL came from a single corporate real-estate loan which we understand had been settled in November. Retail gross NPL ratio continues to show resilient trends. We remain cautious on its asset quality in a soft operating environment. Capital ratios below peers. AMMB’s consolidated fully loaded CET1 ratio currently sits below peers at c.9%. Although AMMB has said that it would be comfortable with CET1 levels at 9% +/-1%, initiatives are on the cards to beef up capital. AMMB is building up advanced internal rating based (AIRB) capabilities to further enhance its capital ratios and is targeted to complete by 2017. Other capital enhancing options include rationalising non-core operations (AMMB has closed approximately 20 of such small entities within the group) and streamlining internal organisation structure to improve efficiency. AMMB aspires to keep its dividend payout at 40-45%. We have assumed 45% payouts in our forecasts. Share Price Drivers:

Limited catalysts. AMMB is currently trading at 0.9x CY16F BV. Although valuations are undemanding, with earnings outlook looking challenging, a re-rating appears unlikely in the near term. Its share price would likely move on news flow. Key Risks:

Inability to grow balance sheet efficiently. AMMB has been rebalancing its portfolio over the past few years. Inability to translate growth into earnings would limit earnings momentum. Liberalisation of (general) insurance tariffs, possibly in 2016, could crimp underwriting margins for its general insurance business. Company background

AMMB Holdings Berhad is an investment holding company. The Company, through its subsidiaries, provides commercial banking, retail financing, stock and futures broking, and investment advisory. AMMB also underwrites general insurance, provides asset and unit trust management, and nominee services.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2014A 2015A 2016F 2017F 2018F


11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

2014A 2015A 2016F 2017F 2018F


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2014A 2015A 2016F 2017F 2018F

Avg: 11.8x

+1sd: 12.7x

+2sd: 13.7x

‐1sd: 10.8x

‐2sd: 9.9x

8.1

9.1

10.1

11.1

12.1

13.1

14.1

15.1


(x)

Avg: 1.54x

+1sd: 1.78x

+2sd: 2.02x

‐1sd: 1.31x

‐2sd: 1.07x

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3


(x)


Company Guide

AMMB Holdings

Key Assumptions

FY Mar 2014A 2015A 2016F 2017F 2018F

Gross Loans Growth 5.3 (1.6) 2.0 5.0 7.0 Customer Deposits Growth 5.7 2.7 5.0 7.0 7.0 Yld. On Earnings Assets 4.0 3.6 3.5 3.4 3.4 Avg Cost Of Funds 2.2 2.1 2.3 2.3 2.3 Income Statement (RM m)

FY Mar 2014A 2015A 2016F 2017F 2018F Net Interest Income 2,272 1,981 1,652 1,672 1,715 Non-Interest Income 1,498 1,876 1,620 1,702 1,873

Operating Income 4,710 4,721 4,224 4,421 4,739 Operating Expenses (2,151) (2,158) (2,223) (2,289) (2,404)

Pre-provision Profit 2,559 2,564 2,001 2,131 2,335 Provisions (121) 73 (40) (66) (107) Associates 21 3 3 3 3 Exceptionals 0 0 0 0 0

Pre-tax Profit 2,448 2,604 1,964 2,068 2,232 Taxation (577) (560) (432) (455) (491) Minority Interests (89) (126) (140) (147) (155) Preference Dividend 0 0 0 0 0

Net Profit 1,782 1,919 1,392 1,466 1,586 Net Profit bef Except 1,782 1,919 1,392 1,466 1,586 Growth (%) Net Interest Income Gth 2.2 (12.8) (16.6) 1.2 2.6 Net Profit Gth 9.0 7.6 (27.5) 5.3 8.2


Business Mix (%) Net Int. Inc / Opg Inc. 48.2 42.0 39.1 37.8 36.2 Non-Int. Inc / Opg inc. 31.8 39.7 38.4 38.5 39.5 Fee Inc / Opg Income 15.1 13.9 17.1 18.0 18.5 Oth Non-Int Inc/Opg Inc 16.7 25.8 21.2 20.5 21.1

Profitability (%) ROAE Pre Ex. 14.2 13.9 9.4 9.5 9.7 ROAE 14.2 13.9 9.4 9.5 9.7 ROA Pre Ex. 1.4 1.5 1.1 1.1 1.1 ROA 1.4 1.5 1.1 1.1 1.1



Company Guide

AMMB Holdings


FY Mar 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 Net Interest Income 515 487 471 424 432 Non-Interest Income 385 312 427 333 299

Operating Income 1,124 1,006 1,123 964 931 Operating Expenses (498) (496) (533) (487) (500)

Pre-Provision Profit 626 510 590 476 432 Provisions (12) 74 89 6 66 Associates 7 5 (11) 0 4 Exceptionals N/A N/A N/A N/A N/A


Net Profit 446 417 519 340 383 Growth (%) Net Interest Income Gth 2.3 (5.3) (3.3) (10.1) 1.9 Net Profit Gth (17.0) (6.5) 24.6 (34.6) 12.7


FY Mar 2014A 2015A 2016F 2017F 2018F Cash/Bank Balance 10,287 10,759 13,262 15,477 16,184 Government Securities 0 0 0 0 0 Inter Bank Assets 1,063 4,069 4,272 4,486 4,710 Total Net Loans & Advs. 87,171 86,174 87,984 92,397 98,865 Investment 19,375 18,926 19,872 20,866 21,909 Associates 252 662 662 662 662 Fixed Assets 3,485 479 493 508 523 Goodwill 3,384 3,348 3,348 3,348 3,348 Other Assets 6,863 8,954 9,252 9,780 10,340

Total Assets 132,353 133,804 139,602 148,003 157,044 Customer Deposits 89,699 92,130 96,737 103,508 110,754 Inter Bank Deposits 4,121 2,302 2,417 2,538 2,664 Debts/Borrowings 6,645 8,302 8,302 8,302 8,302 Others 15,226 13,018 13,347 13,775 14,284 Minorities 951 1,052 1,193 1,340 1,494 Shareholders' Funds 13,143 14,455 15,086 15,892 16,765




Company Guide

AMMB Holdings


FY Mar 2014A 2015A 2016F 2017F 2018F Balance Sheet Structure Loan-to-Deposit Ratio 99.5 95.3 92.6 90.9 90.9 Net Loans / Total Assets 65.9 64.4 63.0 62.4 63.0 Investment / Total Assets 14.6 14.1 14.2 14.1 14.0 Cust . Dep./Int. Bear. Liab. 89.3 89.7 90.0 90.5 91.0 Interbank Dep / Int. Bear. 4.1 2.2 2.2 2.2 2.2

Asset Quality NPL / Total Gross Loans 1.9 1.8 1.9 1.8 1.8 NPL / Total Assets 1.3 1.2 1.2 1.1 1.2 Loan Loss Reserve Coverage 127.4 104.9 93.7 98.1 98.1 Provision Charge-Off Rate 0.1 (0.1) 0.0 0.1 0.1



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 15 Jan 15 6.40 7.00 HOLD

2: 30 Jan 15 6.28 6.70 HOLD

3: 04 Feb 15 6.29 6.70 HOLD

4: 13 Feb 15 6.44 6.70 HOLD

5: 05 Mar 15 6.34 6.70 HOLD

6: 12 Mar 15 6.33 6.70 HOLD

7: 25 May 15 6.34 6.60 HOLD

8: 27 May 15 6.38 6.60 HOLD

9: 02 Jun 15 6.33 6.60 HOLD

10: 04 Jun 15 6.32 6.60 HOLD

11: 20 Aug 15 4.80 5.30 HOLD12: 04 Sep 15 4.30 5.30 HOLD13: 21 Oct 15 4.90 5.30 HOLD14: 20 Nov 15 4.59 4.80 HOLD


1

2

3

4

5

6

7

8

9

10

1112

1314

4.05

4.55

5.05

5.55

6.05

6.55


RM


ed: TH / sa: BC

HOLDLast Traded Price: RM3.86 (KLCI : 1,669.24) Price Target : RM3.85 Potential Catalyst: A turn in consumer sentiments Where we differ: In line with consensus

Analyst Lynette CHENG +603 2604 3907 [email protected] LIM Sue Lin +65 6682 3711 [email protected]

Price Relative

Forecasts and Valuation FY Dec (RMm) 2014A 2015F 2016F 2017F Pre-prov. Profit 940 1,010 1,132 1,250 Net Profit 532 530 557 606 Net Pft (Pre Ex.) 532 530 557 606 EPS (sen) 35.6 34.9 35.6 37.7 EPS Pre Ex. (sen) 35.6 34.9 35.6 37.7 EPS Gth (%) 79 (2) 2 6 EPS Gth Pre Ex (%) 79 (2) 2 6 Diluted EPS (sen) 35.6 34.4 35.1 37.1 PE Pre Ex. (X) 10.8 11.0 10.8 10.3 Net DPS (sen) 14.7 17.2 17.6 18.6 Div Yield (%) 3.8 4.5 4.5 4.8 ROAE Pre Ex. (%) 18.8 17.1 16.3 16.1 ROAE (%) 18.8 17.1 16.3 16.1 ROA (%) 1.1 1.1 1.0 1.0 BV Per Share (sen) 197 212 226 241 P/Book Value (x) 2.0 1.8 1.7 1.6 Earnings Rev (%): - - - Consensus EPS (sen): 34.3 36.3 39.5 Other Broker Recs: B:1 S: 0 H: 5


Still cautious on consumer loans

Soft outlook ahead, HOLD. Our HOLD recommendation is premised on a challenging operating environment for BIMB amidst weaker consumer sentiments. Consumer loans make up slightly more than 60% of BIMB’s total loan portfolio. Topline growth is expected to be dragged by thinning NIM and softer loan growth. Supporting our HOLD recommendation is its decent dividend yield of c.5%.

Only Shariah-compliant banking proxy. BIMB remains Malaysia’s only Shariah-compliant investable bank and is a key beneficiary of the growing Islamic finance sector. Nevertheless, BIMB is not immune to the challenges in the banking sector which includes slower loan growth, NIM being squeezed by funding cost pressures, sluggish capital markets and higher credit costs as recoveries have normalised,.

Moderating loan growth. We forecast loan growth to be at 12% (a slowdown from 24% in FY14) as softer consumer sentiment is expected to impede growth. In 3Q15, the consumer sentiment index dipped to a six-year low of 70.2, reflecting the weak outlook in Malaysia. We expect NIM to contract as competition for deposits has yet to ease.

Valuation:

Our RM3.85 TP, implying 1.7x FY16F BV, is derived from the Gordon Growth Model. Our TP assumes 16.5% ROE, 4% long-term growth and 11% cost of equity. We see limited upside to the stock as softer consumer sentiment could dampen the bank’s loan growth.


Stronger-than-expected loan growth. Our loan growth assumption is premised on a moderation arising from softer consumer sentiments. Earnings could surprise on the upside if loan growth remains persistently strong.

At A Glance

Issued Capital (m shrs) 1,542 Mkt. Cap (RMm/US$m) 5,953 / 1,394 Major Shareholders

Tabung Haji (%) 55.6 Amanah Saham Bumiputera (%) 11.0

PNB (%) 5.2 Free Float (%) 16.9 3m Avg. Daily Val (US$m) 0.5 ICB Industry : Financials / Banks



BIMB Holdings Edition 1 Version 1 | Bloomberg: BIMB MK | Reuters: BIMB.KL Refer to important disclosures at the end of this report

87

107

127

147

167

187

207

227

247

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5


Relative IndexRM

BIMB Holdings (LHS) Relative KLCI INDEX (RHS)


Company Guide

BIMB Holdings


Earnings Drivers:

NIM to remain under pressure due to deposit competition as banks prepare to meet the Liquidity Coverage Ratio requirement under Basel III. Positively, BIMB’s high CASA ratio could slightly ease the pressure on NIM. BIMB’s CASA ratio is currently at the mid-30% range and the bank intends to maintain it at this level.

Moderating loan growth. We forecast a 12% loan growth for BIMB in FY15F and further moderate to 10% in FY16F with continued emphasis on housing and corporate financing. This implies moderation from 24% in FY14 as it takes a conservative stance amidst softer consumer sentiment. BIMB is also targeting to grow its floating rate loan to achieve a portfolio mix of floating-to-fixed rate loans of 80:20.

BIMB is looking to grow deposits by 5% and is comfortable with a maximum 85% loan-to-deposit ratio. A new mandate to distinguish Islamic deposit and Islamic investment accounts was released in 2013 and requires the transition to commence in June 2015. The reclassification saw recorded deposit growth drop to 2% in 9M15. BIMB does not expect a significant earnings impact from this transition as the higher cost of funds is expected to be offset by the benefits reaped from the favourable treatment of these accounts in terms of Statutory Reserve Requirement, liquidity and capital.

Owns 60% of STMB, a key takaful player. Syarikat Takaful Malaysia Berhad (STMB) provides insurance protection based on Shariah principles. Its main distribution channel is its agency force which currently stands at 2,700 agents. Contribution from STMB makes up c.65% of BIMB’s non-interest income.

Stable cost-to-income ratio. BIMB expects it to keep its cost to income ratio at mid-50%. BIMB continues to be keen on expanding its branch network, with a goal to hit 150 branches by year-end.

At the forefront of Islamic finance. As the pioneer of Islamic banking in Malaysia, BIMB is poised to leverage on the deep growth potential of Islamic finance due to the large Muslim population within the region. On top of opportunities arising from the Malaysian government’s initiatives to develop Islamic banking, another potential growth area for BIMB lies in Indonesia as it is the world's most populous Muslim nation. Although BIMB has expressed interest in making its mark in Indonesia, nothing substantial has materialised yet.

Margin Trends

Gross Loan& Growth


Loan-to-Deposit Ratio Trendw



2.3%

2.4%

2.5%

2.6%

2.7%

2.8%

0

200

400

600

800

1,000

1,200

1,400

1,600

2013A 2014A 2015F 2016F 2017F

RM m


-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0

20

40

60

80

100

120

140

160

180

200

2013A 2014A 2015F 2016F 2017F

RM m

Fees & Commissions


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2013A 2014A 2015F 2016F 2017F

RM m



59%

64%

69%

74%

79%

84%

89%

94%

99%

21,367

26,367

31,367

36,367

41,367

46,367

51,367

56,367

2013A 2014A 2015F 2016F 2017F


46.0%

48.0%

50.0%

52.0%

54.0%

56.0%

58.0%

60.0%

0

500

1,000

1,500

2,000

2,500

3,000

2013A 2014A 2015F 2016F 2017F




Company Guide

BIMB Holdings

Balance Sheet:

Stable asset quality. BIMB has improved its asset quality over the years, exemplified by the lowering of its gross NPL ratio to c.1.2% from 13% back in 2009. Management aims to keep asset quality deterioration at bay and maintain gross NPL ratio below 1.5%. High capital ratio. BIMB’s CET-1 ratio is at 12%, which is higher compared to the banking peers. To ensure sustainable levels of capital, BIMB rolled out its Dividend Reinvestment Plan in Aug 2014. Separately, STMB’s capital ratio is well above the minimum requirement of 130%. Share Price Drivers:

Trading close to mean P/BV multiples. Trading at 1.8x BV which is at its 5-year mean valuation is justified given that it is the only listed Shariah-compliant bank in Malaysia and deserves the scarcity premium. Nonetheless, we opine that it is unlikely to further re-rate as growth is expected to slow on the back of weaker consumer sentiments. Stronger-than-expected loan growth. We think valuations could re-rate if there is a turn in consumer sentiments. To that end, BIMB could continue delivering strong earnings growth. Key Risks:

Softer consumer loans. Consumer loans make up just over 60% of BIMB’s loan portfolio, with the bulk being personal and housing loans. Given the high proportion of consumer loans, softer growth in this segment would be unfavourable for BIMB. Tightening measures by BNM. Although the growth in household debt has moderated over the years, thanks to responsible lending measures administered by BNM, household debt-to-GDP ratio remains high at 88% in 2014. More tightening measures could soften the robust growth momentum in the personal loan segment. Company Background

BIMB Holdings Berhad provides all aspects of Islamic banking services and is the only listed Shariah-compliant bank in Malaysia. Through its subsidiaries, the bank also underwrites family and general takaful (Islamic insurance) and provides stock broking and other related services.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2013A 2014A 2015F 2016F 2017F


12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

2013A 2014A 2015F 2016F 2017F


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2013A 2014A 2015F 2016F 2017F

Avg: 12.5x

+1sd: 14.3x

+2sd: 16x

‐1sd: 10.8x

‐2sd: 9.1x

6.5

8.5

10.5

12.5

14.5

16.5

18.5


(x)

Avg: 1.95x

+1sd: 2.31x

+2sd: 2.68x

‐1sd: 1.59x

‐2sd: 1.22x

0.8

1.3

1.8

2.3

2.8


(x)


Company Guide

BIMB Holdings

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F

Gross Loans Growth 21.5 24.2 12.0 10.0 10.0 Customer Deposits Growth 13.9 10.2 2.0 5.0 5.0 Yld. On Earnings Assets 4.3 4.3 4.3 4.2 4.2 Avg Cost Of Funds 2.2 2.2 2.2 2.2 2.2 Income Statement (RMm)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Interest Income 1,163 1,280 1,327 1,422 1,507 Non-Interest Income 848 824 892 967 1,048


Pre-provision Profit 825 940 1,010 1,132 1,250 Provisions 11.4 (56.3) (88.4) (169) (208) Associates (3.7) (68.2) (80.3) (80.3) (80.3) Exceptionals 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 833 815 841 883 961 Taxation (294) (228) (252) (265) (288) Minority Interests (284) (54.6) (58.9) (61.8) (67.3) Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 256 532 530 557 606 Net Profit bef Except 256 532 530 557 606 Growth (%) Net Interest Income Gth 5.6 10.1 3.6 7.2 6.0 Net Profit Gth 1.9 108.3 (0.5) 5.0 8.8






Company Guide

BIMB Holdings

Quarterly / Interim Income Statement (RMm)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Net Interest Income 326 325 318 329 337 Non-Interest Income 200 196 241 224 205

Operating Income 525 521 559 553 542 Operating Expenses (291) (283) (291) (296) (321)

Pre-Provision Profit 234 238 268 256 221 Provisions (23.0) (0.9) (30.5) (25.5) 5.34 Associates (17.0) (17.3) (17.7) (21.0) (22.0) Exceptionals 0.0 0.0 0.0 0.0 0.0

Pretax Profit 194 220 220 210 204 Taxation (55.4) (56.5) (66.8) (63.3) (69.3) Minority Interests (13.8) (9.5) (17.8) (16.7) (14.9)

Net Profit 125 154 136 130 120 Growth (%) Net Interest Income Gth 2.4 (0.1) (2.4) 3.5 2.5 Net Profit Gth (3.4) 22.8 (11.8) (4.3) (7.8)

Balance Sheet (RMm)

FY Dec 2013A 2014A 2015F 2016F 2017F Cash/Bank Balance 3,954 3,898 4,149 4,357 4,574 Government Securities 1,297 1,335 1,350 1,468 1,597 Inter Bank Assets 701 721 675 742 816 Total Net Loans & Advs. 23,741 29,525 33,117 36,420 40,058 Investment 18,409 15,529 16,363 17,246 18,179 Associates 0.0 0.0 0.0 0.0 0.0 Fixed Assets 453 458 481 505 531 Goodwill 0.0 0.0 0.0 0.0 0.0 Other Assets 356 753 791 830 872

Total Assets 49,665 53,030 57,778 62,463 67,566 Customer Deposits 36,927 40,678 41,492 43,567 45,745 Inter Bank Deposits 1,530 300 3,518 5,379 7,505 Debts/Borrowings 1,090 1,133 1,133 1,133 1,133 Others 1,080 1,406 1,437 1,468 1,501 Minorities 239 240 299 361 428 Shareholders' Funds 2,717 2,949 3,259 3,583 3,933




Company Guide

BIMB Holdings



Asset Quality NPL / Total Gross Loans 1.2 1.1 1.1 1.1 1.1 NPL / Total Assets 0.6 0.6 0.6 0.7 0.7 Loan Loss Reserve Coverage 175.8 170.4 164.0 166.0 167.0 Provision Charge-Off Rate 0.0 0.2 0.3 0.5 0.5



Target Price & Ratings History

Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 16 Mar 15 4.02 4.10 HOLD

2: 27 May 15 4.06 4.10 HOLD

3: 30 Jun 15 4.04 4.10 HOLD

4: 04 Sep 15 3.97 4.10 HOLD

5: 15 Sep 15 4.03 3.85 HOLD

6: 21 Oct 15 4.20 3.85 HOLD

7: 01 Dec 15 3.88 3.85 HOLD


1

2

34

5

6

7

3.65

3.75

3.85

3.95

4.05

4.15

4.25

4.35

4.45


RM

ASIAN INSIGHTS VICKERS SECURITIES www.dbsvickers.com ed: JS / sa: BC

HOLD Last Traded Price: RM4.51 (KLCI : 1,669.24) Price Target : RM 4.80 (6% upside) Potential Catalyst: Delivery of new strategic targets Where we differ: Earnings below consensus as we imputed higher credit costs Analyst LIM Sue Lin +65 6682 3711 [email protected] Lynette CHENG +603 2604 3907 [email protected]

Price Relative

Forecasts and Valuation FY Dec (RM m) 2014A 2015F 2016F 2017F Pre-prov. Profit 5,756 5,549 6,227 6,878 Net Profit 3,107 2,833 3,768 4,355 Net Pft (Pre Ex.) 3,009 2,833 3,768 4,355 EPS (sen) 38.5 33.1 42.8 48.0 EPS Pre Ex. (sen) 37.3 33.1 42.8 48.0 EPS Gth (%) (36) (14) 29 12 EPS Gth Pre Ex (%) (30) (11) 29 12 Diluted EPS (sen) 36.9 32.7 42.2 47.3 PE Pre Ex. (X) 12.1 13.6 10.5 9.4 Net DPS (sen) 15.0 17.0 19.0 21.0 Div Yield (%) 3.3 3.8 4.2 4.7 ROAE Pre Ex. (%) 9.1 7.6 9.5 10.0 ROAE (%) 9.4 7.6 9.5 10.0 ROA (%) 0.8 0.7 0.8 0.8 BV Per Share (sen) 444 445 473 505 P/Book Value (x) 1.0 1.0 1.0 0.9 Earnings Rev (%): - - - Consensus EPS (sen): 37.0 47.5 53.8 Other Broker Recs: B: 7 S: 7 H: 10


Still not out of the woods No light at the end of the tunnel yet, HOLD. The bleak outlook for CIMB’s Indonesian and possibly Malaysian operations will continue to weigh on the Group’s earnings. At its high, CIMB Niaga accounted for more than 30% of CIMB Group’s PBT, but this fell to below 10% due to heavy provisioning. Additionally, capital markets are expected to be soft, which would limit CIMB’s capability to leverage on its strong investment banking franchise. NIM pressure could also erode topline growth.

New strategy yet to deliver; T18 targets are challenging to achieve. Although CIMB’s T18 strategy paints a positive picture for the Group in the longer term, cost overruns could derail its aim to generate >15% ROE by FY18. The T18 initiatives aim to reduce cost-to-income ratio to below 50%, increase consumer banking contribution to 60% of income and targeting CET1 ratio to hit 11%, but we view these as challenging targets. Management guided for no capital raising but is instead looking at initiatives to optimise risk-weighted assets.

Restructuring costs and high provisions to cause earnings distractions in FY16F. There has been no guidance for FY16 as yet. But what is clear is that the bulk of restructuring costs and significantly high provisions have already been booked this year, which would mean FY16F’s earnings growth will be inflated, coming from a low base. Restructuring costs related to the investment banking (IB) rationalisation in 1Q15 were RM202m and MSS costs over 2Q-3Q15 amounted to RM450m. Excluding restructuring costs incurred in FY15, CIMB’s FY16F earnings would grow by 8% rather than an inflated 29%. Cost savings should be more visible by 1Q16.

Valuation: CIMB is a HOLD with RM4.80 TP based on the Gordon Growth Model, implying 1.0x FY16F BV. Our TP assumes 11% ROE, 5% long-term growth and 11% cost of equity. We believe share price will not re-rate until there is clearer indication of a pick-up in its core earnings momentum.

Key Risks to Our View: Stronger-than-expected rebound in Indonesian operations and Malaysian capital markets. We have imputed a weak year for CIMB’s Indonesian operations in FY16, so, a better-than-expected improvement would pose upside risk to our earnings forecasts. Meanwhile, a sharp pick up in capital market activities in Malaysia would also boost earnings.

At A Glance Issued Capital (m shrs) 8,490 Mkt. Cap (RMm/US$m) 45,420 / 12,217 Major Shareholders Khazanah (%) 29.7 EPF (%) 17.3 Free Float (%) 53.0 3m Avg. Daily Val (US$m) 11.5 ICB Industry : Financials / Banks



CIMB Group Hldgs Edition 1 Version 1 | Bloomberg: CIMB MK | Reuters: CIMB.KL Refer to important disclosures at the end of this report

51

71

91

111

131

151

171

191

211

4.0

5.0

6.0

7.0

8.0

9.0


Relative IndexRM

CIMB Group Hldgs (LHS) Relative KLCI INDEX (RHS)


Company Guide

CIMB Group Hldgs


Earnings Drivers:

No escape from NIM compression. We expect NIM to contract dragged by its Malaysian and Indonesian operations. In Malaysia, deposit competition remains rife while in Indonesia, CIMB Niaga is shifting its focus to better quality loans, putting pressure on asset yields.

We forecast 10% loan growth in FY16. We expect continued portfolio expansion in Singapore, while the Indonesian portfolio should see a shift from wholesale loans to commercial loans. We assume deposits will grow at the same pace as loans, keeping loan to deposit ratio intact.

Capital markets still soft. CIMB regularly tops the Malaysian league table for equity and debt issuance and is one of the key players within the ASEAN region. As the outlook on capital markets remain soft, growth of non-interest income will likely stay muted. Market-related income makes up c.40% of CIMB’s non-interest income.

Cost management is the key focus for CIMB as it aspires to drive cost-to-income ratio to below 50% by FY18. To achieve this, CIMB is looking to reduce the overall IB operating cost and realign its cost structure and operating efficiencies. CIMB announced a voluntary Mutual Separation Scheme (MSS) in May to employees in Malaysia and Indonesia as part of this initiative.

Regional performance remains a drag in 2015. Historically, overseas operations contribute 40% of CIMB’s total PBT, with Indonesia taking the lead at 30%, followed by Thailand and Singapore at c.5% each. However, the Indonesian operations have been plagued by high provisions since 3Q14, resulting in its contribution declining significantly until end 2015. CIMB Niaga's outlook remains uncertain while we would not discount the possibility of some stress in its retail portfolio. We expect CIMB Niaga’s performance to remain dismal at least until 1H16.

T18 transformation targets may be challenging to achieve. The T18 plan kicked off in 1Q15 with a reorganisation encompassing changes to key management positions and a shift to more regional focused entities. CIMB strives to reduce costs (targeted at its overall processes and investment banking division) and build up three key businesses (Commercial and SME Banking, Transaction Banking and Digital Banking). The T18 initiatives aim to reduce cost-to-income ratio to below 50%, increase consumer banking contribution to 60% of income and targeting CET1 ratio to hit 11%, but we view these as challenging targets.

Margin Trends

Gross Loan& Growth





2.5%

2.6%

2.7%

2.8%

2.9%

3.0%

3.1%

3.2%

0

2,000

4,000

6,000

8,000

10,000

2013A 2014A 2015F 2016F 2017F

RM m


-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0

500

1,000

1,500

2,000

2,500

2013A 2014A 2015F 2016F 2017F

RM m

Fees & Commissions


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2013A 2014A 2015F 2016F 2017F

RM m



80%

85%

90%

95%

100%

205,589

255,589

305,589

355,589

405,589

455,589

2013A 2014A 2015F 2016F 2017F


57.0%

58.0%

59.0%

60.0%

61.0%

62.0%

63.0%

64.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2013A 2014A 2015F 2016F 2017F




Company Guide

CIMB Group Hldgs

Balance Sheet:

Asset quality issues in Indonesia and Malaysia. CIMB Niaga's outlook remains uncertain and we would not discount the possibility of some stress in its retail portfolio. CIMB’s NPL ratio is the highest among peers at c.3% (vs industry average of less than 2%). Meanwhile, in Malaysia, credit costs are likely to pick up with recoveries out of the way. CIMB’s CET-1 ratio is slightly below the industry average. Management guided for no capital raising but is instead looking at initiatives to optimise risk-weighted assets. Meanwhile, we believe CIMB’s dividend reinvestment plan (DRP) will remain in place to provide support to its capital position. Under T18, CIMB is targeting CET-1 to surpass 11% by 2018, which we believe is a challenge. Share Price Drivers:

Limited valuation upside. CIMB is trading at 1.0x BV, which is significantly below its average mean valuation. Although valuations are undemanding, a pick-up in earnings momentum remains uncertain as the operating environment remains a challenge, especially in Indonesia. So long as there is no visibility in earnings pick up, we expect valuations to stay range-bound.

Short term pain for long term gain. Delivery of the T18 strategy would be a re-rating catalyst for CIMB. Post-restructuring, CIMB will be a leaner outfit with improved cost efficiency. In our view, the bank will subsequently emerge as a sturdier organisation to strengthen its footing, especially within the commercial banking space. Key Risks: Ability to rebuild Indonesian business. Expect Indonesian operations to remain soft up to 1H15; 2H15 remains a wildcard and if momentum does not pick up, there could be downside risk to earnings. Delays in delivery of T18 strategies. Although the 3-year plan with costs as its initial key agenda paints a positive picture for the Group for the longer term, cost overruns could derail its aim to achieve >15% ROE by FY18. Consumer banking business is not easy to build up and the Group may not achieve 60% income contribution.

Company background

CIMB Group Holdings Berhad provides commercial banking and related financial services. The Company and its subsidiaries operate as a regional universal bank, offering a full range of financial products and services, covering corporate and investment banking, consumer banking, treasury and asset management.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2013A 2014A 2015F 2016F 2017F


10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

2013A 2014A 2015F 2016F 2017F


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2013A 2014A 2015F 2016F 2017F

Avg: 16.2x

+1sd: 19.1x

+2sd: 22.1x

‐1sd: 13.3x

‐2sd: 10.3x9.2

11.2

13.2

15.2

17.2

19.2

21.2

23.2


(x)

Avg: 1.74x

+1sd: 2.1x

+2sd: 2.45x

‐1sd: 1.39x

‐2sd: 1.04x0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2.7


(x)


Company Guide

CIMB Group Hldgs

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F

Gross Loans Growth 12.5 12.8 10.0 10.0 10.0 Customer Deposits Growth 7.8 7.2 10.0 10.0 10.0 Yld. On Earnings Assets 4.5 4.4 4.4 4.4 4.4 Avg Cost Of Funds 2.1 2.1 2.2 2.1 2.1 Income Statement (RM m)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Interest Income 7,954 8,656 9,211 10,076 10,991 Non-Interest Income 4,600 3,931 4,223 4,539 4,881


Pre-provision Profit 5,689 5,756 5,549 6,227 6,878 Provisions (726) (1,701) (1,816) (1,261) (1,147) Associates 361 123 148 178 213 Exceptionals 525 98 0 0 0

Pre-tax Profit 5,849 4,276 3,881 5,143 5,944 Taxation (1,240) (1,102) (970) (1,286) (1,486) Minority Interests (68) (68) (78) (90) (103) Preference Dividend 0 0 0 0 0

Net Profit 4,540 3,107 2,833 3,768 4,355 Net Profit bef Except 4,015 3,009 2,833 3,768 4,355 Growth (%) Net Interest Income Gth 7.5 8.8 6.4 9.4 9.1 Net Profit Gth 4.5 (31.6) (8.8) 33.0 15.6






Company Guide

CIMB Group Hldgs


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Net Interest Income 2,171 2,242 2,191 2,269 2,416 Non-Interest Income 1,002 976 1,122 1,165 1,038


Pre-Provision Profit 1,495 1,356 1,341 1,393 1,580 Provisions (348) (1,067) (531) (539) (529) Associates 33 19 14 29 24 Exceptionals 0 77 0 1 0

Pretax Profit 1,179 385 824 884 1,075 Taxation (276) (160) (233) (232) (256) Minority Interests (13) (25) (10) (12) (14)

Net Profit 890 200 580 640 804 Growth (%) Net Interest Income Gth (0.2) 3.3 (2.3) 3.5 6.5 Net Profit Gth (6.3) (77.5) 189.6 10.3 25.7


FY Dec 2013A 2014A 2015F 2016F 2017F Cash/Bank Balance 33,679 33,463 36,451 43,223 52,629 Government Securities 8,261 4,758 4,996 5,246 5,508 Inter Bank Assets 3,789 4,239 4,663 5,129 5,642 Total Net Loans & Advs. 228,432 258,015 283,505 311,981 343,319 Investment 69,579 81,535 88,970 97,149 106,145 Associates 1,013 1,086 1,195 1,315 1,446 Fixed Assets 1,699 1,607 1,516 1,434 1,357 Goodwill 9,638 9,762 9,762 9,762 9,762 Other Assets 14,824 19,692 21,584 23,676 25,985

Total Assets 370,913 414,156 452,641 498,915 551,793 Customer Deposits 263,004 282,069 310,276 341,303 375,434 Inter Bank Deposits 20,728 32,150 35,365 38,901 42,791 Debts/Borrowings 28,177 30,310 32,459 34,793 37,329 Others 27,775 31,237 34,830 40,427 48,408 Minorities 757 831 909 998 1,101 Shareholders' Funds 30,471 37,560 38,803 42,492 46,729




Company Guide

CIMB Group Hldgs


FY Dec 2013A 2014A 2015F 2016F 2017F

Balance Sheet Structure Loan-to-Deposit Ratio 89.2 93.9 93.9 93.9 93.9 Net Loans / Total Assets 61.6 62.3 62.6 62.5 62.2 Investment / Total Assets 18.8 19.7 19.7 19.5 19.2 Cust . Dep./Int. Bear. Liab. 84.3 81.9 82.1 82.2 82.4 Interbank Dep / Int. Bear. 6.6 9.3 9.4 9.4 9.4

Asset Quality

NPL / Total Gross Loans 3.2 3.1 3.2 3.1 3.0 NPL / Total Assets 2.0 2.0 2.1 2.0 1.9 Loan Loss Reserve Coverage 84.8 82.7 83.2 84.6 86.1 Provision Charge-Off Rate 0.3 0.6 0.6 0.4 0.3

Capital Strength

Total CAR 14.0 15.1 15.2 14.5 14.0 Tier-1 CAR 10.9 12.2 12.4 12.0 11.6



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rating

1 26 Jun 14 7.32 7.90 Hold

2 08 Jul 14 7.28 7.90 Hold

3 11 Jul 14 7.00 7.90 Hold

4 01 Aug 14 6.97 7.80 Buy

5 25 Aug 14 7.19 7.80 Buy

6 02 Sep 14 7.36 7.50 Hold

7 04 Sep 14 7.28 7.50 Hold

8 09 Oct 14 6.98 7.50 Hold

9 10 Oct 14 6.66 7.50 Hold

10 30 Oct 14 6.50 7.50 Hold

11 10 Nov 14 6.33 6.90 Hold

12 19 Nov 14 6.06 6.90 Hold

13 28 Nov 14 5.83 6.90 Hold

14 15 Jan 15 5.91 6.20 Hold

15 23 Jan 15 5.50 6.20 Hold

16 04 Feb 15 5.65 6.20 Hold

17 09 Feb 15 5.70 6.20 Hold

18 13 Feb 15 5.69 6.20 Hold

19 02 Mar 15 5.95 6.00 Hold

20 05 Mar 15 5.72 6.00 Hold

21 12 Mar 15 5.85 6.00 Hold

22 23 Apr 15 6.15 6.00 Hold

23 21 May 15 5.86 4.80 Hold

1 2

3 4

5

67

8

9

10

11 12

1314

15

16

17

18

19

20

21

22

23

4.92

5.42

5.92

6.42

6.92

7.42

Jun- 14 Oct-14 Feb-15 Jun-15

RM


ed: TH / sa: BC

BUYLast Traded Price: RM13.14 (KLCI : 1,669.24) Price Target : RM14.80 (13% upside) Potential Catalyst: Improved earnings traction Where we differ: EPS from FY16F onwards reflects the impact from its rights issue. Otherwise, we are more bullish on non-interest income growth as we expect HLB’s wealth management contribution to gain traction


Price Relative

Forecasts and Valuation FY Jun (RM m) 2015A 2016F 2017F 2018F Pre-prov. Profit 2,253 2,438 2,716 2,815 Net Profit 2,233 2,264 2,440 2,481 Net Pft (Pre Ex.) 2,233 2,264 2,440 2,481 EPS (sen) 118.8 104.4 112.6 114.5 EPS Pre Ex. (sen) 118.8 104.4 112.6 114.5 EPS Gth (%) 6 (12) 8 2 EPS Gth Pre Ex (%) 6 (12) 8 2 Diluted EPS (sen) 118.8 104.4 112.6 114.5 PE Pre Ex. (X) 11.1 12.6 11.7 11.5 Net DPS (sen) 41.0 35.6 38.2 41.5 Div Yield (%) 3.1 2.7 2.9 3.2 ROAE Pre Ex. (%) 14.3 11.9 11.1 11.3 ROAE (%) 14.3 11.9 11.1 11.3 ROA (%) 1.3 1.2 1.2 1.1 BV Per Share (sen) 893 981 1,056 1,139 P/Book Value (x) 1.5 1.3 1.2 1.2 Earnings Rev (%): - - - Consensus EPS (sen): 105.4 111.0 121.0 Other Broker Recs: B: 6 S: 7 H: 8


Charting the next course

Capital overhang out of the way; BUY. With the capital raising overhang over, HLB can now focus on business growth. Separately, its dividend payout has been on an increasing trend. In addition, HLB has been consistently seeing its book value and earnings grow at c.10% p.a. save for the year when it raised capital to acquire EON Capital. This however, has not been reflected in its share price performance. This underappreciated franchise at currently depressed valuations warrants a BUY rating.

Growth levers to watch. Wealth management would be a space to watch as HLB has started building traction, especially with the establishment of a regional wealth management and private banking platform in Singapore. Apart from that, HLB has also tagged SME as one of its key growth drivers. We understand that HLB has a large pool of underserved small SME clients which has not been fully leveraged on. HLB is also currently focusing on digitising its offerings; something to watch in the next few quarters.

Preliminary 12% ROE target post rights. Preliminary ROE target of c.12% (inclusive of the rights issue) could be tweaked depending on the weakness of Bank of Chengdu’s contribution in the coming quarters. NIM pressure will likely remain a feature as deposit competition is expected to prevail in the industry. We would not discount the possibility of its active treasury markets team to aid in preserving NIM trends. Our post rights issue ROE forecast is at 11.9%

Valuation: HLB is a BUY with a RM14.80 target price derived from the Gordon Growth Model, implying 1.6x CY16 BV. Our TP assumes 12% (diluted) ROE, 10% cost of equity and 5% long term growth rate. The gradual build-up of non-interest income would be a key catalyst.

Key Risks to Our View: Slower-than-expected materialisation of growth plans. Inability to deliver growth plans on wealth management arm. While loan-to-deposit ratio is expected to increase to 80%, slower-than-expected loan growth and excessive NIM compression could limit earnings growth. Weaker-than-expected profit contribution from Bank of Chengdu could derail earnings.

At A Glance


Hong Leong Financial Group (%) 56.4 EPF (%) 11.9 Free Float (%) 31.7 3m Avg. Daily Val (US$m) 4.3 ICB Industry : Financials / Banks



Hong Leong Bank Edition 1 Version 1 | Bloomberg: HLBK MK | Reuters: HLBB.KL Refer to important disclosures at the end of this report

89

109

129

149

169

189

209

9.2

10.2

11.2

12.2

13.2

14.2

15.2


Relative IndexRM

Hong Leong Bank (LHS) Relative KLCI INDEX (RHS)


Company Guide

Hong Leong Bank


Earnings Drivers:

NIM compression largely unavoidable. Although we expect funding cost pressures, we believe HLB’s active treasury functions would strive to keep NIM as stable as possible. CASA, as a low-cost funding source, should help to alleviate NIM compression as well. HLB’s CASA-to-total deposits ratio currently stands at 26% of total deposits and it intends to build up this portfolio to 28-30% over the next 3-5 years.

Room to scale up loan growth; loan-to-deposit ratio is still among the lowest. HLB’s loan growth is driven by mortgage and SME loans. We are assuming 7% loan growth in our forecasts, while deposit growth assumption stands at 8%. With a loan-to-deposit ratio still among the lowest in the industry, HLB would have room to further leverage its asset-liability mix to accelerate loan growth and optimise NIM. We expect its loan-to-deposit ratio would hover around 80%.

Wealth management a crucial new driver. Recurring fee income (loan-related and credit card fees) remains HLB’s key non-interest income driver. However, it is also building up income from wealth management. HLB has established a regional wealth management and private banking platform in Singapore. Wealth management is expected to be HLB’s new growth driver as it gradually gains prominence. We expect the share of non-interest income to reach 24% vs HLB’s target of 25%.

Addressing efficiency issues. From a business-as-usual (BAU) perspective, costs should remain nimble, and cost-to-income ratio should hover below 45%. HLB announced a Mutual Separation Scheme (MSS) on 20 Oct and completed by end-November. No guidance on cost savings was provided as yet. But assuming a 10% reduction in workforce and with personnel costs comprising c.60% of total expenses, we can assume that the MSS could result in cost savings of 6% per annum going forward. Cost savings are likely to be used for investments in the bank’s digitisation agenda

Bank of Chengdu’s profit contribution could moderate amid challenging operating environment. Bank of Chengdu has consistently been increasing its contribution to HLB’s pre-tax profit. But it currently poses some downside risk in FY16F due to the challenging operating environment in China. We understand that provisions and NPLs have inched up while loan growth has moderated. Cautiousness is exercised on the SME segment while consumer loans are still fairly healthy. Loan loss coverage is still high above 150%. While provisions are being bulked up currently and likely in coming quarters, possibility of recoveries would emerge when operating conditions improve.

Margin Trends

Gross Loan& Growth





1.8%

1.9%

1.9%

2.0%

2.0%

2.1%

2.1%

2.2%

0

500

1,000

1,500

2,000

2,500

3,000

2014A 2015A 2016F 2017F 2018F

RM m


-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0

100

200

300

400

500

600

700

2014A 2015A 2016F 2017F 2018F

RM m

Fees & Commissions


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2014A 2015A 2016F 2017F 2018F

RM m



70%

72%

74%

76%

78%

80%

82%

84%

86%

88%

92,321

112,321

132,321

152,321

172,321

192,321

2014A 2015A 2016F 2017F 2018F


38.0%

39.0%

40.0%

41.0%

42.0%

43.0%

44.0%

45.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2014A 2015A 2016F 2017F 2018F




Company Guide

Hong Leong Bank

Balance Sheet:

Superior asset quality. At c.1%, HLB’s NPL ratio is second only to PBK's. Similar to PBK, HLB also boasts a prudent credit culture. We expect HLB to continue recording resilient asset quality indicators. Normalised credit cost is expected to hover around 25bps. Rights issue to boost capital levels. HLB’s rights issue is expected to cause an EPS and ROE dilution of at 10% and 1.0ppt, respectively, while fully-loaded CET1 is expected to be boosted to 11.2% (pre-rights: 8.7%), comfortably above the minimum required CET1 of 9.5% (inclusive of conservation and countercyclical buffers) by 2019 as per Basel III requirements. Capital overhang should be removed with this rights issue. HLB does not have a dividend reinvestment plan in place, but we expect at least 35% payout for FY15F.


Charting the next course. HLB is currently trading close to -2SD of its 10-year P/BV mean. We believe market has punished its decision on its capital raising agenda. We however believe that the current depressed valuations presents an opportunity for a cheap entry into this strong banking franchise. In addition, the stock provides a decent dividend yield of 3-4%. Book value growth has been underappreciated. HLB has been consistently seeing its book value and earnings grow at c.10% p.a. save for the year when it raised capital to acquire EON Capital. This however, has not been reflected in its share price performance. Furthermore, we believe HLB's resilient earnings, with wealth management and SME business as key drivers, coupled with strong liquidity indicators and asset quality parameters should act as a catalyst to the stock.

Key Risks:

Slower-than-expected materialisation of plans. Inability to deliver growth plans on wealth management and slowdown in regional operations. While loan-to-deposit ratio is at 80%, which is the lowest among peers, slower-than-expected loan growth and excessive NIM compression could limit earnings growth.

Company background

Hong Leong Bank Berhad provides commercial banking and related financial services. The Company's services include leasing and hire purchase, nominee, Islamic Banking, and unit trust management.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2014A 2015A 2016F 2017F 2018F


12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

2014A 2015A 2016F 2017F 2018F


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2014A 2015A 2016F 2017F 2018F

Avg: 12.7x

+1sd: 13.5x

+2sd: 14.4x

‐1sd: 11.8x

‐2sd: 10.9x

9.7

10.7

11.7

12.7

13.7

14.7

15.7


(x)

Avg: 1.96x

+1sd: 2.29x

+2sd: 2.62x

‐1sd: 1.62x

‐2sd: 1.29x

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9


(x)


Company Guide

Hong Leong Bank

Key Assumptions

FY Jun 2014A 2015A 2016F 2017F 2018F


FY Jun 2014A 2015A 2016F 2017F 2018F Net Interest Income 2,662 2,741 2,856 3,057 3,283 Non-Interest Income 942 906 978 1,057 928


Pre-provision Profit 2,247 2,253 2,438 2,716 2,815 Provisions (12) 75 (47) (139) (171) Associates 379 418 439 474 512 Exceptionals 0 0 0 0 0

Pre-tax Profit 2,613 2,746 2,830 3,050 3,155 Taxation (511) (513) (566) (610) (674) Minority Interests 0 0 0 0 0 Preference Dividend 0 0 0 0 0

Net Profit 2,102 2,233 2,264 2,440 2,481 Net Profit bef Except 2,102 2,233 2,264 2,440 2,481 Growth (%) Net Interest Income Gth 5.9 3.0 4.2 7.0 7.4 Net Profit Gth 13.3 6.2 1.4 7.8 1.7






Company Guide

Hong Leong Bank


FY Jun 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 Net Interest Income 715 711 657 657 660 Non-Interest Income 189 206 232 279 249

Operating Income 1,015 1,023 988 1,041 1,023 Operating Expenses (429) (463) (450) (471) (463)

Pre-Provision Profit 585 560 538 570 560 Provisions 20 56 14 (14) (21) Associates 99 91 111 116 85 Exceptionals 0 0 0 0 0

Pretax Profit 704 707 663 673 625 Taxation (156) (155) (144) (58) (122) Minority Interests 0 0 0 0 0

Net Profit 548 552 519 615 503 Growth (%) Net Interest Income Gth 5.6 (0.6) (7.6) 0.0 0.4 Net Profit Gth 1.9 0.7 (5.9) 18.4 (18.2)


FY Jun 2014A 2015A 2016F 2017F 2018F Cash/Bank Balance 14,713 6,230 12,351 15,773 19,655 Government Securities 3,151 3,476 3,744 4,033 4,345 Inter Bank Assets 6,757 3,982 4,181 4,390 4,610 Total Net Loans & Advs. 102,579 112,126 119,847 128,207 137,172 Investment 36,908 42,421 43,693 45,004 46,354 Associates 2,153 3,107 3,545 4,019 4,530 Fixed Assets 726 679 692 706 720 Goodwill 2,179 2,149 2,149 2,149 2,149 Other Assets 1,185 9,852 10,049 10,250 10,455

Total Assets 170,351 184,022 200,252 214,532 229,991 Customer Deposits 130,252 140,276 151,498 163,618 176,708 Inter Bank Deposits 7,111 7,096 7,451 7,824 8,215 Debts/Borrowings 8,757 8,847 8,847 8,847 8,847 Others 9,700 11,010 11,179 11,354 11,536 Minorities 0 0 0 0 0 Shareholders' Funds 14,530 16,790 21,276 22,889 24,685




Company Guide

Hong Leong Bank


FY Jun 2014A 2015A 2016F 2017F 2018F


Asset Quality

NPL / Total Gross Loans 1.2 0.8 0.9 0.9 0.8 NPL / Total Assets 0.7 0.5 0.5 0.5 0.5 Loan Loss Reserve Coverage 128.9 136.3 138.3 140.8 159.3 Provision Charge-Off Rate 0.0 (0.1) 0.0 0.1 0.1

Capital Strength




Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 06 Feb 15 13.84 17.01 BUY

2: 26 Feb 15 13.80 17.01 BUY

3: 27 May 15 13.24 16.91 BUY

4: 15 Jul 15 13.03 16.91 BUY

5: 13 Aug 15 12.39 16.91 BUY

6: 27 Aug 15 12.60 15.66 BUY

7: 04 Sep 15 12.80 15.66 BUY

8: 21 Oct 15 13.76 15.66 BUY

9: 26 Oct 15 13.67 15.66 BUY

10: 18 Nov 15 13.14 14.80 BUY


1

2

3

4

5

67

8

9 10

11.56

12.06

12.56

13.06

13.56

14.06

14.56


RM


sa: WMT

BUYLast Traded Price: RM13.80 (KLCI : 1,669.24) Price Target : RM 16.80 (22% upside) Potential Catalyst: Potential privatisation and corporate streamlining Where we differ: Our forecasts earnings are higher than consensus as we are more positive on insurance and investment banking contribution


Price Relative

Forecasts and Valuation FY Jun (RM m) 2015A 2016F 2017F 2018F Pre-prov. Profit 2,491 2,711 2,911 3,162 Net Profit 1,621 1,684 1,857 2,026 Net Pft (Pre Ex.) 1,621 1,684 1,857 2,026 EPS (sen) 154.0 146.8 161.9 176.6 EPS Pre Ex. (sen) 154.0 146.8 161.9 176.6 EPS Gth (%) (5) (5) 10 9 EPS Gth Pre Ex (%) (5) (5) 10 9 Diluted EPS (sen) 154.0 146.8 161.9 176.6 PE Pre Ex. (X) 9.0 9.4 8.5 7.8 Net DPS (sen) 38.0 35.8 39.7 45.0 Div Yield (%) 2.8 2.6 2.9 3.3 ROAE Pre Ex. (%) 13.2 11.9 11.9 12.1 ROAE (%) 13.2 11.9 11.9 12.1 ROA (%) 1.3 1.2 1.3 1.3 BV Per Share (sen) 1,246 1,320 1,410 1,506 P/Book Value (x) 1.1 1.0 1.0 0.9 Earnings Rev (%): - - - Consensus EPS (sen): 151.0 163.2 181.3 Other Broker Recs: B: 5 S: 0 H: 1


Hidden value

Corporate restructuring remains a re-rating catalyst, BUY. This investment thesis remains our basis for our BUY rating. We believe a corporate streamlining within the group would be imminent. It is inefficient to have so many listed entities in the group, especially if the counters have low trading liquidity, in our view. We identify HLFG as the next privatisation target within the group. The potential corporate streamlining will allow investors to focus on only two listed operating entities – the banking arm, HLB, and ideally, its insurance arm, HLA to unlock value within HLFG. This exercise would eliminate administrative overlaps and reduce regulatory compliance costs.

Revenues still hinges largely on HLB. About 90% of HLFG’s revenues will come from HLB, which we remain positive on, with SME and wealth management expected to drive growth. Its insurance business has seen strong growth in the past, but that is expected to moderate as the focus will be on housekeeping and tightened criteria for new policies in the near term. A rising interest rate environment would be positive for HLA. Its investment banking business is expected to stay small and niche. Although small (c.3%), its investment banking unit has been gradually expanding market share in equity and debt issues, as well as in stockbroking

Capital raising near completion. HLFG is raising RM1.1bn from a rights issue to partially fund HLB’s RM3bn rights issue. HLFG’s portion of HLB’s rights issue is RM1.9bn and it will fund the remaining portion with debt. Post-rights, HLFG is expected to see its double leverage inch up closer to 110% (FY15: 106%). As a Financial Holding Company, HLFG is expected to meet Basel III capital requirements by 2019.

Valuation: We have a BUY recommendation and RM16.80 target price based on sum-of-parts metric using our target price for HLB, while HL Cap and HLA are valued at 2x BV. We forecast HLFG's share price will move towards our TP as the three entities continuously improve growth traction. The eventual boost will come from the successful corporate streamlining to improve efficiency.

Key Risks to Our View: Challenging operating environment. Drawing new growth levers may be challenging, given the softer operating environment. Rapid interest rate movements could result in volatile contribution from its insurance operations. At A Glance

Issued Capital (m shrs) 1,053 Mkt. Cap (RMm/US$m) 14,528 / 3,402 Major Shareholders Hong Leong Co Malaysia Bhd (%) 77.5 Free Float (%) 22.5 3m Avg. Daily Val (US$m) 0.9 ICB Industry : Financials / Banks



Hong Leong Financial Group Edition 1 Version 1 | Bloomberg: HLFG MK | Reuters: HLCB.KL Refer to important disclosures at the end of this report

83

103

123

143

163

183

203

10.1

11.1

12.1

13.1

14.1

15.1

16.1

17.1

18.1

19.1


Relative IndexRM

Hong Leong Financial Group (LHS) Relative KLCI INDEX (RHS)


Company Guide

Hong Leong Financial Group


Earnings Drivers:

HLFG’s growth prospects hinge largely on HLB. HLB’s prospects remain promising, with the SME segment as a key growth driver. There is a deeper segment of the SME business which it has yet to fully exploit, especially the small- to mid-SME segment (close to RM10bn in loans) which was added to HLB’s portfolio following the EON Capital acquisition in 2011. In addition, HLB intends to use its Islamic banking arm to penetrate government accounts. We are assuming 7% loan and deposit growth in our forecasts, and 8% deposit growth.

Wealth management a crucial new driver. Recurring fee income (loan-related and credit card fees) remains HLB’s key non-interest income driver. However, it is also building up income from wealth management. HLB has established a regional wealth management and private banking platform in Singapore. Wealth management is expected to be HLB’s new growth driver as it gradually gains prominence. We expect the share of non-interest income to reach 24% vs HLB’s target of 25%.

Hong Leong Assurance (HLA) an overlooked jewel. HLA, HLFG’s insurance arm, contributed 10% to group PBT in FY15 after visibly scaling up its business over the past few years. The key driver has been the shift towards a stronger agency force and larger share of non-participating business. HLA ranks 4th among Malaysian insurers with 12% market share. With an established distribution network, HLA is now shifting its profitability levers to non-par and investment-linked policies. We expect sequential improvement in underwriting margins as HLA positions to grow the more profitable investment-link products. The idea to list the insurance business is conceivable once it reaches a sizeable value. If we value HLA at 3x BV, the potential listing of the insurance arm could unlock RM2.6bn. This would lift HLFG’s RNAV by RM0.82 per share. We value HLA at 2x BV, which contributes RM1.65 to HLFG’s RNAV.

HL Cap on a better footing. Upon establishing a full-fledged and experienced investment banking team in early 2010 and completing the merger of Hong Leong Investment Bank (HLIB) and MIMB Investment Bank in Sep 2012, HLIB has since strengthened its presence in the investment banking industry. HL Cap has seen its pretax profits increase almost four-fold since 2010, and has gradually strengthened its market share in equity and debt issues, as well as in stockbroking. We value HLCap at 2x BV in our SOP valuation.

Margin Trends

Gross Loan& Growth





1.3%

1.4%

1.4%

1.5%

1.5%

1.6%

0

500

1,000

1,500

2,000

2,500

3,000

2014A 2015A 2016F 2017F 2018F

RM m


-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0

100

200

300

400

500

600

700

800

900

2014A 2015A 2016F 2017F 2018F

RM m

Fees & Commissions


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2014A 2015A 2016F 2017F 2018F

RM m



71%

73%

75%

77%

79%

81%

83%

85%

87%

89%

93,300

113,300

133,300

153,300

173,300

193,300

2014A 2015A 2016F 2017F 2018F


37.0%

38.0%

39.0%

40.0%

41.0%

42.0%

43.0%

44.0%

45.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

2014A 2015A 2016F 2017F 2018F




Company Guide


Balance Sheet:

Superior asset quality. At c.1%, HLB’s NPL ratio ranks second after PBK. Similar to PBK, HLB also boasts a prudent credit culture. We expect HLB to continue recording resilient asset quality indicators although there may be a minor uptick as the bank transitions into the new restructured and rescheduled (R&R) rules by Bank Negara.

HLFG’s capital raising near completion. HLFG is raising capital, a combination of equity (rights) and debt, to fully fund HLB’s rights issue. HLFG’s stake in HLB will not be diluted as HLFG is expected to subscribe to all its rights entitlement. HLFG has proposed to raise RM1.1bn through a rights issue to partially fund HLB’s RM3bn rights issue. HLFG’s portion of HLB’s rights issue is RM1.9bn and it will fund the remaining portion with debt. Post-rights, HLFG is expected to see its double leverage inch up closer to 110% (FY15: 106%). As a Financial Holding Company, HLFG is expected to meet Basel III capital requirements by 2019

Streamlining corporate structure could enhance efficiency. We believe it is inefficient to have so many listed entities in the group, especially if the counters have low trading liquidity. The potential corporate streamlining will allow investors to focus on only two listed operating entities – its banking arm, HLB, and ideally, its insurance arm, HLA, to unlock value within HLFG. This exercise would eliminate administrative overlaps, and reduce regulatory compliance costs.


Corporate streamlining could re-rate HLFG’s share price. Our investment thesis is built on the potential corporate restructuring within the group. There is also potential to unlock value in HLA if the insurance unit is carved out for listing. Our TP does not include the potential privatisation of HLFG or HLA’s potential IPO.

Key Risks:

Change in business strategy. A significant change to HLB’s business strategy could derail HLFG’s earnings given that it remains the key earnings driver for HLFG. Inability to continuously scale up HLA’s business could limit earnings upside.

Company background

Hong Leong Financial Group Berhad is the parent company of Hong Leong Bank. Its operations extend beyond commercial banking operations. Through its subsidiaries, HLFG underwrites life and general insurance, and provides fund management, corporate advisory, stock and share broking services.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2014A 2015A 2016F 2017F 2018F


11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

2014A 2015A 2016F 2017F 2018F


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2014A 2015A 2016F 2017F 2018F

Avg: 9.6x

+1sd: 10.6x

+2sd: 11.6x

‐1sd: 8.6x

‐2sd: 7.6x

6.8

7.8

8.8

9.8

10.8

11.8

12.8


(x)

Avg: 1.44x

+1sd: 1.58x

+2sd: 1.72x

‐1sd: 1.31x

‐2sd: 1.17x

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9


(x)


Company Guide


Key Assumptions

FY Jun 2014A 2015A 2016F 2017F 2018F

Gross Loans Growth 7.3 8.7 7.0 7.0 7.0 Customer Deposits Growth 5.4 7.9 8.0 8.0 8.0 Yld. On Earnings Assets 3.3 3.4 3.3 3.3 3.3 Avg Cost Of Funds 2.1 2.2 2.1 2.1 2.1

Income Statement (RM m)

FY Jun 2014A 2015A 2016F 2017F 2018F

Net Interest Income 2,474 2,710 2,858 2,980 3,138 Non-Interest Income 1,640 1,361 1,440 1,522 1,618


Pre-provision Profit 2,583 2,491 2,711 2,911 3,162 Provisions (13) 55 47 139 171 Associates 439 477 439 474 512 Exceptionals 0 0 0 0 0

Pre-tax Profit 3,009 3,023 3,196 3,524 3,844 Taxation (492) (563) (639) (705) (769) Minority Interests (810) (840) (873) (962) (1,050) Preference Dividend 0 0 0 0 0

Net Profit 1,707 1,621 1,684 1,857 2,026 Net Profit bef Except 1,707 1,621 1,684 1,857 2,026 Growth (%)

Net Interest Income Gth 5.1 9.5 5.5 4.3 5.3 Net Profit Gth 14.7 (5.0) 3.9 10.2 9.1


Business Mix (%)


Profitability (%)




Company Guide



FY Jun 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016


Operating Income 1,084 1,143 1,046 1,219 1,147 Operating Expenses (467) (510) (491) (532) (506)

Pre-Provision Profit 617 632 555 687 641 Provisions 20 56 12 (32) (46) Associates 111 108 133 126 102 Exceptionals 0 0 0 0 0


Net Profit 392 424 363 441 387

Growth (%)

Net Interest Income Gth 8.4 3.5 (7.4) 0.1 (0.2) Net Profit Gth (12.9) 8.1 (14.2) 21.4 (12.2)


FY Jun 2014A 2015A 2016F 2017F 2018F

Cash/Bank Balance 17,084 8,463 12,026 14,327 15,978 Government Securities 3,181 3,532 3,804 4,096 4,412 Inter Bank Assets 4,494 4,325 4,455 4,589 4,726 Total Net Loans & Advs. 103,667 113,114 120,905 129,339 138,383 Investment 53,212 61,967 63,114 65,494 68,889 Associates 2,888 3,870 5,185 6,947 9,309 Fixed Assets 1,030 1,150 1,284 1,433 1,599 Goodwill 2,772 2,748 2,748 2,748 2,748 Other Assets 1,850 3,273 3,601 3,961 4,357

Total Assets 190,179 202,443 217,121 232,935 250,401

Customer Deposits 130,632 140,955 152,232 164,410 177,563 Inter Bank Deposits 9,166 8,944 9,391 9,860 10,353 Debts/Borrowings 12,619 10,199 8,706 7,756 7,125 Others 12,399 13,421 14,338 15,337 16,425 Minorities 5,530 6,353 6,603 7,279 7,942 Shareholders' Funds 11,474 13,111 15,146 16,177 17,281




Company Guide



FY Jun 2014A 2015A 2016F 2017F 2018F


Asset Quality

NPL / Total Gross Loans 1.2 0.8 0.9 0.9 0.8 NPL / Total Assets 0.6 0.5 0.5 0.5 0.4 Loan Loss Reserve Coverage 129.0 136.3 138.3 140.8 159.3 Provision Charge-Off Rate 0.0 0.0 0.0 (0.1) (0.1)

Capital Strength



HLFG: RNAV Valuation

Source: DBS Bank

HLFG' key inves tments in l is ted companiesStake Share price No. of s hares Va lue RNAV/s hare Comments

(%) (RM) (RMm) (RM)

Hong Leong Bank 64.4% 14.80 1,880.11 17,920 17.02 Hong Leong Capital 81.3% n.a 238.97 797 0.76

Fa ir va lue of inves tment in l is ted companie (a ) 18,717 17.78

HLFG's key unl is ted as s e ts As s ets L iabi l i ties Net As s ets Va lue(RMm) (RMm) (RMm) (RMm)

Ins urance - HLA Holdings (100%)

Hong Leong Assurance Berhad 70% 13,293 11,965 1,328 1,860 1.77 Hong Leong-MSIG Takaful 65% 445 357 88 114 0.11 MSIG Insurance 30% 30% stake in MSIG Insurance is equity accountedNet as s ets of core divis ions bas ed on BV (b) 1,974 1.88

RNAV (a )+(b) 20,691 19.70 HLFG's no. of shares 1,052.77

Holding Company discount 15%

Fair Va lue 16.80

Based on average discount

HLA Holdings is a holding company that houses all of the group's insurance businesses

Based on our TP for HLB (valued at 2.0x CY15 BV)Based on 2x BV of HLCap; share price is irrelevant

HLA Holdings owns 70%; MSIG owns 30%; Assumed 2x BVHLA Holdings owns 65%; MSIG owns 35%; Assumed 2x BV


Company Guide



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 25 Feb 15 16.47 19.16 BUY

2: 26 Feb 15 16.45 19.16 BUY

3: 27 May 15 15.72 19.16 BUY

4: 13 Aug 15 14.03 19.16 BUY

5: 27 Aug 15 13.44 17.78 BUY

6: 04 Sep 15 13.72 17.78 BUY

7: 12 Oct 15 14.70 17.78 BUY

8: 21 Oct 15 14.46 17.78 BUY

9: 26 Oct 15 14.50 17.78 BUY

10: 18 Nov 15 13.80 16.80 BUY


1

2

3

4

5

6 7

8

9 10

12.11

13.11

14.11

15.11

16.11

17.11

18.11


RM


sa: BC

HOLDLast Traded Price: RM8.41 (KLCI : 1,669.24) Price Target : RM9.00 (7% upside) Potential Catalyst: Capital market recovery; rejuvenation of Indonesian operations Where we differ: We are more conservative on topline growth


Price Relative

Forecasts and Valuation FY Dec (RM m) 2014A 2015F 2016F 2017F Pre-prov. Profit 9,419 10,857 11,508 12,458 Net Profit 6,716 6,820 7,595 8,452 Net Pft (Pre Ex.) 6,716 6,820 7,595 8,452 EPS (sen) 73.9 71.9 77.4 83.2 EPS Pre Ex. (sen) 73.9 71.9 77.4 83.2 EPS Gth (%) (2) (3) 8 8 EPS Gth Pre Ex (%) (2) (3) 8 8 Diluted EPS (sen) 72.1 70.7 76.1 81.8 PE Pre Ex. (X) 11.4 11.7 10.9 10.1 Net DPS (sen) 57.0 53.0 53.3 57.3 Div Yield (%) 6.8 6.3 6.3 6.8 ROAE Pre Ex. (%) 13.6 12.2 12.6 13.4 ROAE (%) 13.6 12.2 12.6 13.4 ROA (%) 1.2 1.0 1.1 1.1 BV Per Share (sen) 568 609 616 628 P/Book Value (x) 1.5 1.4 1.4 1.3 Earnings Rev (%): - - - Consensus EPS (sen): 69.6 72.6 77.7 Other Broker Recs: B: 13 S: 3 H: 7


Dividends remain a sweetener

Tepid outlook ahead; HOLD. We expect weakness at both MAY’s domestic and regional operations. Within Malaysia, weak capital markets and slower than expected loan growth, could cap earnings momentum. MAY’s Indonesian operations, on the other hand, could remain weak during the year. High dividends (6% yield) remain the main attraction.

A delicate balancing act. Dividend payout is expected to remain high (75% assumed) with the dividend reinvestment plan (DRP) in place as its strategic capital management tool. The DRP has served well to raise and preserve capital, but if continued, profit growth must at least equal or exceed equity base growth to remain accretive. Amid the tougher operating environment, this delicate balancing act is at risk of being derailed, which could result in EPS and ROE dilution.

Still relatively challenging outlook ahead. Loan growth may appear high due to forex translation from its regional operations especially Singapore and Indonesia amid the weak RM, but we conservatively assumed higher credit cost for 2016 given that the Group has recorded high provisions in 3Q15. While NIM compression is expected to range at 8-10bps, we have penned in a lower rate judging from the higher loan-to-deposit ratios recorded to date. Overall, ROE is expected to hover at 12-13%, due to a combination of slower profit growth and expanded equity base arising from the DRP.

Valuation: Maybank is a HOLD with RM9.00 target price based on the Gordon Growth Model. Our TP assumes 13% ROE, 5% growth and 10.3% cost of equity. We believe the share price is strongly supported by high dividend yield. We expect dividend payout to remain high so long as the dividend reinvestment plan remains the bank’s strategic capital management tool.

Key Risks to Our View: Change in dividend payout. MAY’s official dividend policy stands at 40-60%, but the payout has been above 70% because of the DRP. Should management decide to change the DRP, dividend yields could disappoint the stock would lose its appeal.

At A Glance


Amanah Saham Bumiputera (%) 37.0 EPF (%) 15.7 Permodalan Nasional Bhd (%) 5.7

Free Float (%) 41.6 3m Avg. Daily Val (US$m) 27.8 ICB Industry : Financials / Banks



Maybank Edition 1 Version 1 | Bloomberg: MAY MK | Reuters: MBBM.KL Refer to important disclosures at the end of this report

78

98

118

138

158

178

198

218

7.3

7.8

8.3

8.8

9.3

9.8

10.3

10.8

11.3

11.8


Relative IndexRM

Maybank (LHS) Relative KLCI INDEX (RHS)


Company Guide

Maybank


Earnings Drivers:

Persistent NIM compression. Like other banks in the industry, MAY is expected to experience NIM compression because of pressure from higher funding costs. Backed by a strong deposit franchise, MAY is in a better position than peers to manage funding cost pressure. MAY’s CASA ratio of c.35% is the highest in the industry.

Sustainable fee income from core banking activities. The outlook remains cloudy for capital markets, which would drag market-related income. However, the share of non-interest income at MAY, which is largely driven by transactional fees from core banking services, should remain stable. MAY’s solid deposit franchise and high CASA share gives it a natural advantage over peers to strengthen its transaction banking segment. MAY’s recurring fee income is high at close to 60% of non-interest income. Growing fee-based income remains a strategic priority for MAY.

Targeting 12-13% ROE. Although loan growth appears highdue to forex translation from its regional operations especially Singapore and Indonesia amidst the weak RM, bottomline would likely be dragged down by NIM compression as well as higher credit costs. Operating costs should remain well contained. However, slower profit growth coupled with the expanded equity base arising from the DRP would drag ROE towards the 12-13% range.

MAY’s Singapore operations remain the group’s forte, contributing c.14% to Group PBT. MAY is the only Malaysian bank with a Qualified Full Banking (QFB) license in Singapore. With the full local incorporation of its operations in Singapore on the cards, MAY may require a little more capital. Thanks to its DRP, MAY would not need to raise external capital.

Indonesian operations remain a challenge. Over in Indonesia, MAY is represented by Bank Internasional Indonesia (BII). BII which used to contribute c.8% to Group PBT is now negligible due to high provisioning largely for the trading and manufacturing sectors. The outlook for Indonesia banks remains uncertain as momentum has yet to pick up. We expect BII’s earnings to remain weak as it focuses on fixing its books and dealing with costs.

MAY has presence in 18 other countries, but their individual contribution will remain small in the near future. MAY has also started work to get a toehold in Myanmar following the Central Bank of Myanmar’s decision to grant a foreign banking licence in 2014. Overseas operations (ex-Singapore and Indonesia) contributed c.11% to Group PBT.

Margin Trends

Gross Loan& Growth





2.0%

2.1%

2.2%

2.3%

2.4%

2.5%

2.6%

2.7%

0

2,000

4,000

6,000

8,000

10,000

2013A 2014A 2015F 2016F 2017F

RM m


-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0

200

400

600

800

1,000

1,200

1,400

1,600

2013A 2014A 2015F 2016F 2017F

RM m

Fees & Commissions


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

100,000

200,000

300,000

400,000

500,000

2013A 2014A 2015F 2016F 2017F

RM m



79%

84%

89%

94%

99%

320,056

370,056

420,056

470,056

520,056

570,056

620,056

670,056

720,056

2013A 2014A 2015F 2016F 2017F


44.0%

45.0%

46.0%

47.0%

48.0%

49.0%

50.0%

0

5,000

10,000

15,000

20,000

2013A 2014A 2015F 2016F 2017F




Company Guide

Maybank

Balance Sheet:

Cautious on asset quality. On several quarters over the years, MAY has reported blips in NPL. Since then, all eyes have been on the bank’s asset quality position. Further deterioration could pose downside risk to earnings. DRP supporting capital ratios. MAY’s capital ratios are high compared to peers. This is aided by the DRP, which MAY will continue to utilise as a strategic capital management tool to build capital, rather than the rights issue option taken by some of its peers. However, it may adjust the cash portion according to its capital needs. MAY is likely to utilise its capital buffer for its local incorporation in Singapore. Attractive dividend yield. Maybank has generously paid out above 70% of profits since FY10, well above its dividend policy of 40-60%. MAY intends to maintain this level of dividend payout as long as the DRP remains in place. We have assumed dividend payout would be 75%. We also note that a delicate balancing act is required between managing the bank’s capital and shareholders’ return, to avoid substantial dilution to EPS and ROE.


Improving domestic sentiment and regional operations. Currently trading at 1.4x FY16 BV, MAY is trading close to -2SD of its 10-year mean P/BV. We remain cautious of the challenging operating environment in the overall banking sector. Recovery of its Indonesian operations and Malaysian capital markets would be re-rating catalysts for the stock.

Key Risks:

Slower than expected regional contribution. The inability to scale up its current small Indonesian profit contribution could derail its regional profit target. Further slowdown in the Indonesian operations could also put earnings at risk. Asset quality will remain a risk to watch. Change in dividend policy. A lower dividend payout ratio could cause Maybank to lose its appeal as a yield stock.

Company background

Malayan Banking Berhad provides commercial and Islamic banking services in Malaysia, Singapore, and other locations. It also owns an Indonesian subsidiary from an acquisition it made in 2008. Through its subsidiaries, the bank provides services such as general and life insurance, stock and futures broking, and leasing and factoring

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2013A 2014A 2015F 2016F 2017F


11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

2013A 2014A 2015F 2016F 2017F


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013A 2014A 2015F 2016F 2017F

Avg: 12.6x

+1sd: 13.4x

+2sd: 14.3x

‐1sd: 11.8x

‐2sd: 10.9x

9.5

10.5

11.5

12.5

13.5

14.5

15.5


(x)

Avg: 1.79x

+1sd: 1.97x

+2sd: 2.15x

‐1sd: 1.61x

‐2sd: 1.43x

1.2

1.4

1.6

1.8

2.0

2.2

2.4


(x)


Company Guide

Maybank

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F




Pre-provision Profit 9,610 9,419 10,857 11,508 12,458 Provisions (880) (471) (1,918) (1,265) (1,047) Associates 139 163 171 180 189 Exceptionals 0 0 0 0 0

Pre-tax Profit 8,870 9,112 9,110 10,423 11,600 Taxation (2,098) (2,201) (2,095) (2,606) (2,900) Minority Interests (219) (195) (194) (223) (248) Preference Dividend 0 0 0 0 0







Company Guide

Maybank


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Net Interest Income 2,462 2,442 2,605 2,680 2,897 Non-Interest Income 1,228 1,831 1,450 1,241 1,766


Pre-Provision Profit 2,254 2,506 2,498 2,470 3,146 Provisions (73) (119) (299) (395) (797) Associates 45 45 42 76 34 Exceptionals 0 0 0 0 0

Pretax Profit 2,226 2,431 2,242 2,150 2,383 Taxation (579) (421) (530) (529) (457) Minority Interests (39) (79) (12) (37) (27)

Net Profit 1,608 1,931 1,700 1,585 1,899 Growth (%) Net Interest Income Gth 2.3 (0.8) 6.7 2.9 8.1 Net Profit Gth 2.1 20.1 (12.0) (6.8) 19.8


FY Dec 2013A 2014A 2015F 2016F 2017F Cash/Bank Balance 48,067 52,853 69,521 85,168 103,448 Government Securities 21 3,625 3,807 3,997 4,197 Inter Bank Assets 7,157 16,106 16,911 17,757 18,645 Total Net Loans & Advs. 355,618 403,513 434,771 469,559 507,232 Investment 107,672 115,911 124,780 134,328 144,607 Associates 2,465 2,528 2,699 2,879 3,068 Fixed Assets 3,198 3,284 3,448 3,620 3,801 Goodwill 6,041 6,261 6,261 6,261 6,261 Other Assets 27,855 31,247 36,897 42,316 48,641

Total Assets 560,443 640,300 704,316 771,367 845,656 Customer Deposits 395,611 439,569 483,526 531,879 585,067 Inter Bank Deposits 42,139 57,387 63,126 69,439 76,383 Debts/Borrowings 31,887 40,064 43,481 47,238 51,372 Others 21,263 23,739 26,171 29,084 32,504 Minorities 1,745 1,767 1,961 2,184 2,432 Shareholders' Funds 45,997 52,975 58,772 61,537 64,891




Company Guide

Maybank






Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 15 Jan 15 8.60 10.00 HOLD

2: 04 Feb 15 8.83 10.00 HOLD

3: 13 Feb 15 9.19 10.00 HOLD

4: 27 Feb 15 9.20 9.90 HOLD

5: 05 Mar 15 9.21 9.90 HOLD

6: 12 Mar 15 9.12 9.90 HOLD

7: 29 May 15 9.03 9.90 HOLD

8: 02 Jun 15 9.14 9.90 HOLD

9: 28 Aug 15 8.76 8.80 HOLD

10: 04 Sep 15 8.37 8.80 HOLD

11: 12 Oct 15 8.51 8.80 HOLD12: 21 Oct 15 8.62 8.80 HOLD13: 27 Nov 15 8.44 9.00 HOLD


1

2 3

4

5

6

7

8

910

11

12

13

7.77

8.27

8.77

9.27

9.77


RM

ASIAN INSIGHTS VICKERS SECURITIES www.dbsvickers.com sa: BC

BUY Last Traded Price: RM18.32 (KLCI : 1,716.11) Price Target : RM21.95 (20% upside) Potential Catalyst: Sustainable amd robust earnings deliveries Where we differ: Our TP is higher than consensus as we believe its consistent earnings delivery could re-rate share price Analyst LIM Sue Lin +65 6682 3711 [email protected] Lynette CHENG +603 2604 3907 [email protected]

Price Relative

Forecasts and Valuation FY Dec (RM m) 2014A 2015F 2016F 2017F Pre-prov. Profit 6,067 6,492 7,007 7,621 Net Profit 4,519 4,863 5,265 5,755 Net Pft (Pre Ex.) 4,519 4,863 5,265 5,755 EPS (sen) 116.4 125.3 135.6 148.2 EPS Pre Ex. (sen) 116.4 125.3 135.6 148.2 EPS Gth (%) 1 8 8 9 EPS Gth Pre Ex (%) 1 8 8 9 Diluted EPS (sen) 116.4 125.3 135.6 148.2 PE Pre Ex. (X) 15.7 14.6 13.5 12.4 Net DPS (sen) 54.0 56.0 58.0 60.0 Div Yield (%) 2.9 3.1 3.2 3.3 ROAE Pre Ex. (%) 18.7 16.6 16.3 16.2 ROAE (%) 18.7 16.6 16.3 16.2 ROA (%) 1.4 1.4 1.3 1.4 BV Per Share (sen) 722 791 869 957 P/Book Value (x) 2.5 2.3 2.1 1.9 Earnings Rev (%): - - - Consensus EPS (sen): 122.5 128.3 138.6 Other Broker Recs: B: 6 S: 4 H: 4


Leading the pack Steady performer, BUY. Public Bank is our top pick among Malaysian banks. Our BUY rating is premised on its sustainable earnings and robust asset quality. Despite domestic macro headwinds, we expect PBK to continue to deliver sustainable growth and top market shares in mortgages, auto and SME segments. Contribution from the asset management business will continue to differentiate the bank from peers. Equipped for excellence. Recurring income makes up 75% of non-interest income, shielding the bank from the headwinds in the capital market. PBK’s key portfolio is the mass market, where loan growth is expected to remain resilient. The bank’s ability to safeguard its asset quality despite years of outperforming industry growth is testament to the success of its prudent practices. Above-industry targets. PBK targets to deliver a sustainable >16% ROE in 2016 which is higher than the industry average. This is expected to be achieved on the back of 8-9% loan growth, which should more than offset sector-wide NIM compression. Its sustainable growth in the unit trust and bancassurance business further aids revenues. Disciplined cost control should keep cost-to-income ratio at below 32%. Valuation: Our RM21.95 target price is derived from the Gordon Growth Model and assumes 9% cost of equity, 4% long term growth and 16% ROE, implying 2.5x FY16F BV. PBK’s premium valuation vs peers is justified as it continues to depict solid growth and quality trends, contrary to peers. Key Risks to Our View: Failure to sustain above-industry growth and asset quality. A key de-rating factor for PBK would be failure to sustain its excellent growth and asset quality track record, as well a faltering market share in segments which it excels in. At A Glance Issued Capital (m shrs) 3,861 Mkt. Cap (RMm/US$m) 70,743 / 16,564 Major Shareholders Tan Sri Dato' Dr Teh Hong Piow (%) 21.8 EPF (%) 15.4 Free Float (%) 62.8 3m Avg. Daily Val (US$m) 24.0 ICB Industry : Financials / Banks



Public Bank Edition 1 Version 1 | Bloomberg: PBK MK | Reuters: PUBM.KL Refer to important disclosures at the end of this report

90

110

130

150

170

190

210

11.0

13.0

15.0

17.0

19.0

21.0

23.0


Relative IndexRM

Public Bank (LHS) Relative KLCI INDEX (RHS)


Company Guide

Public Bank


Earnings Drivers:

NIM compression largely from funding cost pressures. Like its peers, PBK expects continued pressure on NIM arising from higher cost of funds and is guiding for NIM to decline by 8-10bps in FY15F. PBK will be focusing on garnering core deposits (CASA and FD) while managing expensive wholesale deposits. Loan yields are stable. Strong consumer franchise to defy headwinds. PBK has consistently beat industry loan growth and for 2016, it targets around 8-9% growth. The bank expects similar growth in deposits. Despite weaker consumer sentiment, we expect loan growth to remain resilient as its key portfolio lies in the mass market. The bank will be able to maintain its market share position, particularly in mortgages, auto and SME segments. Consumer loans make up close to 60% of PBK’s loan book. Asset management contribution drives non-interest income. Sustainable and growing contribution from its asset management arm, Public Mutual, continues to differentiate PBK from its peers. This is the key driver of recurring income. PBK’s recurring income to non-interest income ratio is among the highest in the industry at 75%. On top of that, PBK also has a strategic bancassurance partnership with AIA Group that enables the Group to offer life, health and investment-linked products to its customers. Although still small as a percentage of non-interest income, growth has been strong. Overall, PBK aims to grow non-interest income by 7-8%. PBK has the lowest cost-to-income ratio in the industry at c.30%. The bank intends to keep that under 32% in 2016. We forecast cost-to-income ratio will remain flat. The cost containment measures coupled with its targeted income growth should keep ROE above 16% (taking into account full dilution impact of rights issue completed in July 2014). Small regional franchise. Apart from domestic operations, PBK also has a regional presence, in Hong Kong, Sri Lanka, Laos, Cambodia, and Vietnam. PBK is currently in the midst of acquiring the remaining 50% equity interest in VID Public Bank in Vietnam. Upon completion, VID Public Bank will become a wholly-owned subsidiary of the Group. That said, overseas operations remain a small contributor to PBK, at about 7% of PBT.

Margin Trends

Gross Loan& Growth





1.9%

2.0%

2.1%

2.2%

2.3%

2.4%

2.5%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2013A 2014A 2015F 2016F 2017F

RM m


-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0

500

1,000

1,500

2,000

2013A 2014A 2015F 2016F 2017F

RM m

Fees & Commissions


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2013A 2014A 2015F 2016F 2017F

RM m



79%

81%

83%

85%

87%

89%

91%

93%

95%

97%

197,474

247,474

297,474

347,474

397,474

2013A 2014A 2015F 2016F 2017F


29.6%

29.8%

30.0%

30.2%

30.4%

30.6%

30.8%

0

2,000

4,000

6,000

8,000

10,000

2013A 2014A 2015F 2016F 2017F




Company Guide

Public Bank

Balance Sheet:

Unrivalled asset quality. PBK leads the industry in terms of asset quality with an enviable NPL ratio of 0.6%. The bank’s ability to safeguard its asset quality despite years of outperforming industry growth is testament to the success of its prudent practices. Given its strong credit culture, we assume NPL ratio will remain low and stable. PBK is well-capitalised, boosted by the RM5bn rights issue completed in 2014. PBK aims to keep total capital ratio at not less than 13%. It does not have a dividend reinvestment plan but dividend payout ratio has been stable at c.45%.


PBK is trading at premium valuation vs peers. This is justified for a quality defensive bank. PBK is currently trading close to -2SD P/BV of its 10-year mean valuation. This presents a good opportunity to accumulate the stock to gain exposure to long-term sustainable earnings. Consistent earnings delivery. PBK’s consistent earnings delivery and robust underlying trend amid a challenging operating environment will be key catalysts to the stock.

Key Risks:

Sharp deterioration in retail growth prospects. PBK’s consumer loan growth did not weaken following Bank Negara’s tightening measures over the last three years, although we expect pockets of speculative and high-end properties to soften. PBK’s key portfolio is the mass market, hence, we expect loan growth to remain resilient.

Company background

Public Bank Berhad provides a range of commercial banking and financial services which include unit trust management, financing for the purchase of licensed public vehicles, and other financial services. The Group's overseas operations include branches in Hong Kong, Sri Lanka, Laos, Cambodia, and Vietnam.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

2013A 2014A 2015F 2016F 2017F


10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

2013A 2014A 2015F 2016F 2017F


0.0%

5.0%

10.0%

15.0%

20.0%

2013A 2014A 2015F 2016F 2017F

Avg: 14.1x

+1sd: 15.5x

+2sd: 16.9x

‐1sd: 12.7x

‐2sd: 11.3x

10.1

11.1

12.1

13.1

14.1

15.1

16.1

17.1

18.1

19.1


(x)

Avg: 2.86x

+1sd: 3.12x

+2sd: 3.39x

‐1sd: 2.6x

‐2sd: 2.34x

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

3.8


(x)


Company Guide

Public Bank

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F




Pre-provision Profit 5,655 6,067 6,492 7,007 7,621 Provisions (351) (258) (246) (244) (227) Associates 6 5 5 5 5 Exceptionals 0 0 0 0 0

Pre-tax Profit 5,310 5,814 6,251 6,768 7,398 Taxation (1,204) (1,251) (1,345) (1,456) (1,592) Minority Interests (41) (45) (44) (47) (52) Preference Dividend 0 0 0 0 0







Company Guide

Public Bank


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Net Interest Income 1,551 1,555 1,535 1,560 1,629 Non-Interest Income 481 502 527 545 631

Operating Income 2,248 2,263 2,266 2,313 2,471 Operating Expenses (649) (635) (703) (722) (741)

Pre-Provision Profit 1,599 1,627 1,563 1,591 1,730 Provisions (47) (63) (75) (60) (117) Associates 0 3 2 1 1 Exceptionals 0 0 0 0 0

Pretax Profit 1,552 1,567 1,489 1,531 1,614 Taxation (350) (301) (304) (318) (397) Minority Interests (11) (12) (13) (16) (16)

Net Profit 1,192 1,254 1,172 1,197 1,201 Growth (%) Net Interest Income Gth 9.1 0.2 (1.3) 1.6 4.4 Net Profit Gth 12.8 5.2 (6.5) 2.1 0.4


FY Dec 2013A 2014A 2015F 2016F 2017F Cash/Bank Balance 22,080 16,817 20,473 24,377 28,607 Government Securities 9,542 6,314 6,946 7,641 8,405 Inter Bank Assets 0 0 0 0 0 Total Net Loans & Advs. 219,416 243,222 267,511 291,598 314,936 Investment 41,224 64,237 67,449 70,822 74,363 Associates 159 157 157 157 157 Fixed Assets 1,303 1,476 1,549 1,627 1,708 Goodwill 2,004 2,083 2,083 2,083 2,083 Other Assets 9,997 11,415 12,384 13,359 14,325

Total Assets 305,725 345,722 378,554 411,663 444,584 Customer Deposits 250,873 276,540 304,194 331,572 358,097 Inter Bank Deposits 16,176 20,670 22,737 25,010 27,511 Debts/Borrowings 10,370 11,428 11,428 11,428 11,428 Others 7,109 8,209 8,588 8,985 9,402 Minorities 774 850 894 941 993 Shareholders' Funds 20,424 28,025 30,713 33,726 37,152




Company Guide

Public Bank






Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 06 Feb 15 18.78 22.60 BUY

2: 05 Mar 15 18.62 22.60 BUY

3: 12 Mar 15 18.40 22.60 BUY

4: 21 Apr 15 19.68 22.60 BUY

5: 14 Jul 15 18.98 22.60 BUY

6: 10 Aug 15 18.88 22.60 BUY

7: 04 Sep 15 17.68 21.95 BUY

8: 21 Oct 15 18.64 21.95 BUY

9: 22 Oct 15 18.64 21.95 BUY


1

2

3

4

5

6

7

8

9

16.41

16.91

17.41

17.91

18.41

18.91

19.41

19.91

20.41


RM


ed: JS / sa: BC

BUYLast Traded Price: RM6.05 (KLCI : 1,669.24) Price Target : RM7.10 (17% upside) Potential Catalyst: Cleaner corporate structure with improved ROE traction, coupled with recovery of capital markets and materialisation of IGNITE initiatives Where we differ: Our forecast on non-interest income growth is lower than consensus


Price Relative

Forecasts and Valuation FY Dec (RMm) 2014A 2015F 2016F 2017F Pre-prov. Profit 2,824 2,535 3,184 3,544 Net Profit 2,038 1,667 2,228 2,486 Net Pft (Pre Ex.) 2,038 1,667 2,228 2,486 EPS (sen) 76.9 58.6 70.8 77.4 EPS Pre Ex. (sen) 76.9 58.6 70.8 77.4 EPS Gth (%) 10 (24) 21 9 EPS Gth Pre Ex (%) 10 (24) 21 9 Diluted EPS (sen) 76.5 53.5 70.1 76.7 PE Pre Ex. (X) 7.9 10.3 8.5 7.8 Net DPS (sen) 5.80 4.05 21.0 23.0 Div Yield (%) 1.0 0.7 3.5 3.8 ROAE Pre Ex. (%) 11.5 8.0 9.3 9.6 ROAE (%) 11.5 8.0 9.3 9.6 ROA (%) 1.0 0.7 0.9 0.9 BV Per Share (sen) 706 736 785 827 P/Book Value (x) 0.9 0.8 0.8 0.7 Earnings Rev (%): - - - Consensus EPS (sen): 63.0 66.4 72.0 Other Broker Recs: B: 7 S: 4 H: 8


STARTING ON A CLEAN SLATE IN 2016

Cleaner structure post rights and reorganisation, BUY. We have a BUY recommendation on RHBC with RM7.10 TP. Post rights issue and reorganisation, RHBC is expected to have a cleaner structure. Cost savings from its rationalisation exercise, stronger loan growth and improvement in credit cost should also pave the way for a better FY16 for RHBC. The making of a more efficient corporate structure. The proposed rights issue and corporate restructuring should spell a new lease of life for RHB Banking Group upon completion. The rights issue should alleviate concerns on RHB Bank requiring any further capital injection and facilitate the group’s reorganisation plan. To reiterate, the proceeds will be used for the settlement of RHBC’s debt as well as housing RHB Investment Bank, RHB Islamic and RHB Insurance under the main operating entity, RHB Bank. RHB Bank will then assume the listed status of RHBC. The removal of goodwill at RHBC (from the purchase of a 30% stake in RHB Bank from Khazanah in 2007) and lower debt are key items to re-rate the group’s book value in 2016. Marching on with IGNITE 2017. RHBC will continue to build its business premised on its IGNITE 2017 strategy which emphasizes on 17 initiatives which revolve around 3 key themes; i.e augmenting funding for future growth, differentiation against peers over the medium term and talent optimisation. Refining its strategy in SMEs, asset management, Singapore, digital banking segments are among the initiatives to be looked at. ROE targets are set at 13% for 2017, which we think are challenging in the current operating environment, and 15% in 2020.

Valuation: RHBC is rated a BUY. Our RM7.10 TP, implying 0.9x FY16 BV, is derived from the Gordon Growth Model and is based on 10% ROE, 11% cost of equity and 4% growth. With the restructuring overhang removed, RHBC should see better share price performance going forward. However, to see a stronger re-rating beyond 1x BV, we would need a pick-up in business growth on a more sustainable basis.


Pick-up in capital market activities. A revival in capital market activities could pose an upside risk to our earnings forecast as we have taken a more conservative stance vs peers.

At A Glance

Issued Capital (m shrs) 2,588 Mkt. Cap (RMm/US$m) 15,660 / 3,667 Major Shareholders EPF (%) 34.7

Aabar Investment (%) 17.6 OSK (%) 8.3 Free Float (%) 39.4 3m Avg. Daily Val (US$m) 1.6 ICB Industry : Financials / Banks



RHB Capital Edition 1 Version 1 | Bloomberg: RHBC MK | Reuters: RHBC.KL Refer to important disclosures at the end of this report

65

85

105

125

145

165

185

205

5.0

6.0

7.0

8.0

9.0

10.0


Relative IndexRM

RHB Capital (LHS) Relative KLCI INDEX (RHS)


Company Guide

RHB Capital


Earnings Drivers:

Persistent NIM compression. NIM is expected to remain under pressure due to deposit competition stays rife. RHBC is focusing on driving CASA growth following its strategy to rebalance deposit mix. This strategy is expected to ease the pressure on NIM compression moving forward.

Bullish loan growth target. RHBC’s FY15F loan traction is impacted by a large repayment earlier in the year, which will result in an overall slower loan growth forecast for the year. We expect loan growth to pick up in FY16F to 8% in the absence of the large repayment, and supported by business loans which are largely shorter tenure working capital loans.

Enlarged investment banking business doing well. RHBC’s investment banking business is doing well post OSK acquisition with a strong non-interest income lift from higher brokerage, fund management and unit trust income, corporate advisory and underwriting fees. However, growing non-interest income will be a challenge going forward, given that capital market outlook remains weak.

Cost-to-income ratio higher than industry average. RHBC’s cost-to-income ratio is above the industry average of 50%. To keep a tighter lid on its cost-to-income ratio, RHBC rolled out a Career Transition Scheme (voluntary staff rationalisation exercise) in Sept-2015. The exercise was completed in Oct-2015 and resulted in a headcount cut of 12% of its total workforce. RHBC expects this to bring in RM193m cost savings per annum from FY16F and cost-to-income ratio should decline to 55%.

International contribution. RHBC’s overseas operations are mainly in Singapore, where it operates seven branches. Other countries RHBC operates in include Laos, Cambodia and Thailand which remains small to the Group. RHBC’s international operations are expected to contribute at least 13% of revenue in FY15.

Rights issue and reorganisation. RHBC proposed a rights issue of up to RM2.5bn on Apr 2015 along with an internal restructuring plan to tidy up its corporate structure. The rights shares are will be listed on 21 Dec, which marks the completion of the rights issue. Meanwhile, the corporate restructuring is expected to be completed by 2Q16 with the winding up of RHBC and the listing of RHB Bank.

Margin Trends

Gross Loan& Growth





1.9%

2.0%

2.1%

2.2%

2.3%

2.4%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2013A 2014A 2015F 2016F 2017F

RM m


-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0

200

400

600

800

1,000

1,200

1,400

1,600

2013A 2014A 2015F 2016F 2017F

RM m

Fees & Commissions


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

50,000

100,000

150,000

200,000

2013A 2014A 2015F 2016F 2017F

RM m



77%

82%

87%

92%

97%

107,588

127,588

147,588

167,588

187,588

207,588

227,588

247,588

2013A 2014A 2015F 2016F 2017F


46.0%

48.0%

50.0%

52.0%

54.0%

56.0%

58.0%

60.0%

62.0%

64.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2013A 2014A 2015F 2016F 2017F




Company Guide

RHB Capital

Balance Sheet:

Expecting improving asset quality. RHBC suffered from asset quality deterioration in early 2013 due to a specific corporate account. Since then, gross NPL ratio has been trending down and management targets to keep it below 1.8%. With the model risk adjustment made to its regulatory reserves, loan loss coverage should rise close to 75%, inching towards 80% over time.

Capital ratios lifted post rights. Post rights, RHBC’s CET1 ratio should be lifted to above 11% coupled with a more efficient corporate and capital structure. While dividend payout ratio was lower in 2014 and 2015, with the capital raising and corporate restructuring completed, RHBC should revert to its 30% minimum payout dividend policy with a dividend reinvestment plan.


Current valuations have priced in negatives. RHBC is currently trading at -2 SD below its 10-year P/BV mean, which prices in most negatives, in our view. However, to see a stronger re-rating beyond 1x BV, we would need to see a pick up in business growth on a more sustainable basis.

Key Risks:

Asset quality upset. This has been largely priced in, but further asset quality deterioration could pose downside risks to our recommendation, target price and earnings.

Sluggish capital market. Post acquisition of OSK, RHBC is now one of the key players in the Malaysian capital market. As the outlook on capital markets remain soft, growth of non-interest income could be weaker than expected.

Company Background

RHB Capital Berhad provides commercial and merchant banking services. Through its subsidiaries, the company provides finance and leasing services and trades securities. RHB Capital also provides nominee, unit trust, asset management, and insurance services.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2013A 2014A 2015F 2016F 2017F


12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

2013A 2014A 2015F 2016F 2017F


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2013A 2014A 2015F 2016F 2017F

Avg: 10.8x

+1sd: 12.2x

+2sd: 13.5x

‐1sd: 9.5x

‐2sd: 8.2x

7.1

8.1

9.1

10.1

11.1

12.1

13.1

14.1

15.1


(x)

Avg: 1.2x

+1sd: 1.36x

+2sd: 1.52x

‐1sd: 1.04x

‐2sd: 0.88x

0.6

0.8

1.0

1.2

1.4

1.6


(x)


Company Guide

RHB Capital

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F

Gross Loans Growth 9.2 17.0 6.0 8.0 8.0 Customer Deposits Growth (0.3) 14.1 9.0 9.0 9.0 Yld. On Earnings Assets 3.9 3.9 3.8 3.8 3.7 Avg Cost Of Funds 2.2 2.4 2.4 2.5 2.5

Income Statement (RMm)

FY Dec 2013A 2014A 2015F 2016F 2017F

Net Interest Income 3,274 3,291 3,422 3,637 3,810 Non-Interest Income 2,085 2,211 2,278 2,392 2,563


Pre-provision Profit 2,899 2,824 2,535 3,184 3,544 Provisions (429) (88.9) (317) (220) (237) Associates 1.22 0.28 0.33 0.40 0.48 Exceptionals 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 2,471 2,735 2,219 2,965 3,308 Taxation (627) (672) (545) (728) (812) Minority Interests (12.4) (25.5) (6.7) (9.0) (10.0) Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 1,831 2,038 1,667 2,228 2,486 Net Profit bef Except 1,831 2,038 1,667 2,228 2,486 Growth (%)

Net Interest Income Gth 10.6 0.5 4.0 6.3 4.8 Net Profit Gth 2.6 11.3 (18.2) 33.6 11.6


Business Mix (%)


Profitability (%)




Company Guide

RHB Capital

Quarterly / Interim Income Statement (RMm)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015


Operating Income 1,647 1,677 1,509 1,487 1,514 Operating Expenses (841) (987) (820) (843) (1,169)

Pre-Provision Profit 806 690 689 644 345 Provisions (91.3) (46.4) (44.1) 48.4 (50.5) Associates 0.03 0.18 0.09 0.04 0.11 Exceptionals 0.0 0.0 0.0 0.0 0.0

Pretax Profit 715 644 645 692 294 Taxation (163) (145) (165) (166) (99.8) Minority Interests (7.1) (12.8) (3.2) (2.3) (0.1)

Net Profit 545 486 476 525 194

Growth (%)

Net Interest Income Gth 1.0 (3.6) (0.7) (1.9) 7.6 Net Profit Gth (2.1) (10.7) (2.0) 10.1 (62.9)

Balance Sheet (RMm)

FY Dec 2013A 2014A 2015F 2016F 2017F

Cash/Bank Balance 9,999 16,237 24,098 28,284 32,951 Government Securities 185 492 516 542 569 Inter Bank Assets 2,773 2,299 2,414 2,534 2,661 Total Net Loans & Advs. 119,543 140,693 148,671 160,611 173,474 Investment 43,746 43,003 47,113 51,723 56,901 Associates 21.0 21.0 22.1 23.2 24.3 Fixed Assets 1,020 1,031 1,041 1,051 1,062 Goodwill 5,237 5,274 5,274 2,974 2,974 Other Assets 8,566 10,306 10,789 11,415 12,086

Total Assets 191,090 219,354 239,938 259,157 282,703

Customer Deposits 137,741 157,134 171,276 186,691 203,493 Inter Bank Deposits 16,998 21,350 24,552 28,235 32,470 Debts/Borrowings 9,729 12,386 11,208 8,987 9,275 Others 9,679 9,590 9,851 10,183 10,535 Minorities 204 99.8 106 115 125 Shareholders' Funds 16,739 18,794 22,945 24,946 26,804




Company Guide

RHB Capital


FY Dec 2013A 2014A 2015F 2016F 2017F


Asset Quality

NPL / Total Gross Loans 2.8 2.0 2.0 2.0 1.9 NPL / Total Assets 1.8 1.3 1.3 1.3 1.2 Loan Loss Reserve Coverage 63.7 62.0 75.7 76.3 78.0 Provision Charge-Off Rate 0.4 0.1 0.2 0.1 0.1

Capital Strength




Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 15 Jan 15 7.48 7.91 HOLD

2: 02 Mar 15 7.75 7.91 HOLD

3: 14 Apr 15 7.68 7.91 HOLD

4: 01 Jun 15 7.23 7.91 HOLD

5: 02 Jul 15 7.34 7.91 HOLD

6: 01 Sep 15 6.15 6.66 HOLD

7: 04 Sep 15 5.85 6.66 HOLD

8: 08 Sep 15 5.73 6.66 HOLD

9: 25 Sep 15 5.79 6.66 HOLD

10: 21 Oct 15 5.98 6.66 HOLD

11: 17 Nov 15 5.91 6.85 BUY12: 19 Nov 15 5.81 7.10 BUY13: 01 Dec 15 5.78 7.10 BUY


1

2

3 4

5

6

78

9

10

11

12

13

5.27

5.77

6.27

6.77

7.27

7.77

8.27


RM

Industry Focus

Malaysian Banks

Page 73

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.

DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.

ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 10 Dec 2015, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities).

COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates do not have a proprietary

position in the securities recommended in this report as of 31 Oct 20152. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.3. Compensation for investment banking services:

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of

Industry Focus

Malaysian Banks

Page 74

securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

alaysia This report is distributed in Malaysia by AllianceDBS Research SdnBhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom

This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.

Dubai This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Limited. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd. 12 Marina Boulevard, Marina Bay Financial Centre Tower 3

Singapore 018982 Tel. 65-6878 8888 , Company Regn. No. 196800306

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