Economics & Banking Update 28 April 2009

Equity Research PP11072/03/2010 (023549)

A ‘Small Bang’ approach…

Competition in financial sector to intensify gradually. Following the liberalization of equity ownership requirements in 27 non-financial services areas last week, the Government announced liberalization measures for the financial sector yesterday. The ‘gradualist’ approach does not come as a surprise, as we enter the final phase of the Financial Sector Master Plan which has laid out a road map for greater foreign participation by 2010.

Up to seven more foreign owned commercial/Islamic banks. The liberalization measures encompass three areas, namely:

up to seven new licenses for foreign commercial and Islamic banks – four in 2009 and three in 2011, which may be 100% foreign owned, and two more takaful operators;

increase in foreign equity limits in domestic insurance/takaful, investment banks and Islamic banks to 70% (from 49% previously);

greater operational flexibility for locally-incorporated foreign commercial banks, mainly in branch openings.

Existing domestic commercial banks’ foreign ownership limit of 30% is unchanged. Details of the measures are summarized in page 2.

Generally, in line with the “managed” approach in the past, as opposed to the “Big-Bang” approach. This fits in with the national development agenda of enhancing contribution of the services sector as a source of growth, employment, investment and trade, as well as laying the foundations for the domestic financial services sector to take advantage of the eventual recovery in the global economy and investment flows.

Gives local banks “some time” before the “crunch” in 2011. On the outset, the moves imply increased competition for the domestic commercial banks. But this will not come immediately as the two new commercial banking licenses in 2009 to foreign players are for "specialized expertise", relating to “industry-specific financing” like for shipping, technology, infrastructure and agro-based. Also, greater operational flexibility for foreign commercial banks for micro-financing should not have an immediate material impact on the domestic banks. In essence, the domestic commercial banks have a 1½ year time frame to raise their competitiveness and efficiency before the opening of the banking sector to three world-class commercial banks in 2011.

The liberalisation measures are LT positive in raising Malaysia’s competitiveness in the financial services sector. We however, maintain Underweight on the Banking sector. The immediate issues are on asset quality, as the global and domestic economy head for a slowdown. We stay concerned over rising NPLs and equity cash calls to boost core capital (although not needed for now). The main risk is a more severe and protracted economic downturn, with spikes in unemployment (3.7% @ end-2008), and asset deflation.

Financial services liberalisation Suhaimi Ilias Suhaimi_ilias@maybank-ib.com (603) 2297 8682 Wong Chew Hann wchewh@maybank-ib.com (603) 2297 8686

Financial Services Sector Liberalisation

28 April 2009 Page 2 of 4

Banking Sector – Peer Valuation Summary Stock Rec Shr px Mkt cap TP PER (x) PER (x) P/B (x) P/B (x) ROAE

(%) ROAE

(%) Gross

yld Gross

yld (RM) (RMm) (RM) CY09E CY10E FY09E FY10E CY09E CY10E FY09E FY10E Maybank * NR 4.46 31,566 NR 12.2 13.0 1.1 1.1 8.8 8.5 5.6 5.6 BCHB Sell 8.00 28,625 5.40 15.0 14.3 1.5 1.4 10.6 10.4 2.3 2.3 Public Bank Sell 8.45 29,845 7.60 12.6 12.2 2.7 2.4 22.3 20.7 5.9 6.5 RHB Cap Hold # 4.10 8,829 3.60 10.3 9.7 1.1 1.0 10.6 10.5 3.7 3.7 AMMB Hold # 3.04 8,278 2.50 11.8 11.4 1.1 1.0 9.0 8.6 2.3 2.0 EON Cap FV 3.58 2,482 3.00 12.1 11.2 0.7 0.7 6.3 6.4 2.8 2.8 HL Bank * NR 5.65 8,928 NA 10.8 10.4 1.6 1.4 15.1 13.9 3.9 4.0 AFG * NR 2.05 3,174 NA 9.5 8.4 1.1 1.0 12.3 10.9 3.3 3.7 Affin Hldgs * NR 1.74 2,600 NA 11.6 10.1 0.6 0.5 5.4 5.6 2.8 2.7 Sector (weighted) 124,326 12.4 12.1 1.3 1.2

* Consensus; # Under Review; Source: Maybank-IB

Malaysia: Liberalisation of Financial Services Areas Measures

Issuance of New Licences Up to 2 new Islamic banking licences in 2009 to foreign players with paid-up capital of at least USD1b

Up to 2 new commercial banking licences in 2009 to foreign players that will bring in specialised expertise (e.g. in shipping, technology, infrastructure, agro-based, etc.)

Up to 3 new commercial banking licences in 2011 to world-class banks that can offer significant value propositions to Malaysia (BNM’s guidelines for world class banks include Islamic banks with value propositions including “strengthening Malaysia’s position as an international Islamic financial hub and as a shared services and outsourcing centre”)

Up to 2 new family takaful licences in 2009

Increase in Foreign Equity Limits Up to 70% foreign equity limits (from 49% previously) for:

(i) existing domestic Islamic banks that wish to scale up their operations and expand globally (these banks must maintain a paid-up capital of at least USD1b)

(ii) investment banks; and

(iii) insurance companies and takaful operators.

A higher foreign equity limit beyond 70% for insurance companies will be considered on a case-by-case basis for those who can facilitate consolidation and rationalisation of the insurance industry.

Operational Flexibilities Locally-incorporated foreign commercial banks can establish up to ten microfinance branches to provide financial services to the underserved sectors of the economy;

Locally-incorporated foreign commercial banks will be allowed to establish up to 4 new branches in 2010 based on a distribution ratio of 1(market centre): 2(semi-urban): 1(non-urban);

Locally-incorporated foreign insurance companies and takaful operators are allowed to establish branches nationwide without restriction;

The restriction for locally-incorporated foreign insurance companies and takaful operators to enter into bancassurance / bancatakaful arrangements with banking institutions is now lifted;

Banks, insurance companies and takaful operators will be given greater flexibility to employ specialist expatriates;

Offshore banking institutions will be accorded flexibility to have a physical presence onshore from 2010, and offshore insurance companies from 2011.

Source: BNM Press Release

Financial Sector Master Plan - Banking

The FSMP, drawn up in 2001, is a change programme over 8-10 years (by 2010) with the objectives of improving efficiency, innovation, flexibility, resilience and dynamism in the banking system. The programme has been implemented over three stages with the following objectives:

Phase 1 – To develop a core set of strong domestic banking institutions. Therefore, initial steps shall focus on measures to strengthen the capability and capacity of domestic banking institutions, create an environment where the best domestic banking institutions emerge, and building and enhancing the financial infrastructure.

Phase 2 – To increasingly level the playing field for incumbent foreign players. This will add further competition to the industry, and provide wider choices for the consumers.

Phase 3 – To introduce foreign competition. In addition, there will be expansion of domestic banking institutions to foreign markets.

Source: FMSP

Financial Services Sector Liberalisation

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List of Banking Institutions in Malaysia, Feb ‘09 COMMERCIAL BANKS INVESTMENT BANKS

Domestic Commercial Domestic IB

1. Affin Bank Berhad 1. Affin Investment Bank Berhad

2. Alliance Bank Malaysia Berhad 2. Alliance Investment Bank Berhad

3. AmBank (M) Berhad 3. AmInvestment Bank Berhad

4. CIMB Bank Berhad 4. Maybank Investment Bank Berhad

5. EON Bank Berhad 5. CIMB Investment Bank Berhad

6. Hong Leong Bank Berhad 6. Hwang-DBS Investment Bank Berhad

7. Malayan Banking Berhad 7. KAF Investment Bank Berhad

8. Public Bank Berhad 8. Kenanga Investment Bank Berhad

9. RHB Bank Berhad 9. MIDF Amanah Investment Bank Berhad

Domestic Islamic 10. MIMB Investment Bank Berhad

1. Affin Islamic Bank Berhad 11. OSK Investment Bank Berhad

2. Alliance Islamic Bank Berhad 12. Public Investment Bank Berhad

3. AmIslamic Bank Berhad 13. RHB Investment Bank Berhad

4. Bank Islam Malaysia Berhad 14. Hong Leong Investment Bank Berhad

5. Bank Muamalat Malaysia Berhad 15. ECM Libra Investment Bank Berhad

6. CIMB Islamic Bank Berhad

7. EONCAP Islamic Bank Berhad

8. Hong Leong Islamic Bank Berhad

9. Maybank Islamic Berhad

10. Public Islamic Bank Berhad

11. RHB ISLAMIC Bank Berhad

Foreign Commercial

1. The Royal Bank of Scotland Berhad

2. Bangkok Bank Berhad

3. Bank of America Malaysia Berhad

4. Bank of China (Malaysia) Berhad

5. Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad

6. Citibank Berhad

7. Deutsche Bank (Malaysia) Berhad

8. HSBC Bank Malaysia Berhad

9. J.P. Morgan Chase Bank Berhad

10. OCBC Bank (Malaysia) Berhad

11. Standard Chartered Bank Malaysia Berhad

12. The Bank of Nova Scotia Berhad

13. United Overseas Bank (Malaysia) Berhad

Foreign Islamic

1. Al Rajhi Banking & Investment Corporation (Malaysia) Berhad

2. Asian Finance Bank Berhad

3. Kuwait Finance House (Malaysia) Berhad

4. HSBC Amanah Malaysia Berhad

5. OCBC Al-Amin Bank Berhad

6. Standard Chartered Saadiq Berhad

Source: BNM

Financial Services Sector Liberalisation

28 April 2009 Page 4 of 4

Definition of Ratings

Maybank Investment Bank Research uses the following rating system: STRONG BUY Total return is expected to exceed 20% in the next 12 months; high conviction call

BUY Total return is expected to be above 10% in the next 12 months

HOLD Total return is expected to be between above 0% to 10% in the next 12 months

FULLY VALUED Total return is expected to be between -10% and 0% in the next 12 months

SELL Total return is expected to be below -10% in the next 12 months

TRADING BUY Total return is expected to be between 10-20% in the next 6 months arising from positive newsflow e.g. mergers and acquisition, corporate restructuring, and potential of obtaining new projects. However, the upside may or may not be sustainable

Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear): Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings BV = Book Value FV = Fair Value PEG = PE Ratio To Growth CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share NTA = Net Tangible Asset ROSF = Return On Shareholders’ Funds EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date EV = Enterprise Value PBT = Profit Before Tax

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