Banking - Sector Weekly Reviews

1st – 7th Mar: OPR hike is positive

· A buoyant week for the banking sector
The banking sector had a buoyant week following Bank Negara
Malaysia’s decision to raise the Overnight Policy Rate (OPR) by 25 bps
to 2.25% last Thursday. The KL Finance Index gained 3.6% for the week,
outperforming the benchmark FBMKLCI’s gain of 2.3%. All banking
stocks posted gains, except for AMMB which shed 2.0% due to its
proportionately larger exposure to fixed rate loan which is a drag when
interest rate rises.

· OPR hike expected to be earnings accretive
The 25 bps hike in OPR is generally earnings accretive to banks as we
expect the re-pricing of loans to outpace that of deposits. This can be
observed from past increases in OPR from Nov 2005 to Apr 2006. During
the period, OPR was raised 3 times from 2.70% to 3.50%. Over the same
period, the spread of average lending rate over fixed deposit rate has
widened by about 50 bps. However, risk to this expectation is the intense
competition in the domestic banking sector which has driven ALR-FD
spread down since early 2007.

Among banking stocks, Alliance will have the greatest potential for
earnings accretion due to its high proportion of variable rate loans at 84%
as well as high proportion of current accounts and saving accounts
(CASA) at 37%. At the end of the other spectrum, AMMB, EONCap and
Affin will benefit the least from the OPR hike due to their high proportion
of fixed rate loans (> 40%) and low proportion of CASA (<20%).

· Other notable bankings news
Public Bank stated that it has no plans to raise capital in 2010 in
anticipation of the Basel 3 framework. Hong Leong Bank’s 49% joint
venture in a Chinese consumer finance operation has received regulator’s
operation approval. CIMB Group also obtained approval for subscription
of equity interest in Vietnam’s Vinashin Shipbuilding Finance Co
Securities LLC which will see the group subscribing for an initial 10%
stake at RM6.7m. Last but not least, RHB has entered into a
memorandum of understanding with TM Asia Life Malaysia to negotiate
the terms for forming a mutually exclusive 10-year bancassurance
alliance in Malaysia which may see RHB receiving an exclusivity fee of
RM100m.

· Maintain OVERWEIGHT
The sustained growth of non-interest income and slide in credit costs will
drive earnings growth in 2010. The added excitement of potential M&A
activities within the sector should keep interest buoyant for a while. We
like CIMB Group Holdings for its regional as well as its strong non-
interest income growth going forward. Public Bank continues to be an
investment for its superior earnings, ROE and asset quality, while we
believe Maybank will finally allay sceptics’ concerns when it continues
reporting strong quarterly profits going forward.

Market snapshot
The banking sector had a buoyant week following Bank Negara Malaysia’s decision to raise
the Overnight Policy Rate (OPR) by 25 bps to 2.25% last Thursday. The KL Finance Index
gained 3.6% for the week, outperforming the benchmark FBMKLCI’s gain of 2.3%. All
banking stocks posted gains, except for AMMB which shed 2.0% due to its proportionately
larger exposure to fixed rate loan which is a drag when interest rate rises. On major
shareholding changes, Employees Provident Fund were seen accumulating CIMB (+9.3m
shares) and Hong Leong (+1.9m shares) while selling Maybank (-0.6m shares) and Public
Bank (-0.4m shares). Others changes include PNB disposing 7.9m shares in Maybank and
Mitsubishi UFJ Financial Group accumulating 1.4m shares in CIMB.