MALAYAN BANKING HOLD. Dividend boost in final quarter Company report. (Maintained) Rationale for report: Company Result BANKING

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1 BANKING MALAYAN BANKING (MAY MK, MBBM.KL) 22 February 2013 Dividend boost in final quarter Company report Rachel Huang Rationale for report: Company Result HOLD (Maintained) Price Fair Value 52-week High/Low Key Changes Fair value EPS RM8.93 RM10.20 RM9.46/RM8.43 Unchanged Unchanged Investment Highlights We are maintaining our HOLD rating on Malayan Banking Bhd (Maybank), with an unchanged fair value of RM10.20/share. This is based on an ROE of 14.0% FY13F, which translates into a fair P/BV of 1.9x. YE to Dec FY12 FY13F FY14F FY15F Total income (RMmil) 16, , , ,665.0 Core net profit (RMmil) 5, , , ,130.3 Core EPS (Sen) EPS growth (%) Consensus EPS (Sen) n/a n/a DPS (Sen) BV/share (RM) PE (x) Div yield (%) P/BV (x) ROE (%) Stock and Financial Data Shares Outstanding (million) 8,440.0 Market Cap (RMmil) 75, Book value (RM/share) 5.00 P/BV (x) 1.8 ROE (%) 15.0 Major Shareholders Free Float (%) 35.5 Avg Daily Value (RMmil) 77.4 Amanahraya Trustees Bhd - Skim Amanah Saham Bumiputera (42.8%) Permodalan Nasional Bhd (5.3%) Price performance 3mth 6mth 12mth Absolute (%) (0.9) (1.3) 2.6 Relative (%) (0.3) 0.8 (0.6) ) M 6.00 (R ,779 1,478 1, In d e x P o in ts Maybank s FY12 is in-line with our estimate but about 3.0% above consensus RM5,580mil. The main positive surprise was the dividend. Maybank has proposed a final dividend comprising:- (a) GDPS of RM0.18 less 25% tax (NDPS of RM0.135), and (b) singletier dividend of RM0.15/share. Together with the gross DPS of RM0.32 (net RM0.24) already declared for 1HFY12, the total net DPS for FY12 would be RM This is above our forecast of net DPS of RM0.48. Net dividend payout ratio was at 74.7%, above our forecast of 70.8%. Elsewhere, group loans growth was at 12.9%, below the target of 15% but still a reasonably strong year. NIM registered an about 12bps drop on a YoY basis, in-line with expectations. Non-interest income was slower on QoQ basis, mainly because of a soft investment and trading income. Otherwise, fee income had picked up somewhat in 4Q compared to a relatively subdued 3Q. The other blip may be an increase in working capital impaired loans, attributed to a manufacturing company which had unexpectedly gone into impaired loan status in 4Q. However, given good recoveries in earlier quarters, credit costs overall at 23bps remained lower than the earlier guidance of 36bps. Nevertheless, the marginal improvement in asset quality in this quarter came mainly from write-offs rather than recoveries. Maybank reported a higher group common equity ratio of 10.96% (assuming an 85% dividend reinvestment rate) in 4QFY12, vs. 9.16% in 3QFY12 (assuming an 88% reinvestment rate). For the bank entity s common equity Tier 1 ratio, we estimate a marginal increase to 7.6% in 4QFY12, from 7.5% in 3QFY12 (this is assuming no phase-in arrangements as is allowed by Bank Negara, i.e. assuming full deduction of the bank entity s investments in subsidiaries and associates) F A F A F A F e b u e g b u e g b u e g b Maybank FBM KLCI PP 12247/06/2013 (032380) A u g -1 1 F e b -1 2 A u g -1 2 F 574 e b -1 3 Maybank s 4QFY12 s main positive surprise was its higher final dividend, which is likely to sustain the share price. Topline growth has improved from a softer 3QFY12 but was behind target. Credit cost is now normalising after previous good recoveries. We expect the main driver to share price to still be high dividend. We are maintaining our dividend payout ratio at 55.9% FY13F given the relatively low level for its banking entity s common equity ratio.

2 TABLE 1: RESULTS COMPARISON Figure 1: Quarterly Results Comparison YTD2011 YTDFY2012 YE June (RMmil) 2QFP12 3QFY112 4QFY112 QoQ YoY Cum 2011 YoY (FPE Dec) (FYE Dec) (FYE Dec) % chg % chg % chg Interest income 3, , , , , Interest expense (1,499.0) (1,609.1) (1,602.3) (0.4) 6.9 (5,519.5) (6,366.3) 15.3 Net interest income 2, , , , , Islamic Banking (7.3) 7.1 1, , Total NII 2, , ,721.3 (0.2) 2.9 9, , Insurance - net Non-interest income 1, , ,205.4 (8.4) 4.7 4, ,273.7 Total non-interest Income (incl insurance) 1, , , , , Operating income 4, , , , , Overhead expense (2,054.0) (2,044.0) (2,137.0) (7,457.9) (8,158.1) 9.4 Pre-provision profit 1, , , , , Loan loss provision (230.3) (87.4) (160.0) 83.0 (30.5) (449.0) (642.7) 43.1 Allowance/(writeback) of impairment of securities (68.3) (13.9) (18.6) 33.4 (72.8) (177.0) (60.2) (66.0) Operating profit after provision 1, , ,915.3 (3.7) , , Associate (4.6) (9.7) Impairment loss on investments n.m. n.m n.m. Pre-tax profit 1, , ,949.3 (3.7) , , Taxation and Zakat (414.7) (490.4) (411.8) (16.0) (0.7) (1,753.6) (1,977.3) 12.8 Minorities (56.9) (33.8) (77.9) (237.6) (172.6) (27.4) Net profit 1, , ,459.6 (2.7) , , EPS (sen) (9.4) Source: Company / AmResearch. Note: FP11 is for six months ending December Before this, FY11 was based on 12-months ending June FY12 onwards is based on new December FYE. IN-LINE WITH OUR EXPECTATIONS Maybank s FY12 is in-line with our estimate but about 3.0% above consensus RM5,580mil. Maybank has proposed a final dividend comprising:- (a) (a) GDPS of RM0.18 less 25% tax (NDPS of RM0.135) (b) single-tier dividend of RM0.15/share The proposed gross dividend consists of a cash portion of RM0.04/share single-tier dividend to be paid in cash and an electable portion of RM0.29 sen/share (net RM0.245/share), whereby the electable portion comprises:- (a) RM0.11 sen/share single-tier dividend; (b) RM0.18/share franked dividend (net RM0.135/share) Together with the gross DPS of RM0.32 (net RM0.24) already declared for 1HFY12, the total net DPS for FY12 would be RM This is above our forecast of net DPS forecast of RM0.48 FY12F. Net dividend payout ratio was at 74.7%, above our forecast of 70.8%. LOANS GROWTH OF 12.9% FOR FY12 Group loans growth picked up to 4.7% QoQ in 4QFY12 (3QFY12; 0.6%), translating into total loans growth to 12.9% for FY12. This came in below the targeted 15.2% for FY12F. The growth came mainly from the domestic global wholesale segment (20% of total loans), which swung back into positive growth in 4QFY12 at 2.1% QoQ (3QFY12: -2.6% QoQ). Loans growth for Malaysia was at 11.8%, which was above industry s 10.4% but below the target of 13.6%. Similarly, loans growth for Singapore was at 10.5%, just a tad above industry s 10.4% but also below the higher target of 11.4%. Loans growth for Indonesia was at 20.8%, below the industry s 23.1% and the target of 20.9%. Domestic consumer-based loans (43% of total loans) growth was slower at 2.5% QoQ, with the overall loans growth at 12.2% YoY (slower than 3QFY12 s annualised 13.5%). Maybank foresees the consumer loans growth to be sustained by its auto loans segment as well as renewed growth focus on its mortgage loan segment and revamped SME business model. The targeted overall loans growth for FY13F is now 12.0%. AmResearch Sdn Bhd 2

3 TABLE 2: LOANS DATA YE June (RMmil) 2QFP11 3QFY12 4QFY12 QoQ % chg Gross loans by purpose (FYE Dec) (FYE Dec) (FYE Dec) YoY % chg Securities 21, , , Transport vehicles 40, , , Landed properties - residential 51, , , Landed properties - non residential 17, , , Fixed assets (excl landed properties) 4, , , Personal use 7, , , Credit card 6, , , Consumer durables Construction 13, , , Working capital 104, , , Other purpose 15, , , less Islamic financing sold to Cagamas Bhd n.a. n.a. TOTAL GROSS DOMESTIC LOANS 281, , , Labuan Offshore n.a. n.a. GROSS LOANS 281, , , Gross loans by country Malaysia 177, , , Singapore 60, , , Indonesia 24, , , Labuan Offshore 4, , , Hong Kong SAR 6, , ,130.4 (2.8) 9.6 USA 1, , ,014.2 (8.8) (8.2) China 1, , , Vietnam (26.3) United Kingdom 1, , ,315.8 (1.1) (3.5) Brunei Cambodia Bahrain (15.3) (11.2) Philippines 1, , , Papua New Guinea (2.3) 18.7 Thailand n.a. n.a. Others n.a. n.a. Gross loans 281, , , Source: Company / AmResearch Deposit growth of 10.7% overall Deposit growth was better at 5.0% QoQ in 4QFY12, compared to the contraction of 2.9% QoQ. Group deposit growth was at 10.7%, again below the target of 12.3%. However, deposit excluding Malaysia grew at a higher rate of 14%. CASA growth was much stronger at 6.4% QoQ in 4QFY12 after a noticeable slowdown to 2.4% QoQ in 3QFY12. Total CASA contribution had consequently been raised to 35.2% in 4QFY12, from 34.7% in 3QFY12. In terms of deposit by holders, the gains came mainly from the government segment (4% of total deposit), which rose 15.1% QoQ in 4QFY12 following a drop of 30.4% QoQ in 3QFY12. We would note though that this segment is relatively volatile, as 2QFY12 s growth was a big jump of 60.6%. We believe this reflects the wholesale nature of this segment. The business deposit (45% of total deposits) segment was also stronger with a growth of 5.1% QoQ in 4QFY12, after a decline of 3.2% QoQ in 3QFY12. This possibly reflected the stronger loan growth to the domestic business segment. Individual deposits (44% of total deposits) also increased at a higher pace of 4.1% QoQ in 4QFY12 following a flat 1.3% QoQ. AmResearch Sdn Bhd 3

4 TABLE 3: KEY RATIOS FYE June / Dec 1QFP11 2QFP11 1QFY12 2QFY12 3QFY12 4QFY12 (FYE Dec) (FYE Dec) (FYE Dec) (FYE Dec) (FYE Dec) (FYE Dec) Profitability Average net asset yields (%) Average cost of funds (%) Average NIM (%) - per Maybank Average spread (%) Fee income ratio (%) Cost to income ratio (%) Effective tax rate (%) Annualised ROE (%) Balance Sheet Gross loans & advances (RMm) 272, , , , , ,798.3 Gross loan growth (% qoq) Deposits of customers (RMm) 293, , , , , ,155.5 Deposit growth (% qoq) (2.9) 5.0 CASA to total deposit (%) Gross loan/deposit ratio (%) Asset Quality Gross impaired loans (RMmil) 8, , , , , ,654.4 Gross impaired loans ratio (%) Loan loss cover (%) NPL movement: New impaired loans (RMmil) 1, , , ,091.9 Reclassed to performing Recoveries Subtotal: Reclassed to performing + recoveries 1, , , , Impaired loans written-off Annualised new NPL formation rate (%) Overall credit charge-off (%) Capital after dividends (%) Tier 1 CAR fully electable portion paid in cash Tier 1 CAR fully electable portion reinvested Total CAR fully electable portion paid in cash Total CAR fully electable portion reinvested Source: Company / AmResearch NIM records marginal decline of 6bps QoQ Maybank s reported a 6bps QoQ decline in NIM to 2.36% in 4QFY12, from 2.42% in 3QY12, likely due to asset growth. Full-year NIM was reported at 2.41% FY12, a 12bps decline YoY compared with 2.53% in CY2011. This is in line with the guidance of a NIM decline of about 10bps YoY for FY12. NON-INTEREST INCOME LOWER QOQ FOR SECOND CONSECUTIVE QUARTER Non-interest income declined for the second consecutive quarter, by 8.4% QoQ in 4QFY12 (3QFY12: -7.0% QoQ; 2QFY12: +4.5% QoQ). Due mainly to softer investment and trading income This was due to a softer investment and trading income line, with a net gain of RM72mil in 4QFY12 vs. a net gain of RM322.1mil in 3QFY12. AmResearch Sdn Bhd 4

5 TABLE 4: GROSS IMPAIRED LOANS / NPL DATA YE June (RMmil) 2QFP11 1QFY12 2QFY12 3QFY12 4QFY12 QoQ % chg (FYE Dec) (FYE Dec) (FYE Dec) (FYE Dec) (FYE Dec) YoY % chg Purchase of securities (16.8) (31.1) Purchase of transport vehicles (13.9) (0.9) Landed properties - residential 1, (10.7) (45.5) Landed properties - non residential (8.6) (30.9) Fixed assets (excl landed properties) n.a. n.a. Personal use (17.2) 6.6 Credit card (14.0) Purchase of consumer durables (50.6) (80.1) Construction (16.7) (57.9) Working capital 4, , , , , (26.9) Other purpose (16.0) (22.2) Total gross NPL 8, , , , ,654.4 (2.5) (29.6) Gross NPL ratios by sector (%) 2QFP11 1QFY12 2QFY12 3QFY12 4QFY12 Purchase of securities Purchase of transport vehicles Landed properties - residential Landed properties - non residential Personal use Credit card Purchase of consumer durables Construction Working capital Other purpose Total gross NPL ratio Source: Company / AmResearch Fee based income did relatively better Fee-based income did relatively better with a 12.9% QoQ improvement in 4QFY12, following a drop by 15.9% QoQ in 3QY12. The increase came from the service charges portion, which had now climbed back by 17.4% QoQ in 4QFY12 to RM450.2mil after recording a decline of 22.0% QoQ in 3QFY12. This would likely have included part of the investment banking fees, which had did well in 2QFY12 partly due to mega IPO deals. We believe 4QFY12 was lifted partly by M&A deals, i.e. the SapuraKencana deal in Malaysia. On an entity basis, Maybank Kim Eng recorded a 3.5% QoQ increase in gross income to RM291.8mil in 4QFY12 from RM281.8mil in 3QFY12, although this was of course nowhere close to the big jump to RM418.3mil in 2QFY12 (1QFY12: RM340.1mil) (due to participation in mega IPOs in Malaysia). Included in this was Malaysia s Kim Eng operations which registered a 16.8% QoQ improvement to RM116.4mil in income, from RM99.7mil in 3QFY12 (2QFY12: RM197.8mil; 1QFY12: RM131.6mil). CONTINUED IMPROVEMENT IN ASSET QUALITY Gross impaired loans balance has improved, with a 2.5% QoQ decline in 4QFY12. However, the working capital impaired loans recorded an increase of 5.9% QoQ, which was attributed to a longstanding manufacturing company which had unexpectedly been reclassified into impaired loan status in 4QFY12. Despite this, the company assures that asset quality trend remains healthy. The new manufacturing impaired loans were reflected as well in higher newly impaired loans in the quarter at RM1,091.9mil (3QFY12: RM959.8mil), although this was more than offset by higher write-offs (4QFY12: RM442.8mil; 3QFY12: RM392.2mil). Recoveries were relatively flat at RM807.2mil in 4QFY12 compared with RM782.4mil in 3QFY12. Thus the improvement in overall impaired loans is largely from write-offs rather than recoveries. AmResearch Sdn Bhd 5

6 Given the continued reduction in gross impaired loans as well as expansion in the loan base, gross impaired loans ratio continued to improve to 1.8% in 4QFY12 from1.9% in 3QFY12. As for impaired loans by country, the only one with a noticeable uptick was Indonesia, with the reported gross impaired loans rising by 9.4% QoQ to RM572.8mil in 4QFY12 from RM523.4mil in 3QFY12. This was in-line with BII s results which were reported earlier. Loan loss cover was sustained at 105.6% in 4QFY12, vs % in 3QFY12. The collective assessment rate (as a percentage of gross loans net of individual assessment balance) was notably lower in this quarter at 1.19%, down from 1.32% in 3QFY12 and 1.50% a year earlier in 4QFY12, thus contributing to lower collective assessment loan loss provisioning expenses. However, individual assessment expense has been raised in relation to the unexpected manufacturing impaired loans. Thus, credit cost rose to 21bps in 4QFY12 from a low 12bps (attributed then to good recoveries) in 3QFY12. 5) Credit cost guidance is now 30bps for FY13F. We have forecast 43bps FY14F. 6) Maybank believes it is likely to be able to maintain its dividend payout ratio at close to current levels given continuing strong support for its dividend reinvestment plan (DRP) from shareholders. We maintain our forecast for a dividend payout ratio at 55.9%. Maybank s 4QFY12 s main positive surprise was its higher final dividend, which is likely to sustain share price. Topline growth improved from a softer 3QFY12 but was behind target. Credit cost is now normalising after previous good recoveries. We are maintaining our HOLD rating on Malayan Banking Bhd (Maybank), with an unchanged fair value of RM10.20/share. This is based on an ROE of 14.0% FY13F, which translates into a fair P/BV of 1.9x. We expect the main driver to share price to still be the high dividend. We are maintaining our dividend payout ratio at 55.9% FY13F given the relatively low level for its banking entity s common equity ratio. Total credit cost for FY12 was still low though at 23bps (vs. CY2011 s 20bps), below the 36bps guidance. This was due to strong recoveries in earlier quarters. GROUP CAPITAL RATIOS AT COMFORTABLE LEVELS Maybank reported a higher group common equity ratio of 10.96% (assuming an 85% dividend reinvestment rate) in 4QFY12, vs. 9.16% in 3QFY12 (assuming an 88% reinvestment rate). For the bank entity s common equity Tier 1 ratio, we estimate a marginal increase to 7.6% in 4QFY12, from 7.5% in 3QFY12. Our estimate is assuming no phase-in arrangements as is allowed by Bank Negara, i.e. assuming full deduction of the bank entity s investments in subsidiaries and associates. Thus, bank entity level s common equity Tier 1 ratio remains relatively low. MAINTAIN HOLD WITH FAIR VALUE AT RM10.20/SHARE Maybank has articulated new KPI targets for its new FY13F: 1) ROE of 15.0%; 2) Group loans growth target of 12.0% (Malaysia: 12.0% Singapore: 11.0%; Indonesia: 22.0%); We maintain our forecast at 6.2% given recent subdued industry leading indicators. 3) Group deposit target of 12.0%; 4) NIM likely to see a compression of 10bps YoY FY13F. We have modelled in NIM compression of 6bps overall YoY FY13F. AmResearch Sdn Bhd 6

7 TABLE 5 : FINANCIAL DATA Income Statement (RMmil, YE 31 Dec) F 2014F 2015F Net interest income 4, , , , ,705.0 Non-interest income 3, , , , ,036.8 Islamic banking income 1, , , , ,923.2 Total income 8, , , , ,665.0 Overhead expenses (4,349.0) (8,158.1) (7,092.4) (7,136.5) (7,181.0) Pre-provision profit 3, , , , ,484.0 Loan loss provisions (329.1) (642.7) (1,413.3) (1,428.3) (1,443.1) Impairment & others (67.2) (60.2) Associates (14.6) (14.6) (14.6) Pretax profit 3, , , , ,026.2 Tax (887.1) (1,977.3) (2,086.1) (2,358.7) (2,676.8) Minority interests (93.3) (172.6) (186.3) (202.0) (219.1) Net profit 2, , , , ,130.3 Core net profit 2, , , , ,130.3 Balance Sheet (RMmil, YE 31 Dec) F 2014F 2015F Cash & deposits with FIs 49, , , , ,095.4 Marketable securities 95, , , , ,347.5 Total current assets 144, , , , ,442.9 Net loans & advances 276, , , , ,232.2 Statutory deposits Long-term investments 10, , , , ,890.8 Fixed assets 2, , , , ,781.6 Intangible assets 6, , , , ,531.3 Other long-term assets 11, , , , ,342.8 Total LT assets 306, , , , ,778.6 Total assets 451, , , , ,221.5 Customer deposits 314, , , , ,248.3 Deposits of other FIs 36, , , , ,887.4 Subordinated debts 27, , , , ,665.2 Hybrid capital securities 6, , , , ,787.3 Other liabilities 30, , , , ,996.6 Total liabilities 415, , , , ,584.7 Shareholders funds 34, , , , ,303.9 Minority interests 1, , , , ,332.9 Key Ratios (YE 31 Dec) F 2014F 2015F Total income growth (%) n/a Pre-provision profit growth (%) n/a Core net profit growth (%) n/a Net interest margin (%) Cost-to-income ratio (%) Effective tax rate (%) Net dividend payout (%) Key Assumptions (YE 31 Dec) F 2014F 2015F Loan growth (%) Deposit growth (%) Loan-deposit ratio (%) Gross NPL (%) Net NPL (%) Credit charge-off rate (%) (0.1) (0.2) (0.4) (0.4) (0.4) Loan loss reserve (%) RWCR (%) Core (%) Source: Company, AmResearch estimates AmResearch Sdn Bhd 7

8 Published by AmResearch Sdn Bhd ( P) (A member of the AmInvestment Bank Group) 15 t h F l oor B a ng un an A mb a n k Group 55 Jalan Raja Chulan Kuala Lumpur Tel: ( 03 ) ( r e sea rc h) F a x: ( 03 ) Printed by AmResearch Sdn Bhd ( P) (A member of the AmInvestment Bank Group) 15 t h F l oor B a ng un an A mb a n k Group 55 Jalan Raja Chulan Kuala Lumpur Tel: ( 03 ) ( r e sea rc h) F a x: ( 03 ) The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd Benny Chew Managing Director AmResearch Sdn Bhd 8