Malaysian Banks. Malaysia Industry Focus. Riding the sentiment rally. DBS Group Research. Equity 20 Apr 2017 KLCI : 1,738.95

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1 PBV (x) FY17 Malaysia Industry Focus Malaysian Banks Refer to important disclosures at the end of this report DBS Group Research. Equity 20 Apr 2017 Riding the sentiment rally Valuations of selected banking stocks have ran ahead of fundamentals, but this could persist for at least another quarter There could potentially be more upside for heavyweights (MAY and CIMB), as evidenced by previous pre-election valuation movements We expect a gradual recovery in fundamentals but retain a tinge of caution on asset quality Place bets on MAY (to ride on the sentiment driven rally), PBK as well as HLB (for solid fundamentals), AMMB (for potential turnaround) and BIMB (for superior growth) Liquidity influx stretching valuations. CIMB and MAY were prime beneficiaries of the liquidity-driven rally, as evidenced by the increase in foreign shareholding by 3ppts q- o-q. Fundamental improvements in AMMB and Affin coincided with this period, resulting in a step-up in valuations. The more defensive banks such as PBK and HLB saw relatively flat share price performance. Sentiments may continue to outweigh fundamentals. At this juncture, the valuations of the Malaysian banks have indeed moved ahead of fundamentals when compared against regional peers. That said, we would not be surprised if the banks continue to trade at premium valuations for at least another quarter as the liquidity driven rally could persist amid a pick-up in interest for domestic equities as well as optimism leading to an expected general election in 3Q17. Based on our analysis of the past three general elections, we see more pronounced movements in the valuations of MAY and CIMB compared to the other banks (refer to page 4). Assuming a potential valuation premium of 0.3x BV for these two banks, there could be another 16% upside to current share price for both. Slight reduction in uncertainties. A pick-up in retail loans application and approval trends has injected some belief that we are seeing the end of the downtrend for retail loan growth. Meanwhile, barring any extensive competition for deposits, NIM compression could ease off as banks shed their expensive time deposits accumulated in the past year. Asset quality remains a wildcard, but firmer commodity prices have prompted us to have a more positive bias. Take your pick. We pick MAY as the best proxy to ride on a plausible sentiment-driven rally prior to the election date. HLB and PBK retain their positions as our fundamental picks, as both banks continue to demonstrate resilience against the odds. We also like AMMB and BIMB for a compelling turnaround story and superior growth, respectively. KLCI : 1, Analyst Sue Lin LIM Lynette CHENG suelinlim@dbs.com lynettecheng@alliancedbs.com STOCKS Malaysian Banks: YTD 2017 share price performance Source: Bloomberg L.P Finance, DBS Bank, AllianceDBS ASEAN Banks: P/B vs ROE scale (FY17F) Malaysia Philippines Average Thailand Indonesia % 12.0% 14.0% 16.0% 18.0% ROE (%) FY17 12-mth Price Mkt Cap Target Price Performance (%) RM US$m RM 3 mth 12 mth Rating Affin Holdings , HOLD Alliance Financial ,393 NA 7.2 (2.4) NR AMMB Holdings , BUY CIMB Group , HOLD Hong Leong Bank , BUY Maybank , (1.2) BUY Public Bank , (0.8) 4.4 BUY RHB Bank , (17.3) HOLD BIMB Holdings , BUY Hong Leong , BUY Source: DBS Bank, AllianceDBS, Bloomberg Finance L.P. Closing price as of 19 Apr 2017 ed: CK / sa:bc, PY

2 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec Jan 11-Jan 18-Jan 25-Jan 01-Feb 08-Feb 15-Feb 22-Feb 01-Mar 08-Mar 15-Mar 22-Mar 29-Mar 05-Apr 12-Apr 19-Apr Industry Focus Sentiments outweighing fundamentals 1Q17 share price performance boosted by liquidity influx. A global liquidity driven-rally on reflation expectation has helped Malaysian equities to stage a strong rebound in 1Q. Given the heavy weightage carried in the FBMKLCI index, the sturdy share price performance of the banking stocks comes as no surprise. YTD, the share price of heavyweights such as CIMB and MAY have increased by 19% and 12%, respectively. Congruently, the foreign shareholding level has increased q-oq, by +2.9ppts for MAY and +3.0ppts for CIMB. Despite holding the highest weightage in KLCI, PBK s share price (+0.5%) was unaffected due to its defensive qualities. The same can be said for HLBK (+3%). In this period, AMMB (+15%) and Affin s (+17%) share price outperformance was underpinned by improvement in the fundamentals of these banks. Malaysian Banks: YTD 2017 share price performance Source: Bloomberg L.P Finance, DBS Bank, AllianceDBS MAY, PBK, CIMB: Foreign shareholding level % CIMB, 19.1 AHB, 17.1 AMM, 15.1 MAY, 12.0 RHB, 7.8 AFG, 7.8 HLB, 3.3 PBK, 0.5 CIMB PBK MAY RHB AMM AFG HLB AHB Malaysian Banks: Estimated weightage to KLCI Company Name Estimated weight in Index (%) AMMB Holdings Bhd 1.74 Astro Malaysia Holdings Bhd 1.11 Axiata Group Bhd 3.93 British American Tobacco Malaysia Bhd 1.34 CIMB Group Holdings Bhd 5.32 DiGi.Com Bhd 3.91 Westports Holdings 0.97 Genting Bhd 3.77 Genting Malaysia Bhd 2.98 Hong Leong Bank Bhd 1.71 Hong Leong Financial Group Bhd 0.66 IHH Healthcare Bhd 3.79 IJM Corporation Bhd 6 IOI Corp Bhd 3.43 KLCCP Stapled Group 0.74 Kuala Lumpur Kepong Bhd 2.69 Malayan Banking Bhd 8.44 Maxis Bhd 3.27 MISC Bhd 2.29 Petronas Chemicals Group Bhd 4.17 Petronas Dagangan Bhd 1.45 Petronas Gas Bhd 3.48 PPB Group Bhd 2.00 Public Bank Bhd RHB Bank Bhd 0.74 Sime Darby Bhd 5.53 Telekom Malaysia Bhd 2.88 Tenaga Nasional Bhd Hap Seng Consolidated Bhd 1.10 YTL Corp Bhd 1.69 Total financial sector 32 Source: DBS Bank, AllianceDBS Stretched valuations. At this juncture, the valuations of the Malaysian banks have indeed moved ahead of fundamentals. As we plot the prospective ROE and P/B valuation of the banks within the region, we find that the Malaysian banks sit above the trend line, this implying more expensive valuations relative to ROE. MAY CIMB PBK Page 2

3 PBV (x) FY17 Industry Focus ASEAN Banks: P/B vs ROE scale (FY17F) 1.4 Malaysia Philippines 1.3 Average 1.2 Thailand 1.1 Indonesia Malaysian Banks: Rolling forward P/B valuation PBV (X) SD, SD, Mean, SD, SD, % 12.0% 14.0% 16.0% 18.0% ROE (%) FY17 Expect valuations to hold up in 2Q17. That said, we would not be surprised if the banks continue to trade at premium valuations for at least another quarter as the liquidity-driven rally could persist amid a pick-up in optimism for domestic equities. Firmer commodity prices, improving earnings prospects, a steadier MYR exchange rate, M&A activities and newsflows on mega infrastructure projects are among the catalysts for Malaysian equities. Sentiment also has a part to play. In particular, with the street expecting that the 14th general elections will be held in 3Q17, an election rally is a widely expected phenomenon. Sentiments may boost CIMB and MAY s share price further. An analysis of the valuation trends exhibited on the year of the past three general elections (refer to table on pg 4) shows that barring an event risk, there are more pronounced movements in the valuations of MAY and CIMB compared to the other banks. Assuming a potential valuation premium of 0.3x BV for these two banks and half of that (0.15x BV) for the remaining banks, we see upside potential still apparent for CIMB and MAY at more than 15% from the current share price. Malaysian banks: Potential upside to share price Current share price Current valuation Valuation before recent rally Potential premium to valuation Potential valuation Potential share price Potential upside RM PB x PB x PB x PB x RM % Affin AMMB CIMB HLBK MAY PBK RHB Source: Companies, Bloomberg Finance L.P., DBS Bank, AllianceDBS Page 3

4 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Industry Focus Malaysian banks: Valuation trends during election year Valuation chart PB (x) GE11 GE12 GE13 Polling date PB (x) PB (x) Polling date Polling date Affin AFG AMMB CIMB HLBK MAY PBK RHB Affin AFG AMMB CIMB HLBK MAY PBK RHB Affin AFG AMMB CIMB HLBK MAY PBK RHB Timeline of events A run-up in valuation occurred from Feb 2004 and lasted for more than a month until the polling date of 21 Mar 2004 or slightly less than a month before the dissolution of parliament was announced. In GE12, the ruling party attained one of the worst results in the coalition s history (notwithstanding GE13 s results), with only 63% of seats won. Valuations plummeted two weeks prior to the polling date of 8 Mar In 2Q08, weak capital markets led to a drag on selected banks earnings. The collapse of Lehman Brothers in Sep 2008 marked the beginning of the Global Financial Crisis. GE13 was yet another year of dismal election results for the ruling party, with only 60% of seats won. Valuations stayed relatively stagnant for as long as four months before the polling date of 5 May The banks traded closer to their fundamental valuations after the polling date. Comment CIMB and MAY both saw an increase in valuations by 0.3x BV. The valuations of AFG and AMMB experienced a sharper increase (of close to 0.4x BV) due to impending corporate actions (entrance of Temasek as shareholder for AFG, listing of investment AmInvestment Group for AMMB). The valuations of the remaining banks moved by 0.2x BV. Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS PBK experienced the biggest dip (-0.7x BV) following a strong run-up in valuations prior to this. But valuations picked up immediately after the elections. MAY s valuations declined by 0.3x BV but stayed low as the purchase of Bank Internasional Indonesia (BII) was not well-received by the market. The valuations of the remaining banks dropped by 0.1x 0.2x BV. Post polling date, CIMB posted the strongest increase in valuation among the banks, at slightly more than 0.2x BV. HLB and PBK experienced a decline in valuations prior to the election due to concerns over shareholding structure changes in anticipation of the implementation of Financial Services Act On the contrary, there was a gradual re-rating of MAY s valuation due to improving fundamentals (removed capital overhang and BII gaining traction).

5 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17F 0.28% 0.16% 0.20% 0.18% 0.78% 0.68% 0.72% 0.51% 0.32% 0.43% 0.35% 1.16% 1.02% 1.31% 1.24% Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Industry Focus Reducing headwinds Slight improvement in fundamentals. Apart from MAY, we have not adjusted our earnings projection for the remaining banks. Nonetheless, we believe there is less uncertainty surrounding some of the critical factors for the sector. Indeed loan growth has moderated from past levels, however, a pickup in the leading indicators (application and approval trends) for retail loans have injected some belief that we are seeing the end of the downtrend for retail loan growth. Retails loans made up 54% of total system loans as of Feb Meanwhile, barring any extensive competition for deposits, NIM compression could ease as banks shed their expensive time deposits accumulated in the past year Malaysian Banks: Earnings growth % CY12 CY13 CY14 CY15 CY16 CY17F (1.1) (2.8) AMMB AFFIN CIMB HLB MAY PBK RHBBANK BIMB AFG Sector Malaysian Banks: NIM 4.00% 3.50% 3.00% 2.50% 2.00% 0% 1.00% 0.50% 0.00% 2.46% 2.38% 2.25% % 2.15% 2.12% CY12 CY13 CY14 CY15 CY16 CY17F AMMB AFFIN CIMB HLB MAY PBK RHBBANK AFG Sector Malaysian Banks: Retail loans leading indicators % Retail loans application y-o-y growth Source: BNM, DBS Bank, AllianceDBS Asset quality remains the wildcard. Firmer commodity prices prompted us to have a more positive bias towards the assetquality resilience of the banks. Nevertheless, we keep a tinge of caution as we understand that several quarters are needed for a substantial pick-up in business activities to become apparent. Malaysian Banks: Credit cost 2.00% 1.80% 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Source: Companies, DBS Bank, DBS Bank, AllianceDBS Malaysian Banks: Impaired loans ratio 4.0% 3.5% 3.0% 2.5% 2.0% % 1.0% 0.5% 0.0% Sector credit cost 2.4% 2.0% Retail loans approval y-o-y growth Sector credit cost ex CIMB, MAY, RHB 1.8% 1.8% 1.9% 1.8% CY12 CY13 CY14 CY15 CY16 CY17F AMMB AFFIN CIMB HLB MAY PBK RHBBANK AFG Sector ex PBK Page 5

6 Industry Focus Stock picks Adding MAY to our BUY list. Following an upward revision to earnings in MAY (on the back of lower credit cost and higher non-interest income growth assumption), we have bumped up our TP to RM10.00 (from RM8.00) and upgraded our recommendation to BUY (from HOLD). MAY is our pick for a tactical bet to ride on a plausible sentiment-driven rally prior to the election date. While CIMB (HOLD; TP: RM5.00) is also a proxy to ride on this positive wave, we opine that earnings growth is still insufficient to close the gap for its T18 targets. Fundamental picks remain intact. HLB (BUY; TP: RM15.00) and PBK (BUY; TP: RM22.50) retain their positions as our fundamental picks, as both banks continue to demonstrate resilience against the odds. We like AMMB (BUY; TP: RM5.20) for a compelling turnaround story, with expectations for EPS to grow by 12% y-o-y in FY18 (premised on lower NIM compression, higher non-interest income and lower expenses). We also like BIMB (BUY; TP: RM5.00) as we expect its strong niche in Islamic banking to support its better-than-industry financing growth. Malaysian banks: Peer comparison Banking Group Market cap Price Target Price Rating PE (x) CAGR P/BV (x) ROE (%) Net div (%) (US$bn) (RM/s) (RM/s) CY16A CY17F CY18F ^ (%) CY16A CY17F CY18F CY17F CY17F Affin Holdings 1, HOLD 9.7x 9.4x 8.5x x 0.6x 0.6x 6.6% 4.3% Alliance* 1, NA NA 11.9x 1x 11.0x x 1.3x 1.3x 11.1% 3.8% AMMB 3, BUY 1x 10.6x 9.4x x 0.9x 0.9x 8.8% 3.8% CIMB Group 11, HOLD 13.4x 12.3x 11.2x x 1.0x 1.0x 8.5% 3.6% Hong Leong 6, BUY 14.2x 12.5x 11.3x x 1.3x 1.2x 10.5% 2.8% Maybank 20, BUY 13.4x 12.9x 12.1x x 1.3x 1.2x 10.1% 5.9% Public Bank 17, BUY 14.9x 14.1x 13.1x x 2.1x 1.9x 15.3% 2.8% RHB Bank 3, HOLD 11.3x 10.0x 9.0x x 0.9x 0.8x 9.0% 3.0% Weighted average 13.5x 12.7x 11.7x 7.6 x 1.4x 1.3x 11.1% 4.1% Weighted average (ex-public Bank) 13.1x 12.2x 11.2x x 1.1x 1.1x 9.6% 4.5% Simple average 12.5x 11.7x 10.7x x 1.2x 1.1x 10.2% 3.8% Simple average (ex-public Bank) 12.2x 11.3x 10.3x x 1.0x 1.0x 9.6% 3.9% BIMB 1, BUY 12.2x 11.3x 10.6x x 1.6x x 15.1% 3.0% Hong Leong Financial Group 4, BUY 12.3x 10.8x 10.0x x 1.1x 1.0x 10.5% 2.9% * Based on Bloomberg consensus ^ Refers to a 2-year EPS CAGR for CY16-18F Source: Companies, Bloomberg Finance L.P., DBS Bank, AllianceDBS Page 6

7 Industry Focus 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 Completed Date: 20 Apr :51:25 (MYT) Dissemination Date: 20 Apr :44:28 (MYT) Sources for all charts and tables are DBS Bank, AllianceDBS unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd, AllianceDBS Research Sdn Bhd (''AllianceDBS''). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates 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, AllianceDBS Research Sdn Bhd (''AllianceDBS''). 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 ) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research 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. 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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. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. 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