MALAYAN BANKING BHD. (MAYBANK) Prepared by: L. C. Chong. Investment Strategy. Analysis Date: 23/08/2013

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1 MALAYAN BANKING BHD Analysis Date: (MAYBANK) Prepared by: L. C. Chong All figures in thousands of Ringgit Malaysia except per share values and ratios 23/8/213 Financial Year: /12/212 Latest Quarter: 31/12/212 Price: 9.95 Stock Category: Large Capital Growing Overview Malayan Banking Berhad and its subsidiaries provide various banking and financial services. As of June 3, 29, the company operated 45 branches. The company s product and service range includes commercial banking, investment banking, Islamic banking, offshore banking, insurance and takaful, factoring, trustee services, asset management, stock broking, nominee services, venture capital, and Internet banking. The company provides various services and products, including mortgage and automobile financing, credit and debit cards, bancassurance, wealth management, as well as retail and Internet banking. Segments The company operates in four segments: Banking, Investment Banking, Insurance and Takaful, and Others. Banking The Banking segment offers consumer and business banking products and services. It provides consumer banking products and services to individuals, including savings and fixed deposits, remittance services, and current accounts; consumer loans, such as housing loans and personal loans; unit trusts; bancassurance products; and credit cards. This segment also offers business banking products and services, which include long term loans, such as project financing; short term credit comprising overdrafts and trade financing; and fee based services, including cash management and custodian services to large corporate and public sector, and small and medium enterprises. Corporate and Business Banking, which include corporate and commercial segments, caters to public listed companies, multinationals and institutional clients, as well as SMEs through various services that include cash management and trade financing. Investment Banking The Investment Banking segment engages in the business of discount house and securities brokerage services. It offers direct lending, advisory banking services, bond issuance, equity financing, syndicated financing, mergers and acquisitions advisory services, debt restructuring advisory services, and share and futures dealings services. The Investment Banking Group spearheaded by Maybank Investment Bank offers a range of investment solutions from corporate finance to debt capital markets, equity markets to research and strategic advisory. Insurance and Takafu The Insurance and Takaful segment involves in the business of underwriting various classes of general and life insurance, offshore investment life insurance business, and general takaful and family takaful businesses. The company s Insurance business under the Etiqa brand offers all types and classes of Life and General conventional insurance as well as Family and General Takaful plans. Other segment The Others segment include asset and fund management, nominee and trustee services, and custodian services. It operates in Malaysia, Singapore, Indonesia, the Philippines, Papua New Guinea, Brunei Darussalam, the People s Republic of China, Hong Kong, Vietnam, the United Kingdom, the United States, Cambodia, and Bahrain. Significant Events On December 28, 29, Bank Of China (Malaysia) Berhad entered into strategic alliance relationship in renminbi business with six lenders in Malaysia. The bank is to release personal, corporate, and financial institutional deposit business with the six partners, including Malayan Banking Bhd, Public Bank Berhad, CIMB Investment Bank Berhad, RHB Bank, OCBC Bank (Malaysia) Berhad, and Alliance Bank Malaysia Bhd. History Malayan Banking Berhad was founded in 196. Board: Main Board FBMKLCI: YES Industry: FINANCIALS Sub Sector: BANKS Ownership: Corporate Owned (Local);Government & Politically Linked Investment Strategy Portfolio Strategy: Lump Sum + Top Up Averaging Down Method: Dollar Cost/Value Averaging Portfolio Execution: Buy and Monitor Basis for Buying & Selling: EPS QoQ Growth EY % OSCILLATOR Institutional Sponsorship Market Direction L. C. Chong Page 1 of 14

2 Financial Performance 25% 2% 15% Sustainable Profitability Rating: Average Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency ROE 15% 11.78% 11.1%.34% 8.4% 24% ROIC 15% 4.87% 5.39% 98.34% 5.42% % MAYBANK s ROE, in general, is very close to my benchmark, but not as good as PBBANK. 1% 5% % ROE 15% 17% 15% 17% 17% 15% 3% 14% 22% 14% ROIC 2% 7% 2% 22% 2% 16% 4% 18% 22% 2% Earnings Growth Quality Rating: Very Good 4,, 1.2 Result YoY % 3 Y % 5 Y % 1 Y % Consistency 35,, 3,, 25,, 2,, Revenue % 19.72% 7.55% 9.3% 69% EPS % 14.96% 14.34% 5.66% 8% Revenue and EPS are riding in uptrend, except for 29 (sub prime crisis). 15,, 1,, 5,, PAR Adjusted EPS Revenue Linear (PAR Adjusted EPS) Linear (Revenue) L. C. Chong Page 2 of 14

3 Healthy Cash Flow 12% 1% 8% 6% 4% 2% % 2% 4% CROIC 1% 23% 2% 99% 4% 29% 28% 32% 24% 6% CCC Rating: Average Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency CROIC 15% 3.75% 1.26% 1.79%.75% 6% CCC CROIC is not really applicable to banks. 15,, 1,, 5,, 5,, Cash Flow Growth Quality Rating: Very Good Result YoY 3 Y 5 Y 1 Y Consistency Ops. Cash 1.% 726.7% 26.22% 8.31% 13% Owner Earnings % 19.44% 28.45% 3.83% 27% Net Operating Cash Flow is very inconsistent, but this is common for banks. However, MAYBANK s owner earnings is surprisingly in good uptrend. 1,, 15,, Net Ops. Cash Owner Earnings Linear (Net Ops. Cash ) Linear ( Owner Earnings) L. C. Chong Page 3 of 14

4 12% 1% 8% 6% 4% 2% % 2% 4% Sustainable Competitive Advantage Rating: Very Good Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency NPM 1% 2.55% 18.68%.71% 19.1% 1% FCF/Sales 5% 5.15% 1.65% 4.21%.48% 19% Despite facing stiff competition, MAYBANK is still able to maintain 2% net profit margin. Its net interest income and Islamic banking income increased by RM171.2mil or 6% from a year ago. MAYBANK s net impaired loans ratio improved to 1.9% as at June 3, 213, comparing to 1.28% as at June 3, 212 For more comprehensive analysis on competitive advantage of MAYBANK, please refer pdf 6% NPM 22% 23% 22% 22% 21% 18% 4% 21% 41% 21% FCF/Sales 12% 73% 17% 13% 41% 34% 43% 38% 65% 5% Conservative Debt Rating: Average 25% 2% 15% 1% 5% % Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency DCR 15% 8.55% 15.5% 4.14% 1.% 28% Debt/Eqty. < % % 2.32% 2.95% 2% 1% Quick R. 1% 49.89% 55.84% 43.26% 24.1% % Bank business basically is buying and selling money. In theory, MAYBANK won t be able to pay off their debts, but in practical, MAYBANK has very huge shareholder s fund and reserves. Besides, they are able to give dividend every year. So I assume MAYBANK financial health is good. 5% DCR 38% 256% 62% 334% 99% 64% 47% 43% 53% 45% Debt/Equity %191.73%121.89%1183.6% % %115.91%174.6%237.17%125.86% Quick R. 47% 75% 33% 94% 96% 9% 86% 92% 136% 39% L. C. Chong Page 4 of 14

5 Economic Moats Cost Advantage Even if MAYBANK enjoys high net profit margin, MAYBANK (in fact, all banks) is facing Net Interest Margin compression. Analysts forecasts that NIM compression will persist in 213 and 214. Also, analysts predict that credit costs will rise going forward. Switching Costs Consumer switching costs are also quite low as consumers can change their preferred bank easily. Not to mention attractive refinancing offers provided by other banks. Not available or no moat found Network Effect Not available or no moat found Intangible Assets Not available or no moat found Efficient Scale Reference: v3 n2 9.pdf L. C. Chong Page 5 of 14

6 Market Timing Discounted Cash Flows Valuation 3 Y 5 Y 1 Y Good 8% Base 4% Bad % Ugly 4% Good 8% Base 4% Bad % Ugly 4% Good 8% Base 4% Bad % Ugly 4% Fair Value Buy Under Actual M.O.S. 7.47% 2.92% 14.92% 28.82% 1.25% 3.76% 2.38% 4.18% 13.45% 6.74% 31.68% 62.42% Refer Appendix 1 Growth rate applied in Reverse DCF to reach the current stock price (9.95): 4% Refer Appendix 2 EY% Valuation EPS QoQ Growth EY% High EY% Low Buffer R4Q EPS FY13 EPS* FY14 EPS* Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 QoQ % 7.33% 5.42% 1% % Fair Value Refer Appendix 3 Insider Trading Refer Appendix 4 Buy Under Sell Above (blank) # Securities Price (blank). Grand Total Comments Refer Appendix 5 Since MAYBANK s owner earnings increase consistently, looks like I can use DCF valuation. However, based on my experience, DCF valua on is not working well with banks in prac cal. As for EY% valuation, based on the current R4Q EPS, MAYBANK is still undervalued. I will closely monitor this counter to accumulate more shares. I will wait for good bargained price or enter by using Technical Analysis. L. C. Chong Page 6 of 14

7 Notes Created Date Details Type Source Type 1/8/213 3 類消息纏身銀行股震盪 Sector Analysis Newspaper busy weekly banks1.pdf 5/8/213 Unexpected jump in impaired loans, lower than expected loan growth and significant slowdown in capital market. Risk Analyst Report 3/8/213 发出高息定存优惠银行抢高端客户 Note Newspaper e993b6e8a18ce68aa2e9ab98e7abafe5aea2e688b7.pdf 2/8/213 Abdul Farid is appointed Maybank s new CEO/ president Note Newspaper 12/7/213 Top 3 banks to benefit from ghter lending criteria, says Moody s Note Newspaper 11/7/213 Maybank extends reach to India 1/7/213 h p://klsenew.klsetracker.com.my/brf.php?brcd=21259 Growth Driver Announcement Newspaper Newspaper MALAYAN BANKING has allocated RM1m for information technology (IT) investments over 45 months in four operating countries. 1/7/213 h p://klsenew.klsetracker.com.my/brf.php?brcd=21255 Risk MALAYAN BANKING reported Jun 21, 213 that it had sold a 9% stake in Indonesian unit, PT BANK INTERNASIONAL INDONESIA tbk (BII) to a third party investor, still 8.3% short of the required selldown by the Indonesian authorities. The mandatory selldown requirements seek to achieve a 2% public float in BII. The value of the transaction, however, was not disclosed. In 28, MAYBANK paid 51 rupiah (16 sen) a share to buy BII from Singapore's state owned investment company TEMASEK HOLDINGS. Based on the closing price of 355 rupiah (11 sen) on Jun 2, 213, the 9% stake is valued at RM557.19m. Newspaper L. C. Chong Page 7 of 14

8 Created Date Details Type Source Type 1/7/213 h p://klsenew.klsetracker.com.my/brf.php?brcd= MAYBANK wants to cater to the "mass affluent" banking business segment, a customer group which has often been overlooked by the wider local financial industry. On Jun , MAYBANK launched its new service called the Maybank Aspire, a new branded conventional or Islamic bundled offering comprising cards, deposits, financing, insurance, investment and will writing service targeted at the segment base. Growth Driver Newspaper 16/6/213 Decreasing net interest margin and slow loan growth. Basically, all banks are facing the same issue. Risk Analyst Report L. C. Chong Page 8 of 14

9 Appendix 1 Discounted Cash Flows Valuation Discount Rate Margin of Safety Average risk premium Average Risk free rate Unadjusted Discount % Business Risk Factor Financial Risk Factor Discount % Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk Based MOS 7.19% 3.44% 1.63% % 35% 3% 15% 21% 3% 1.% 8% Growth Estimation Financial Figures Owner Earnings GR. Terminal % Decay Rate (Yr4E Yr7E) Extra Decay (Yr8E Yr1E) Shares Out. FCF Type 212 Owner Earnings Excess Cash Intangibles Assets Intangibles% add to DCF 8% 3% 15% 2% Owner , % 4% Earnings Projection of Future Free Cash Flow (Base Line 4%) FV 5, , ,7.28 6, , , , , , ,57.63 DPV 75,73.8 7, , , , , , , , ,37.87 PV 8, , , , , , , , , , Fair Value Buy Under (M.O.S. 3%) M.O.S. on Cur. Price (9.95) 3 Y 5 Y 1 Y % 4% 7% L. C. Chong Page 9 of 14

10 Projection of Future Free Cash Flow (Good Scenario 8%) 8% FV 5, , , ,2.91 7, ,8.22 8, , , , DPV 77, , , , , , , , , , PV 83, , , , , , , , , ,31.3 Fair Value Buy Under (M.O.S. 3%) M.O.S. on Cur. Price (9.95) 3 Y 5 Y 1 Y % 1% 13% Projection of Future Free Cash Flow (Bad Scenario %) % FV 5, , , , , , , , , , DPV 72, , , , , , , , , ,614.6 PV 77, , , , , , , , , , Fair Value Buy Under (M.O.S. 3%) M.O.S. on Cur. Price (9.95) 3 Y 5 Y 1 Y % 2% 32% Projection of Future Free Cash Flow (Ugly Scenario 4%) 4% FV 5,18.6 4, , , , , , , , ,95.85 DPV 69, , , , , , , , , , PV 74, , , , , , , , , ,73.61 Fair Value Buy Under (M.O.S. 3%) M.O.S. on Cur. Price (9.95) 3 Y 5 Y 1 Y % 4% 62% L. C. Chong Page 1 of 14

11 Appendix 2 Reverse Discounted Cash Flows Discount Rate Margin of Safety Average risk premium Average Risk free rate Unadjusted Discount % Business Risk Factor Financial Risk Factor Discount % Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk Based MOS 7.19% 3.44% 1.63% % 35% 3% 8% 21% 3% Growth Estimation Financial Figures Owner Earnings GR. Terminal % Decay Rate (Yr4E Yr7E) Extra Decay (Yr8E Yr1E) Shares Out. FCF Type 212 Owner Earnings Excess Cash Intangibles Assets Intangibles% add to DCF 8% 3% 15% 2% Owner % 4% Earnings Projection of Future Free Cash Flow (GR. 4%) Yearly GR. FV 5, , ,7.28 6, , , , , , ,57.63 DPV 75,73.8 7, , , , , , , , ,37.87 PV 8, , , , , , , , , , Y 5 Y 1 Y Shares Outstanding Fair Value Desired M.O.S. 3% Buy Under Current Price 9.95 Actual M.O.S. 3% 4% 7% L. C. Chong Page 11 of 14

12 Appenfix 3 EY% Valuation EY% High EY% Low Buffer R4Q EPS FY13 EPS* FY14 EPS* 7.33% 5.42% 1% Fair Value Buy Under Sell Above * Estimations from Reuters or local analysts' reports EY% Price High R4Q FY13 FY14 Low Green Zone EY% 7.33% Green Zone Price($) % Buy Under % Trading Range 1.91% 5.61% Sell Above % Red Zone EY% 5.42% Red Zone Price($) Low High L. C. Chong Page 12 of 14

13 Appendix 4 Insider Trading Last 3 months or last 3 insider transactions Transaction Date Securities Holder Type of transaction No of securities Price Transacted L. C. Chong Page 13 of 14

14 Appendix 5 Market Timing Buy Signal No. Method Description 1 EPS QoQ Growth The current quarter's EPS is up more than 15% from the same quarter the year before. 2 DCF Intrinsic Value Price is below Intrinsic Value 3EY % Oscillator Price is below or around the price derived from EY% High 4 Market Direction Stock price breaks out of consolidation/dip on an uptrend. 5 Institutional sponsorship Company owner/directors, EPF, Khazanah, PNB and major fund institutions heavily buying Sell Signal No. Method Description 1 EPS QoQ Growth Quarterly EPS drop for 3 consecutive months. 2 DCF Intrinsic Value Has the stock risen too far from its intrinsic value? 3 Market Direction Long term trend changed from bullish to bearish 4 Institutional sponsorship Company owner, EPF, Khazanah and PNB heavily selling. 5EY % Oscillator Price is above or around the price derived from EY% Low 6 Fundamental Analysis Fundamental of business turns unattractive or bad Declining cash flow Serial charges Serial acquirers The CFO or Auditors leave the company The bills aren t being paid Changes in credit terms and account receivable Found a better opportunity to replace this stock L. C. Chong Page 14 of 14