Banking. OPR cut effect yet to be seen. Overweight (maintain) Sector Update

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1 OPR cut effect yet to be seen July loan growth continued to trend lower as loan growth for business (+3.7% yoy, 0.1% mom) and household (+5.7% yoy, +0.3% mom) continue to struggle. The effect of the OPR cut during the month has yet to be reflected and we believe that the loan growth should gradually improve in 2H16 with the lower lending rates available. Maintain OVERWEIGHT; our top sector picks are CIMB, PBB, AFG and RHB. Jul16 system loan growth remain subdued at 5.1% yoy July 2016 loan growth (+5.1% yoy, Fig 1) continued the 1H16 trend as business loan growth and household loan growth remained weak. The annualized system loan growth stood at only 2.6%. Recall that Bank Negara Malaysia has reduced the Overnight Policy Rate (OPR) by 25bps on 13 July As most financial institutions took 1 to 2 weeks to finalise the revisions in their base rate and base lending rate, we believe this could partly explain the reduction in loan application, loan approval and loan disbursement during the month as borrowers wait for the introduction of lower rates. While our current loan growth forecast of 6.0% for 2016 (based on 6.4% growth from the household sector and 5.5% from business sectors) remains challenging, we believe that the general strength in the domestic economy, with a low unemployment rate of 3.4% (June 2016), coupled with sufficient liquidity in the banking system (Fig 20 22) and a more accommodative monetary policy should continue to support credit growth in We also do not rule out a more aggressive upcoming fiscal budget 2017 ahead of a possible national election next year although any positive spillover effects are likely to be more apparent towards the end of 2016 and Lending rates trended lower post OPR cut Subsequent to the OPR cut, weighted average base rate of commercial banks during the month had decreased by 21bps while fixed deposit rates for tenures 1 year and below also declined by an average of 18bps (Fig 1819). We believe that this is positive for business loans growth, especially with the expected commencement of some major infrastructure projects in 2H16. Meanwhile, household loans will likely see a boost to the subdued growth, despite cautiouslending at most banks in order to preserve asset quality. As a reference, we have also included a list of the latest base rate, base lending rate and indicative effective lending rate of the financial institutions, Islamic financial institutions and development financial institutions (Fig 3032). Slight deterioration in overall banking system asset quality The industry loanloss cover (LLC) slid to 88.7% as system grossimpairedloan ratio continued to creep up to 1.68%, as at July Key sectors that remain vulnerable include mining and quarrying, construction, manufacturing and transport, storage and communication. We note that the headline grossimpairedloan ratio could possibly be affected by higher number of Restructured and Rescheduled Loans, which are still performing. Nevertheless, should the industry asset quality ratios continue to deteriorate in the coming months, it could be a cause for concern. Sector Update Banking Overweight (maintain) Absolute Performance (%) 1M 3M 12M AFG AMMB CIMB HLBB Maybank PBB RHB MBSB AEONCS Affin (Not rated) BIMB (Not rated) Relative Performance (%) AFG AMMB CIMB Hong Leong Bank Maybank MBSB Public Bank RHB Capital BIMB 160 AeonCs Jan15 Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16 May16 Jul16 Source: Affin Hwang, Bloomberg Loh Jia Ying (603) jiaying.loh@affinhwang.com) Tan Ei Leen (603) eileen.tan@affinhwang.com Page 1 of 11

2 Maintain OVERWEIGHT. Top picks CIMB, PBB, AFG and RHB We note that overall sector valuation for banks in 2016 remain quite attractive at a 1.20x P/BV multiple vs. the 3year average of 1.5x. For sector exposure, we expect CIMB (CIMB MK, BUY, RM4.80, TP 1.0x P/BV) to see a more significant turnaround in 2016E earnings in the absence of staff rationalization cost and hefty provisions at CIMB Niaga. We continue to like defensive banks such as Public Bank (PBK MK, BUY, RM19.80; TP: 2.5x P/BV) given the group s more stringent credit underwriting standards and established franchise in the domestic retail financing markets. We also like AFG (AFG MK, BUY, RM3.95, TP: 1.31x P/BV) as a niche and nimble smallcap bank. For RHB Bank (RHBBANK MK, BUY, RM5.00, TP 0.9x P/BV), we expect an improved earnings profile with a relatively steady NIM and strengthened capital ratios post rights issue and internal restructuring. Maintain OVERWEIGHT. Peer Comparison Stock Rating Price (RM) PT Bloomberg Mkt Cap Core PE (x) Core EPS (sen) P/BV (x) ROE (%) Net Yield (%) Net DPS (sen) 30Aug (RM) Code () CY16E CY17E CY16E CY17E CY16E CY17E CY16E CY17E CY16E CY17E CY16E CY17E AFG BUY AFG MK 6, AMMB HOLD AMM MK 13, CIMB BUY CIMB MK 41, HLB HOLD HLBK MK 26, Maybank HOLD MAY MK 78, PBB BUY PBK MK 76, RHB BUY RHBBANK MK 20, Affin Not rated 2.13 AHB MK 4, AEONCS BUY ACSM MK 2, MBSB HOLD MBS MK 3, Financial sector w eighted average (ex MBSB, AEONCS, PBB) Financial sector w eighted average Note: Pricing as of close on 30 August 2016 Source: Affin Hwang forecasts, Bloomberg When a report covers six or more subject companies please access important disclosures for Daiwa Capital Markets Hong Kong Limited at or contact your investment representative or Daiwa Capital Markets Hong Kong Limited at Level 26, One Pacific Place, 88 Queensway, Hong Kong. Focus Charts: Fig 1: Banking system loan, financing and deposit growth Jan16 Feb16 Mar16 Apr16 May16 Jun16 Jul16 Yoy Mom Ytd RMbn RMbn RMbn RMbn RMbn RMbn RMbn (%) (%) (%) System financing outstanding 1, , , , , , , System loan outstanding 1, , , , , , , Household Business (0.1) 0.3 Loan application (18.0) (19.7) Household (14.1) (12.8) Business (22.0) (26.3) Loan approval (19.4) (12.8) Household (20.8) (14.6) Business (17.8) (10.7) Loan disbursement (11.0) (13.9) Household (11.5) (7.3) Business (10.8) (16.2) System Deposit 1, , , , , , , (1.2) (1.0) CASA (2.3) (1.0) FD NIDs () (3.3) (24.4) REPOs (4.6) (17.3) (30.1) FX Deposits (4.5) (10.2) Others (1.6) (2.2) 2.6 Note: The definition of system financing outstanding for data from February 2016 has been amended to include development financial institutions (DFI) loans outstanding. Page 2 of 11

3 Loan growth up 5.1% yoy, increased 0.1% mom; yoy growth rate declined for 11 consecutive months since Aug15 Fig 2: Outstanding banking system loan growth by purpose (from the Demand side of the economy) Loan Growth yoy (%) Total Purchase of Securities Transport Vehicles Of w hich is Passenger Cars Residential Property Non Residential Property Other Fixed Assets Personal Use Credit Card Consumer Durables Construction Working Capital Other Purpose Jan > (5.9) Feb > (12.5) Mar > (9.6) Apr > (10.8) May (59.1) (8.8) Jun (62.9) (4.6) Jul (0.1) (65.9) Aug (68.6) Sep (0.2) (71.9) Oct (1.6) (74.2) Nov (2.5) (3.3) (76.2) (2.3) Dec (1.9) (4.3) (77.3) (2.4) Jan (3.0) (6.4) (78.3) (3.6) Feb (4.1) (7.1) 6.1 (0.4) (79.4) Mar (7.5) (10.1) 7.1 (1.8) (80.6) (0.4) Apr (7.4) (8.9) (81.7) (0.5) May (6.6) (8.8) (4.7) Jun (6.6) (0.0) (5.0) (5.8) (0.9) Jul (6.6) (0.4) (0.2) (5.1) (8.2) (1.6) Fig 3: Outstanding system loan growth by sector (from the Supply side of the economy) Loan Growth yoy (%) Total Primary Mining and agriculture quarrying Manufacturing Electricity, gas and water supply Wholesale & retail trade, and Construction Real Estate hotels & restaurants Transport, storage and commun. Finance, insurance and business Education, health and others Households Jan (3.8) (7.8) (4.0) 9.7 (5.3) Feb (4.5) (20.5) (8.2) 9.7 (3.2) Mar (23.1) (0.1) Apr (26.1) (0.4) 9.4 (6.6) May (22.7) (2.4) 9.0 (5.7) Jun (20.5) Jul (17.4) Aug (15.7) Sep (9.6) Oct (9.7) Nov (17.8) Dec (11.2) Jan (11.7) (2.0) Feb (3.6) Mar (17.2) (1.3) (2.9) Apr (11.8) (2.5) (4.2) May (8.3) (1.6) (5.6) Jun (2.1) (14.1) (2.7) (18.2) Jul (2.5) (14.6) (3.9) (21.6) Others Page 3 of 11

4 Fig 4: Banking system financing and loans growth Fig 5: Annual incremental loan growth Annual growth 14% 12% 10% 8% 6% Gross loan growth System financing growth 6.8% 5.1% 4% Jul12 Jan13 Jul13 Jan14 Jul14 Jan15 Jul15 Jan16 Jul16 RMbn Annual incremental loan growth (RMbn) Annual loan growth (%) Annual growth (%) 13.6% 14.0% 12.9% 12.8% 12.0% 10.6% 10.4% 9.3% % 8.6% 8.6% 7.8% 7.9% 8.0% 6.3% 6.0% % 4.0% % % E Fig 6: Banking system loan breakdown by sector Purchase of consumer durables 0.0% Construction 3.0% Credit card 2.4% Personal use 4.4% Outstanding system loan RM1.47tn Working capital 23.6% Other purpose 4.4% Fixed assets purchase 0.7% Purchase of securities 4.8% Purchase of transport vehicles 11.5% Purchase of nonresidential property 13.9% Purchase of residential property 31.4% Fig 7: Banking system loan breakdown by purpose Household 57.3% Primary agriculture 2.5% Other sector 1.0% Outstanding system loan RM1.47tn Mining and quarrying 0.8% Education, health and others 2.9% Manufacturing (including agrobased) 6.7% Electricity, gas and w ater supply 0.6% Wholesale & retail trade, and hotels & restaurants 7.3% Finance, insurance and business activities 7.0% Construction 4.4% Real estate 7.1% Transport, storage and communication 2.3% Fig 8: Household and business loans growth rate Fig 9: Key consumer loans growth rate Growth 15.0% Household Loans Business Loans Grow th (%) 35.0% Purchase of securities Purchase of residential property Credit cards Purchase of passenger cars Personal uses 13.0% 30.0% 25.0% 11.0% % 9.0% 7.0% 5.7% 15.0% % 5.0% 5.0% 3.7% 3.0% Jul13 Jan14 Jul14 Jan15 Jul15 Jan16 Jul16 0.0% 5.0% % Jul12 Jan13 Jul13 Jan14 Jul14 Jan15 Jul15 Jan16 Jul16 Page 4 of 11

5 Fig 10: Key business loans growth rate Primary agriculture Manufacturing (including agrobased) Wholesale & retail trade, and restaurants & hotels Construction Real Estate Transport, storage and communication Finance, insurance and business activities Education, health & others Growth (%) 45.0% 35.0% 25.0% 15.0% 5.0% 5.0% 15.0% 25.0% Jun12 Dec12 Jun13 Dec13 Jun14 Dec14 Jun15 Dec15 Jun16 Fig 11: Household and business loan application RMbn Business Household Loan application YoY growth (RHS) Mar15 Jul15 Nov15 Mar16 Jul16 % Fig 12: Household and business loans approval RMbn Business Household Loan approval YoY growth (RHS) Mar15 Jul15 Nov15 Mar16 Jul16 % Fig 13: Household and business loan disbursement RMbn Business Household Loan disbursement YoY growth (RHS) Mar15 Jul15 Nov15 Mar16 Jul16 % Deposit growth (+1.0% yoy, 1.2% mom) remain subdued, in line with the weaker loan growth Fig 14: Banking system deposit growth Fig 15: Deposit growth by holder RM bn System Deposit % yoy growth 16% 14% 12% 10% De pos it growth 50.0% 40.0% 30.0% Individuals Financial Institutions Others Business Enterprises Government institutions % % 800 6% % % 2% 0% 0.0% % 0 Jul08 Jul09 Jul10 Jul11 Jul12 Jul13 Jul14 Jul15 Jul16 2% % Jun12 Dec12 Jun13 Dec13 Jun14 Dec14 Jun15 Dec15 Jun16 Page 5 of 11

6 Fig 16: Banking system deposit breakdown by holder System Deposit RM1.65tr Fig 17: Banking system deposit breakdown by type System Deposit RM1.65tr Government institutions 6% Others 6% Others 40% Financial Institutions 18% Individuals 38% Fixed Deposits 35% Business Enterprises 32% Savings 8% Current 17% Base rate dropped by 21bps as a result of the OPR cut in July 2016 Fig 18: Average interbank rates vs. base rate Fig 19: Banks ALR vs. 12mth fixed deposit rate Rates (%) 4.10 Base Rate (%) 1mth KLIBOR 1wk KLIBOR 3mth KLIBOR ALR & FD rate (%) ALRFD Spread % (RHS) 8.00 ALR % (LHS) 12month FD rate (LHS) 7.00 ALR FD Spread (%) Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16 May16 Jul Jul02 Jul04 Jul06 Jul08 Jul10 Jul12 Jul14 Jul16 Banking sector liquidity and funding conditions remained supportive of financing activities Fig 20: Banking system funding ratios Fig 21: Banking system surplus liquidity and LCR LoantoDeposit Ratio LoantoFund & Equity Ratio LoantoFund Ratio RMbn High Quality Liquid Assets (HQLA) Surplus liquidity placed with BNM (inclduing SRR) Liquidity Coverage Ratio (%) LCR % 124% 119% 123% 125% 130% 125% 131% 126% 129% 127% 125% 140% % % 80% 60% Dec15 Jan16 Feb16 Mar16 Apr16 May16 Jun16 Jul Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 Jun16 40% 20% 0% Page 6 of 11

7 Fig 22: Outstanding liquidity placed with BNM ~ RM203bn 450, ,000.0 BNM Outstanding Debt Securities liquidity placed at Bank Negara Direct Borrowing, Wadiah Acceptance & Commodity Murabahah Programme SRR REPO Others M3 growth (%) (RHS) M3 growth (%) , , , , , , , Sep05 Jul06 May07 Mar08 Jan09 Nov09 Sep10 Jul11 May12 Mar13 Jan14 Nov14 Sep15 Jul16 Industry GIL ratio continued to creep up to 1.68%, LLC dipped to 88.7% Fig 23: Impaired loan (by purpose) as at Jul16 Impaired Loans (By purpose) Dec15 Jan16 Feb16 Mar16 Apr16 RM m May16 RM m Jun16 RM m Jul16 Mom chg (%) Yoy chg Ytd chg (%) (%) Purchase of securities Purchase of transport vehicle 1, , , , , , , , (3.8) 1.9 of which are purchase of passenger cars 1, , , , , , , , (11.9) (7.2) Purchase of residential property 5, , , , , , , , Purchase of nonresidential property 1, , , , , , , , Purchase of fixed assets (2.3) (36.9) (39.6) Personal uses 1, , , , , , , , Credit cards Purchase of consumer durable goods (27.3) (7.8) 51.8 Construction 2, , , , , , , ,277.7 (2.7) Working capital 8, , , , , , , , Other purpose 1, , , , , , , ,091.0 (9.2) (21.8) (21.1) Total Impaired Loans 23, , , , , , , , Fig 24: Impaired loan (by economic sectors) as at Jul16 Impaired Loans (By Sector) Dec15 Jan16 Feb16 Mar16 RM m Apr16 May16 Jun16 Jul16 RM m Mom chg (%) Yoy chg (%) Ytd chg (%) Primary agriculture (2.3) Mining and quarrying Manufacturing (including agrobased) 4, , , , , , , , Electricity, gas and w ater supply (23.6) Wholesale & retail trade, restaurants & hotel 1, , , , , , , ,967.8 (0.7) (1.4) 1.2 Construction 1, , , , , , , ,099.7 (6.9) Transport, storage & communication 2, , , , , , , , (0.3) Finance, insurance and business activities 2, , , , , , , , Education, health & others (4.6) (9.9) (1.6) Household sector 8, , , , , , , , Other sectors (1.6) 5.2 (9.4) Total Impaired Loans 23, , , , , , , , Page 7 of 11

8 Fig 25: Gross impaired loan ratio (by purpose) Gross Impaired Loans Ratio (%) Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 Jun16 Jul16 Purchase of securities Purchase of transport vehicle Purchase of residential property Purchase of nonresidential property Purchase of fixed assets Personal uses Credit cards Purchase of consumer durable goods Construction Working capital Other purpose Industry Gross Impaired loan ratio Fig 26: Gross impaired loan ratio (by economic sector) Gross Impaired Loans Ratio (%) Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 Jun16 Jul16 Primary agriculture Mining and quarrying Manufacturing (including agrobased) Electricity, gas and w ater supply Wholesale & retail trade, restaurants & hotel Construction Transport, storage & communication Finance, insurance and business activities Education, health & others Household sector Other sectors Total Impaired Loans Fig 27: Impaired loans and loan loss cover Fig 28: Gross impaired loan ratio by purpose NPLs / Im paired Loans () 40,000 35,000 30,000 25,000 NPLs / Impaired Loans Loan Loss/Impaired Loans Cover (%) Loan Loss Cover 1% 105.0% 100.0% % Purchase of securities Purchase of transport vehicle Loans for Residential Property Loans for nonresidential property Purchase of fixed assets other than land and building Personal uses Credit cards Construction Working capital 20, % , % 10, % 5, % Jul09 Jul10 Jul11 Jul12 Jul13 Jul14 Jul15 Jul Jul12 Jan13 Jul13 Jan14 Jul14 Jan15 Jul15 Jan16 Jul1 Page 8 of 11

9 Banking sector capital ratios at adequate levels; no massive capital raising plans foreseen in 2016 Fig 29: Capital ratios Total Capital, Tier1 and CET 1 Capital adequacy ratio (%) CET1 Tier1 Total Capital Jun15 Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 Jun16 Jul16 Revision downward in base rate and base lending rate after OPR cut Fig 30: Base rate, base lending rate and indicative effective lending rate of financial institutions No. Financial Institution Base Rate Base Lending Rate Indicative Effective Lending Rate* (%) (%) (%) 1 Affin Bank Alliance Bank AmBank Bank of China (Malaysia) Berhad CIMB Bank Berhad Citibank Berhad Hong Leong Bank Malaysia Berhad HSBC Bank Malaysia Berhad Industrial and Commercial Bank of China (Malaysia) Berhad 10 Malayan Banking Berhad OCBC Bank (Malaysia) Berhad Public Bank Berhad RHB Bank Berhad Standard Chartered Bank Malaysia Berhad United Overseas Bank (Malaysia) Berhad Note: Latest data as of 18 August 2016 Source: Bank Negara Malaysia * Indicative effective lending rate refers to the indicative annual effective lending rate for a standard 30year housing loan/home financing product with financing amount of RM350k and has no lockin period. Page 9 of 11

10 Fig 31: Base rate, base lending rate and indicative effective lending rate of Islamic financial institutions No. Islamic Financial Institution Base Rate Base Financing Rate Indicative Effective Lending Rate* (%) (%) (%) 1 Affin Islamic Bank Berhad Al Rajhi Banking & Investment Corporation (Malaysia) Berhad 3 Alliance Islamic Bank Berhad AmIslamic Bank Berhad Asian Finance Bank Berhad Bank Islam Malaysia Berhad Bank Muamalat Malaysia Berhad CIMB Islamic Bank Berhad Hong Leong Islamic Bank Berhad HSBC Amanah Malaysia Berhad Kuwait Finance House (Malaysia) Berhad Maybank Islamic Berhad OCBC AlAmin Bank Berhad Public Islamic Bank Berhad RHB Islamic Bank Berhad Standard Chartered Saadiq Berhad Note: Latest data as of 18 August 2016 Source: Bank Negara Malaysia * Indicative effective lending rate refers to the indicative annual effective lending rate for a standard 30year housing loan/home financing product with financing amount of RM350k and has no lockin period. Fig 32: Base rate, base lending rate and indicative effective lending rate of development financial institutions No. Development Financial Institution Base Rate Base Financing Rate Indicative Effective Lending Rate* (%) (%) (%) 1 Bank Kerjasama Rakyat Malaysia Berhad Agrobank Bank Simpanan Nasional Note: Latest data as of 18 August 2016 Source: Bank Negara Malaysia * Indicative effective lending rate refers to the indicative annual effective lending rate for a standard 30year housing loan/home financing product with financing amount of RM350k and has no lockin period. Page 10 of 11

11 Equity Rating Structure and Definitions BUY Total return is expected to exceed +10% over a 12month period HOLD Total return is expected to be between 5% and +10% over a 12month period SELL Total return is expected to be below 5% over a 12month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to underperform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389U) (formerly known as HwangDBS Investment Bank Berhad) ( the Company ) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Thirdparty data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development FundBursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389U) (formerly known as HwangDBS Investment Bank Berhad) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, Kuala Lumpur. research@affinhwang.com Tel : Fax : Page 11 of 11