Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high...

83
ed-TH / sa- BC, PY Staying on the defence 3QCY16 results emitting first sign of hope; but still too early to turn positive Asset quality remains the main swing factor; imputing higher-than-guided credit costs Assuming a worst-case scenario, CY17 could be another year of muted earnings growth; sustainable re-rating in valuations remains challenging Sticking to the best; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our top picks 3QCY16 results emitting first sign of hope. The recent 3QCY16 results finally showed y-o-y growth in earnings, after eight consecutive quarters of decline. While we read this as an early indication of the end of the earnings downgrade cycle, we believe it is still too early to be bullish on the sector. We would turn more positive when issues affecting (1) asset quality, (2) loan growth, and (3) NIM, start to taper off. Asset quality still the main swing factor. At this juncture, asset quality could surprise on either side – positively if reclassification of rescheduled and restructured (R&R) loans (from impaired to performing status) are more pronounced than new formations, or negatively if the vulnerable segments continue to be strained amid the challenging operating environment. In our base case, we have placed a caveat on the extent of reclassifications and imputed credit costs that are higher than guided by management. Recoveries are tapering off; credit costs should normalise in 2017. Still no impetus to drive top-line growth. Judging from the weak loan application and approval trends, we expect another year of benign loan traction in 2017, with growth hitting 5% at best. Further cuts in Overnight Policy Rate (OPR) next year may result in more NIM pressure than expected (base case assumption is -2bps y-o-y). Positively, the banks may be able to mitigate the impact by reining in their high cost deposits, as seen in the recent quarter’s results. NIM pressure is likely more pronounced for CIMB as the bank is shifting its focus to higher-quality loans tagged with lower yields, particularly in Indonesia. Keeping defenses up; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our top picks. Although sector valuations are at a 10-year low, a sustainable re-rating in valuations remains dubious in the absence of tangible revenue drivers. We prefer to stick to banks with solid metrics - Public Bank (PBK) and Hong Leong Bank (HLB). PBK remains resilient in this challenging operating environment while HLB has strong liquidity apart from robust asset quality. A better-than-expected recovery from its associate, Bank of Chengdu, could surprise on the upside. Key risks would be our view on asset quality, loan growth and NIM. Assuming a worst-case scenario (3% loan growth, 10bps compression in NIM and credit cost higher at 40bps), our back-of-the-envelope calculation estimates earnings growth to reach 1% instead of 11%, indicating another year of muted earnings growth. KLCI KLCI KLCI KLCI : : : : 1,629.73 1,629.73 1,629.73 1,629.73 Analyst Sue Lin LIM +65 8332 6843 Lynette CHENG +60 32604 3907 [email protected] [email protected] STOCKS Source: DBS Bank, AllianceDBS, Bloomberg Finance L.P. Closing price as of 6 Dec 2016 Malaysian Banks: Earnings growth trend Source: Companies, DBS Bank, AllianceDBS Malaysian Banks: Credit cost trends Source: Companies, DBS Bank, AllianceDBS 17.0 17.0 17.0 17.0 8.2 8.2 8.2 8.2 (2.4) (2.4) (2.4) (2.4) (3.7) (3.7) (3.7) (3.7) 2.5 2.5 2.5 2.5 10.7 10.7 10.7 10.7 -40 -30 -20 -10 0 10 20 30 40 CY12 CY13 CY14 CY15 CY16F CY17F % AMMB AFFIN CIMB HLB MAY PBK RHBBANK AFG Sector DBS Group Research . Equity DBS Group Research . Equity DBS Group Research . Equity DBS Group Research . Equity 7 Dec 2016 Malaysia Industry Focus Malaysian Banks Refer to important disclosures at the end of this report Price Price Price Price Mkt Cap Mkt Cap Mkt Cap Mkt Cap Target Price Target Price Target Price Target Price Performance (%) Performance (%) Performance (%) Performance (%) RM RM RM RM US$m US$m US$m US$m RM RM RM RM 3 mth 3 mth 3 mth 3 mth 12 mth 12 mth 12 mth 12 mth Rating Rating Rating Rating Affin Holdings Berhad 2.30 1,005 2.00 7.5 (0.4) FV Alliance Financial Group 3.86 1,323 NA (3.5) 8.4 NR AMMB Holdings 4.23 2,866 4.50 (3.9) (9.0) HOLD CIMB Group Holdings 4.64 9,250 4.80 (3.9) 4.1 HOLD Hong Leong Bank 13.48 6,219 15.00 2.6 5.3 BUY Maybank 7.88 18,056 7.50 0.1 (5.9) HOLD Public Bank 19.62 17,031 22.60 (1.4) 7.3 BUY RHB Bank 4.79 3,311 5.40 (5.2) (20.2) BUY BIMB Holdings Berhad 4.27 1,525 NA 5.7 10.3 NR Hong Leong Financial Group 14.84 3,820 17.00 (7.3) 7.4 BUY

Transcript of Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high...

Page 1: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ed-TH / sa- BC, PY

Staying on the defence

• 3QCY16 results emitting first sign of hope; but still too early to turn positive

• Asset quality remains the main swing factor; imputing higher-than-guided credit costs

• Assuming a worst-case scenario, CY17 could be another year of muted earnings growth; sustainable re-rating in valuations remains challenging

• Sticking to the best; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our top picks

3QCY16 results emitting first sign of hope. The recent 3QCY16 results finally showed y-o-y growth in earnings, after eight consecutive quarters of decline. While we read this as an early indication of the end of the earnings downgrade cycle, we believe it is still too early to be bullish on the sector. We would turn more positive when issues affecting (1) asset quality, (2) loan growth, and (3) NIM, start to taper off. Asset quality still the main swing factor. At this juncture, asset quality could surprise on either side – positively if reclassification of rescheduled and restructured (R&R) loans (from impaired to performing status) are more pronounced than new formations, or negatively if the vulnerable segments continue to be strained amid the challenging operating environment. In our base case, we have placed a caveat on the extent of reclassifications and imputed credit costs that are higher than guided by management. Recoveries are tapering off; credit costs should normalise in 2017. Still no impetus to drive top-line growth. Judging from the weak loan application and approval trends, we expect another year of benign loan traction in 2017, with growth hitting 5% at best. Further cuts in Overnight Policy Rate (OPR) next year may result in more NIM pressure than expected (base case assumption is -2bps y-o-y). Positively, the banks may be able to mitigate the impact by reining in their high cost deposits, as seen in the recent quarter’s results. NIM pressure is likely more pronounced for CIMB as the bank is shifting its focus to higher-quality loans tagged with lower yields, particularly in Indonesia. Keeping defenses up; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our top picks. Although sector valuations are at a 10-year low, a sustainable re-rating in valuations remains dubious in the absence of tangible revenue drivers. We prefer to stick to banks with solid metrics - Public Bank (PBK) and Hong Leong Bank (HLB). PBK remains resilient in this challenging operating environment while HLB has strong liquidity apart from robust asset quality. A better-than-expected recovery from its associate, Bank of Chengdu, could surprise on the upside. Key risks would be our view on asset quality, loan growth and NIM. Assuming a worst-case scenario (3% loan growth, 10bps compression in NIM and credit cost higher at 40bps), our back-of-the-envelope calculation estimates earnings growth to reach 1% instead of 11%, indicating another year of muted earnings growth.

KLCIKLCIKLCIKLCI : : : : 1,629.731,629.731,629.731,629.73

Analyst Sue Lin LIM +65 8332 6843 Lynette CHENG +60 32604 3907 [email protected] [email protected] STOCKS

Source: DBS Bank, AllianceDBS, Bloomberg Finance L.P.

Closing price as of 6 Dec 2016

Malaysian Banks: Earnings growth trend

Source: Companies, DBS Bank, AllianceDBS

Malaysian Banks: Credit cost trends

Source: Companies, DBS Bank, AllianceDBS

17.0 17.0 17.0 17.0 8.2 8.2 8.2 8.2

(2.4)(2.4)(2.4)(2.4) (3.7)(3.7)(3.7)(3.7)

2.5 2.5 2.5 2.5

10.7 10.7 10.7 10.7

-40

-30

-20

-10

0

10

20

30

40

CY12 CY13 CY14 CY15 CY16F CY17F

%%%%

AMMB AFFIN CIMBHLB MAY PBKRHBBANK AFG Sector

DBS Group Research . Equity DBS Group Research . Equity DBS Group Research . Equity DBS Group Research . Equity

7 Dec 2016

Malaysia Industry Focus

Malaysian Banks Refer to important disclosures at the end of this report

Price Price Price Price Mkt CapMkt CapMkt CapMkt Cap Target PriceTarget PriceTarget PriceTarget Price Performance (%)Performance (%)Performance (%)Performance (%)

RMRMRMRM US$mUS$mUS$mUS$m RMRMRMRM 3 mth3 mth3 mth3 mth 12 mth12 mth12 mth12 mth RatingRatingRatingRating

Affin Holdings Berhad

2.30 1,005 2.00 7.5 (0.4) FV Alliance Financial Group

3.86 1,323 NA (3.5) 8.4 NR

AMMB Holdings 4.23 2,866 4.50 (3.9) (9.0) HOLD CIMB Group Holdings

4.64 9,250 4.80 (3.9) 4.1 HOLD Hong Leong Bank 13.48 6,219 15.00 2.6 5.3 BUY Maybank 7.88 18,056 7.50 0.1 (5.9) HOLD Public Bank 19.62 17,031 22.60 (1.4) 7.3 BUY RHB Bank 4.79 3,311 5.40 (5.2) (20.2) BUY BIMB Holdings Berhad

4.27 1,525 NA 5.7 10.3 NR

Hong Leong Financial Group

14.84 3,820 17.00 (7.3) 7.4 BUY

Page 2: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 2

Table of Contents A glimmer of hope 3

Hopeful on asset quality stabilisation 5

Loan growth likely to stay muted 7

NIM risk if there is a further rate cut 7

Valuation and recommendation 8

Appendix 10

Company Guides

Affin Holdings 17

AMMB Holdings 25

CIMB Group 33

Hong Leong Bank 41

Maybank 49

Public Bank 57

RHB Bank 65

Hong Leong Financial Group 73

Page 3: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 3

A glimmer of hope

First sign of hope.First sign of hope.First sign of hope.First sign of hope. 3QCY16 results were largely in line, with the

exception of Affin Holdings (AFFIN) which beat expectations on

lower-than-expected credit cost. This is the first quarter pointing

to more positive trends as we saw y-o-y earnings growth for the

sector, after eight consecutive quarters of decline. Earnings were

lifted by lower provisions, mainly driven by Maybank (MAY) and

RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-

provision profits grew on the back of lower expenses. Revenue

growth proves to still be a challenge as it was flat y-o-y.

Consensus haConsensus haConsensus haConsensus haveveveve consistently been overconsistently been overconsistently been overconsistently been over----optimistic on their optimistic on their optimistic on their optimistic on their

forecast since 2014.forecast since 2014.forecast since 2014.forecast since 2014. Actual sector earnings for 2014 and 2015

were below consensus’ initial forecast (in the beginning of the

year) by 9% and 13% respectively. With our ROE forecasts

largely in line or lower than guided (with the exception of PBK),

we are hopeful for an end to the earnings downgrade cycle for

the banks.

Malaysian Banks: Consensus full-year earnings forecast

Source: Bloomberg Finance L.P, DBS Bank, AllianceDBS

Malaysian Banks: ROE trends

Note: No forecasts for AFG

Source: Companies, DBS Bank, AllianceDBS

Staying cautious.Staying cautious.Staying cautious.Staying cautious. While we read this as an early indication of the

end of the earnings downgrade cycle, we believe it is still too

early to be bullish on the sector. We would turn more positive

on the sector when issues affecting (1) asset quality, (2) loan

growth, and (3) NIM starts to taper off.

Malaysian Banks: Earnings growth

Note: No forecasts for AFG

Source: Companies, DBS Bank, AllianceDBS

Revenue growth remains a challengeRevenue growth remains a challengeRevenue growth remains a challengeRevenue growth remains a challenge as loan growth moderates,

NIM narrows and non-interest income continues to lack

impetus. We imputed for less NIM compression in CY17 (-2bps

y-o-y) as opposed to CY16 (-4bps y-o-y), but subsequent policy

rate cuts may result in more pressure on NIMs. Amid lacklustre

loan application and approval trends, we expect 2017 loan

growth to hit mid-single digits at best. We also see no catalyst

to boost non-interest income and expect this to remain sluggish.

Malaysian Banks: NIM trends

Source: DBS Bank, AllianceDBS

Slower growth in overhead and credit costsSlower growth in overhead and credit costsSlower growth in overhead and credit costsSlower growth in overhead and credit costs. As banks are

placing cost management high on their priorities, we are

expecting a tight lid to be held on overhead expenses. We are

forecasting overhead expenses to grow by a meagre 4% y-o-y,

15.5%15.5%15.5%15.5% 14.6%14.6%14.6%14.6%

12.7%12.7%12.7%12.7%

10.3%10.3%10.3%10.3% 9.7%9.7%9.7%9.7%9.8%9.8%9.8%9.8%

0%

5%

10%

15%

20%

25%

CY12 CY13 CY14 CY15 CY16F CY17F

AMMB AFFIN CIMB HLB MAY

PBK RHBBANK AFG Sector

17.0 17.0 17.0 17.0 8.2 8.2 8.2 8.2

(2.4)(2.4)(2.4)(2.4) (3.7)(3.7)(3.7)(3.7)

2.5 2.5 2.5 2.5

10.7 10.7 10.7 10.7

-40

-30

-20

-10

0

10

20

30

40

CY12 CY13 CY14 CY15 CY16F CY17F

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AMMB AFFIN CIMBHLB MAY PBKRHBBANK AFG Sector

2.46% 2.38%2.25%

2.16% 2.12% 2.10%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

CY12 CY13 CY14 CY15 CY16F CY17F

AMMB AFFIN CIMB HLB MAY

PBK RHBBANK AFG Sector

Page 4: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 4

after a contraction of 1% in CY16. Although we have imputed

for credit cost to trend lower in CY17, this is largely driven by

MAY, RHB and CIMB which have incurred significant provisions

in 2016, from its Indonesian operations (CIMB), oil & gas (MAY

and RHB), as well as steel (RHB) exposure. Excluding these three

banks, our credit cost assumption would be higher y-o-y at

10bps for CY17F (CY16F: 8bps).

Malaysian Banks: Cost-income ratio

Note: Cost-to-income ratio at 50.1% stripping off CY15 exceptionals in CIMB (RM684m costs), RHB (RM309m costs), AMMB (RM268m gain), MAY (RM197m gain), HLB (RM172m costs)

Source: Companies, DBS Bank, AllianceDBS

Malaysian Banks: Credit cost

Source: Companies, DBS Bank, AllianceDBS

45.0%45.0%45.0%45.0%45.7%45.7%45.7%45.7%

46.6%46.6%46.6%46.6%47.2%47.2%47.2%47.2%

48.6%48.6%48.6%48.6%

51.4%51.4%51.4%51.4%

49.8%49.8%49.8%49.8%49.2%49.2%49.2%49.2%

50.1%50.1%50.1%50.1%

40%

42%

44%

46%

48%

50%

52%

54%

CY10 CY11 CY12 CY13 CY14 CY15 CY16F CY17F

1.16%

1.02%

1.08%

1.12%

0.80%

0.68%

0.71%

0.49%

0.28%

0.16%

0.20%

0.18%

0.33%

0.42%

0.32%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

CY03

CY04

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

CY16F

CY17F

Sector credit cost Sector credit cost ex CIMB, MAY, RHB

Page 5: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 5

Hopeful on asset quality stabilisation

RetailRetailRetailRetail segment remains stable.segment remains stable.segment remains stable.segment remains stable. While bankruptcy data has not

been updated since mid-2015, we gather that the number of

participants enrolled under Agensi Kaunseling dan

Pengurusan Kredit’s (AKPK; BNM’s Credit Counseling and

Debt Management Agency) Debt Management Programme

serves as a prudent proxy to bankruptcy levels. The increase in

number of enrolments is on a slight uptrend, but not at an

alarming level. It is also noteworthy that loans restructured

under AKPK are not classified as impaired in accordance with

BNM’s guideline. This treatment reflects the inherent controls

built into AKPK’s debt management programme, which

among others, incorporates a rigorous assessment of the

customers’ debt repayment ability under the revised terms

and conditions, and precludes the affected customers from

obtaining further loans as long as they are under the

programme.

Malaysia: Y-o-y change in number of participants in

AKPK’s Debt Management Programme

Source: BNM Economic Report 2016/17

Looking out for the vulnerable segments. Looking out for the vulnerable segments. Looking out for the vulnerable segments. Looking out for the vulnerable segments. We had previously

flagged oil & gas, commodities, steel and commercial property

as sectors we see weakness in. Positively for selected sectors,

improvements in commodity prices (e.g. crude oil, CPO and

steel) have improved the prospects of companies operating in

these sectors. Nonetheless, we believe it would take several

more quarters of stable prices to completely ease concerns on

these sectors. Hence, we continue to favour banks with lower

exposure in these sectors. PBK, HLB and AFG have low

exposures to the oil & gas sector, making up less than 1% of

total loans.

Malaysian Banks: Oil & gas exposure (% of total loans)

MAYMAYMAYMAY CIMBCIMBCIMBCIMB PBKPBKPBKPBK RHBRHBRHBRHB HLBHLBHLBHLB AMMAMMAMMAMM AHBAHBAHBAHB AFGAFGAFGAFG TotalTotalTotalTotal

4.3 2.7 0.0 3.2 0.7 4.0 2.0 0.0 2.6

Source: Companies, DBS Bank, AllianceDBS

Positive surprise in asset quality?Positive surprise in asset quality?Positive surprise in asset quality?Positive surprise in asset quality? Effective 1 April 2015,

rescheduled and restructured (R&R) loans can be reclassified

as performing upon consistent repayment for a period of six

months. Banks such as MAY and RHB accelerated R&R in

2Q16, indicating that more reclassifications could be

impending. In the event reclassifications are stronger than

new formations, credit cost could trend lower on the back of

more write-backs. In our base-case view, we have placed a

caveat to the extent of reclassifications and imputed credit

costs that are higher than guided by management.

Malaysian Banks: Impaired loans ratio

Source: Companies, DBS Bank, AllianceDBS

Favouring banks with high loanFavouring banks with high loanFavouring banks with high loanFavouring banks with high loan loss coverageloss coverageloss coverageloss coverage. While loan loss

coverage may not be at the epicentre of all banks’ attention

(due to high collateral values), we continue to draw comfort in

banks with high loan loss coverage ratio. We believe banks

with high buffers are better positioned to weather the current

volatile environment unscathed. Based on our sensitivity

analysis, every 10-bp increase in credit cost impacts the banks’

net profit by -5 to -7%.

Malaysian Banks: Sensitivity Analysis for a 10-bp increase

in credit cost

FFFFY17Y17Y17Y17 (Current)(Current)(Current)(Current) FY17FY17FY17FY17 (Sensitised)(Sensitised)(Sensitised)(Sensitised) % chg in % chg in % chg in % chg in earningsearningsearningsearnings

Credit costCredit costCredit costCredit cost Net profitNet profitNet profitNet profit Credit costCredit costCredit costCredit cost Net profitNet profitNet profitNet profit

AHB 0.13% 507.7 0.23% 470.0 -7%

AMMB 0.03% 1,251.7 0.13% 1,188.4 -5%

CIMB 0.55% 3,997.9 0.65% 3,741.5 -6%

HLB 0.09% 2,265.5 0.19% 2,142.3 -5%

MAY 0.43% 6,832.4 0.53% 6,465.8 -5%

PBK 0.09% 5,588.1 0.19% 5,319.2 -5%

RHB 0.35% 2,246.7 0.45% 2,118.6 -6%

Source: DBS Bank, AllianceDBS

11,638 15,837

15,534

16,811

16,110

16,769

20,624

22,208

13,189

-

5,000

10,000

15,000

20,000

25,000

2008

2009

2010

2011

2012

2013

2014

2015

7M

2016

2.4%2.4%2.4%2.4%2.0%2.0%2.0%2.0%

1.8%1.8%1.8%1.8% 1.8%1.8%1.8%1.8% 1.9%1.9%1.9%1.9% 1.8%1.8%1.8%1.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

CY12 CY13 CY14 CY15 CY16F CY17F

AMMB AFFIN CIMB

HLB MAY PBK

RHBBANK AFG Sector ex PBK

Page 6: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 6

Loan growth likely to stay muted

Net financing growth supported by strong issuances of Private Net financing growth supported by strong issuances of Private Net financing growth supported by strong issuances of Private Net financing growth supported by strong issuances of Private

Debt Security (PDS).Debt Security (PDS).Debt Security (PDS).Debt Security (PDS). Although loan growth trends were weak in

2016, net financing growth was still relatively robust, thanks to

strong growth in PDS issuances. The strong growth is

presumably attributable to the finance, insurance, real estate

and business services sector which made up more than half of

the debt securities issuances in 2016.

Malaysian Banks: Net financing growth

Note: *2016 growth was annualized **Private Debt Security (PDS) amount represents an estimate from BNM press release figures.

Source: BNM, DBS Bank, AllianceDBS

No respite for loan growth.No respite for loan growth.No respite for loan growth.No respite for loan growth. Plotting a seasonally-adjusted trend

on m-o-m growth, the trend for loan demand has declined since

2010, providing little room to boost loan growth in the near

future. Limiting this further is the even more discouraging

approval trends, which have plunged to negative territory since

early 2014. This could partially be explained by a lower risk

appetite by the banks, but this could also indicate poorer quality

seen in loan applicants. A pick-up in these trends is a challenge,

in our view. Thus, loan growth would likely tread on similar

levels to the current year. We expect loan growth in 2017F to

reach mid-single digit at best.

Malaysian Banks: Loan application trends

Source: BNM, DBS Bank, AllianceDBS

Malaysian Banks: Loan approval trends

Source: BNM, DBS Bank, AllianceDBS

Minimal impact to bottomMinimal impact to bottomMinimal impact to bottomMinimal impact to bottom linelinelineline. Based on our sensitivity analysis,

every 1% decline in loan growth impacts the banks’ net profit

by -0.6 to +0.8%.

Malaysian Banks: Sensitivity analysis for a 1% decline in

loan growth

FY17 (Current)FY17 (Current)FY17 (Current)FY17 (Current) FY17 (Sensitised)FY17 (Sensitised)FY17 (Sensitised)FY17 (Sensitised) Change Change Change Change in in in in

earningsearningsearningsearnings

Loan Loan Loan Loan growthgrowthgrowthgrowth

Net Net Net Net profitprofitprofitprofit

Loan Loan Loan Loan growthgrowthgrowthgrowth

Net Net Net Net profitprofitprofitprofit

AHB 5% 507.7 4% 504.8 -0.6%

AMMB 2% 1,251.7 1% 1,262.2 0.8%

CIMB 6% 3,997.9 5% 3,989.3 -0.2%

HLB 6% 2,265.5 5% 2,271.9 0.3%

MAY 5% 6,832.4 4% 6,824.3 -0.1%

PBK 8% 5,588.1 7% 5,584.3 -0.1%

RHB 5% 2,246.7 4% 2,265.3 0.8%

Source: DBS Bank, AllianceDBS

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

-

500

1,000

1,500

2,000

2,500

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

%%%%RM bnRM bnRM bnRM bn

Loan (LHS) PDS (LHS) Loan + PDS growth (RHS) Loan growth (RHS)

(10.0)

(8.0)

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

-30

-20

-10

0

10

20

30

40

Jan

-10

Jun

-10

No

v-1

0

Ap

r-1

1

Se

p-1

1

Fe

b-1

2

Jul-

12

De

c-1

2

Ma

y-1

3

Oct

-13

Ma

r-1

4

Au

g-1

4

Jan

-15

Jun

-15

No

v-1

5

Ap

r-1

6

Se

p-1

6

%RM bn

absolute chg (LHS) est trend % m-o-m (RHS)

(8.0)

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

-10

-5

0

5

10

15

20

Jan

-10

Jun

-10

No

v-1

0

Ap

r-1

1

Se

p-1

1

Fe

b-1

2

Jul-

12

De

c-1

2

Ma

y-1

3

Oct

-13

Ma

r-1

4

Au

g-1

4

Jan

-15

Jun

-15

No

v-1

5

Ap

r-1

6

Se

p-1

6

%RM bn

absolute chg (LHS) est trend % m-o-m (RHS)

Page 7: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 7

NIM compression risk if there is a further rate cut

Further cuts in OPR may drag NIMsFurther cuts in OPR may drag NIMsFurther cuts in OPR may drag NIMsFurther cuts in OPR may drag NIMs. Our base-case assumption is

for NIM to drop by 2bps y-o-y. However, further cuts in

Overnight Policy Rate (OPR) may result in more NIM pressures

than expected. There remains monetary policy space for BNM to

manoeuvre and ease OPR (private consumption growth has

fallen below trend while inflation rate shows little signs of

heating up), and hence an OPR cut should not be discounted.

Positively, the banks may be able to mitigate the impact by

reining in on their high-cost deposits, as seen in most of the

banks’ results in 3QCY16.

3QCY16 NIM trend

qqqq----oooo----q NIM trendq NIM trendq NIM trendq NIM trend ReasonReasonReasonReason

MAYMAYMAYMAY Minimal slippage Funding cost management

CIMBCIMBCIMBCIMB Lower Rate cut

PBKPBKPBKPBK Stable Funding cost management

RHBRHBRHBRHB Lower Rate cut

HLBHLBHLBHLB Stable Funding cost management

AMMAMMAMMAMM Stable Funding cost management

AHBAHBAHBAHB Higher Funding cost management

AFGAFGAFGAFG Stable Funding cost management

Source: Companies, DBS Bank, AllianceDBS

Deposit competition is not as intense as before.Deposit competition is not as intense as before.Deposit competition is not as intense as before.Deposit competition is not as intense as before. We still expect

competition for deposits to surface seasonally (especially in

December as the liquidity coverage ratio requirement is bumped

up by 10% every year), but it is not expected to be as intense as

before. On the ground, fixed deposit campaigns are less

prevalent as it was at end-2015. The intensity has softened as

weaker loan growth traction has eased off pressure to gather

deposits aggressively.

Malaysian Banks: Loan and deposit growth

Source: BNM, DBS Bank, AllianceDBS

CIMB to face more NIM compression; AMMB’s to increase from CIMB to face more NIM compression; AMMB’s to increase from CIMB to face more NIM compression; AMMB’s to increase from CIMB to face more NIM compression; AMMB’s to increase from

a a a a low base.low base.low base.low base. Of the lot, we think NIM pressure is more

pronounced for CIMB (forecasting -10bps y-o-y as opposed to

industry's -2bps y-o-y) as the bank is shifting its focus to higher-

quality loans which are tagged with lower yields, particularly in

Indonesia. We are expecting higher NIMs (+4bps y-o-y) for

AMMB after a pronounced decline in FY16 (-36bps y-o-y). Recall

that AMMB’s NIM was negatively impacted from higher cost of

funds and its portfolio rebalancing strategy which targeted

better quality loans. Based on our sensitivity analysis, every 10-

bp decline in NIM impacts the banks’ net profit by -6% to -9%.

Sensitivity analysis: 10-bp decline in NIM

FY17 (Current)FY17 (Current)FY17 (Current)FY17 (Current) FY17 (Sensitised)FY17 (Sensitised)FY17 (Sensitised)FY17 (Sensitised) Change in Change in Change in Change in earningsearningsearningsearnings

NIMNIMNIMNIM Net profitNet profitNet profitNet profit NIMNIMNIMNIM Net profitNet profitNet profitNet profit

AHB 1.90% 507.7 1.80% 459.8 -9%

AMMB 2.07% 1,251.7 1.97% 1,164.1 -7%

CIMB 2.16% 3,997.9 2.06% 3,633.3 -9%

HLB 1.87% 2,265.5 1.77% 2,114.0 -7%

MAY 2.28% 6,832.4 2.18% 6,306.9 -8%

PBK 2.05% 5,588.1 1.95% 5,274.2 -6%

RHB 1.94% 2,246.7 1.84% 2,056.5 -8%

Source: DBS Bank, AllianceDBS

70

72

74

76

78

80

82

84

86

88

90

(2)

0

2

4

6

8

10

12

14

16

Jan-09

May-09

Sep

-09

Jan-10

May-10

Sep

-10

Jan-11

May-11

Sep

-11

Jan-12

May-12

Sep

-12

Jan-13

May-13

Sep

-13

Jan-14

May-14

Sep

-14

Jan-15

May-15

Sep

-15

Jan-16

May-16

Sep

-16

%

Loan growth (LHS) Deposits growth (LHS) Loan-to-deposit ratio

OctOctOctOct----16:16:16:16:Loan growth: 4.5% y-o-yDeposit growth: 2.8% y-o-yLoan-to-deposit ratio: 90%

Page 8: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 8

Valuation and recommendation

What has been priced in?What has been priced in?What has been priced in?What has been priced in? Malaysian banks are trading at 10-

year trough valuations, pricing in concerns of further ROE de-

rating from a significant blow-up in asset quality. While this is

not our base-case view, we believe this remains the critical

factor in determining share price performance in the year to

come.

Malaysian banks: Forward-rolling P/BV band vs ROE

Source: Bloomberg Finance L.P, DBS Bank, AllianceDBS

WorstWorstWorstWorst----case scenario would see 1% earnings growth.case scenario would see 1% earnings growth.case scenario would see 1% earnings growth.case scenario would see 1% earnings growth. At a

worst-case scenario analysis of 3% loan growth, 10-bp

compression and credit cost of 40bps, our back-of-the-envelope

calculation estimates an 8% downside to our current base-case

earnings forecast. This would slash earnings growth to 1% (vs

11% in our base case), indicating another year of muted

earnings growth. With that, ROE would likely be a tad bit lower

than current year levels.

Stay safe; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our Stay safe; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our Stay safe; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our Stay safe; PBK (RM22.60 TP) and HLB (RM15.00 TP) remain our

top picks.top picks.top picks.top picks. In view of the challenging operating environment, we

continue to favour banks with defensive attributes, i.e. PBK and

HLB. Both banks have strong asset-quality attributes and are

expected to see loan growth driven by mortgages from strong

pipelines built up previously.

Malaysian banks: Peer comparison

Banking GroupBanking GroupBanking GroupBanking Group Market Market Market Market capcapcapcap

PricePricePricePrice Target Target Target Target PricePricePricePrice

RatingRatingRatingRating PE (x)PE (x)PE (x)PE (x) CAGRCAGRCAGRCAGR P/BV (x)P/BV (x)P/BV (x)P/BV (x) ROE (%)ROE (%)ROE (%)ROE (%) Net div Net div Net div Net div (%)(%)(%)(%)

(US$bn)(US$bn)(US$bn)(US$bn) (RM/s)(RM/s)(RM/s)(RM/s) (RM/s)(RM/s)(RM/s)(RM/s) CY15ACY15ACY15ACY15A CY16FCY16FCY16FCY16F CY17FCY17FCY17FCY17F ^ (%)^ (%)^ (%)^ (%) CY15ACY15ACY15ACY15A CY16FCY16FCY16FCY16F CY17FCY17FCY17FCY17F CY16FCY16FCY16FCY16F CY16FCY16FCY16FCY16F

Affin HoldingsAffin HoldingsAffin HoldingsAffin Holdings

1,012 2.30 2.00 FULLY

VALUED 12.1x 9.0x 8.8x 17.3 0.5x 0.5x 0.5x 5.8% 4.5% Alliance*Alliance*Alliance*Alliance* 1,333 3.86 NA NA 11.4x 11.4x 11.0x 1.7 1.3x 1.2x 1.2x 10.9% 4.1% AMMBAMMBAMMBAMMB 2,887 4.23 4.50 HOLD 9.1x 10.0x 9.4x -1.8 0.9x 0.8x 0.8x 8.3% 4.5% CIMB GroupCIMB GroupCIMB GroupCIMB Group 9,316 4.64 4.80 HOLD 13.8x 11.2x 10.1x 16.8 1.0x 0.9x 0.8x 8.6% 4.3% Hong LeongHong LeongHong LeongHong Leong 6,263 13.48 15.00 BUY 13.9x 14.1x 12.3x 6.1 1.5x 1.3x 1.3x 10.2% 3.0% MaybankMaybankMaybankMaybank 18,185 7.88 7.50 HOLD 11.0x 13.1x 11.9x -3.7 1.2x 1.2x 1.2x 10.0% 5.9% Public BankPublic BankPublic BankPublic Bank 17,152 19.62 22.60 BUY 15.0x 14.9x 13.6x 5.1 2.4x 2.2x 2.0x 15.7% 2.9% RHB BankRHB BankRHB BankRHB Bank 3,334 4.79 5.40 BUY 8.9x 9.7x 8.7x 1.5 0.8x 0.8x 0.7x 8.6% 3.4% Weighted averageWeighted averageWeighted averageWeighted average 12.7x12.7x12.7x12.7x 12.7x12.7x12.7x12.7x 13.0x13.0x13.0x13.0x 11.8x11.8x11.8x11.8x 3.93.93.93.9 1.5x1.5x1.5x1.5x 1.4x1.4x1.4x1.4x 1.3x1.3x1.3x1.3x 11.2%11.2%11.2%11.2% Weighted average (exWeighted average (exWeighted average (exWeighted average (ex----Public Public Public Public Bank)Bank)Bank)Bank)

11.7x11.7x11.7x11.7x 11.8x11.8x11.8x11.8x 12.2x12.2x12.2x12.2x 11.0x11.0x11.0x11.0x 3.53.53.53.5 1.1x1.1x1.1x1.1x 1.1x1.1x1.1x1.1x 1.0x1.0x1.0x1.0x 9.4%9.4%9.4%9.4%

Simple averageSimple averageSimple averageSimple average 11.9x11.9x11.9x11.9x 11.9x11.9x11.9x11.9x 11.7x11.7x11.7x11.7x 10.7x10.7x10.7x10.7x 5.45.45.45.4 1.2x1.2x1.2x1.2x 1.1x1.1x1.1x1.1x 1.1x1.1x1.1x1.1x 10.0%10.0%10.0%10.0% Simple average (exSimple average (exSimple average (exSimple average (ex----Public Bank)Public Bank)Public Bank)Public Bank) 11.4x11.4x11.4x11.4x 11.5x11.5x11.5x11.5x 11.2x11.2x11.2x11.2x 10.3x10.3x10.3x10.3x 5.45.45.45.4 1.0x1.0x1.0x1.0x 1.0x1.0x1.0x1.0x 0.9x0.9x0.9x0.9x 9.4%9.4%9.4%9.4%

BIMBBIMBBIMBBIMB 1,536 4.27 NA NR 11.8x 12.0x 11.5x 1.6 1.9x 1.8x 1.6x 17.2% 2.9% Hong Leong Financial Hong Leong Financial Hong Leong Financial Hong Leong Financial GroupGroupGroupGroup 3,848 14.84 17.00 BUY 10.9x 11.4x 10.0x 4.4 1.1x 1.1x 1.0x 10.0% 2.9%

* Based on Bloomberg consensus

^ Refers to a 2-year EPS CAGR for CY15-17F

Source: Companies, Bloomberg Finance L.P., DBS Bank, AllianceDBS

0

2

4

6

8

10

12

14

16

18

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

06 07 08 09 10 11 12 13 14 15 16

%%%%xxxx

P/B (LHS) ROE (RHS)

Page 9: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 9

Malaysian banks: Summary of valuations and recommendations

TP and TP and TP and TP and GGM GGM GGM GGM BankBankBankBank RecRecRecRec basisbasisbasisbasis asmpt.asmpt.asmpt.asmpt. %%%% Key pointsKey pointsKey pointsKey points

PBK Buy RM22.60 ROE 16 Investment thesis: Most efficient bank with resilient earnings growth, lowest cost-to-income ratio and solid asset quality

2.3x CY17 BV growth 4 Catalyst: Sustainable and robust earnings delivery

16x CY17 EPS COE 9 Risk: Failure to sustain better-than-industry growth and asset quality

HLB Buy RM15.00 ROE 11 Investment thesis: Underappreciated franchise with strong liquidity position, promising earnings outlook and removed capital overhang

1.4x CY17 BV growth 4 Catalyst: Improved earnings traction

14x CY17 EPS COE 9 Risk: Slower-than-expected materialisation of growth plans

RHB Buy RM5.40 ROE 10 Investment thesis: Better earnings traction from cost savings, but to re-rate beyond 1x BV, we would need a pick-up in business growth on a more sustainable basis and asset quality concerns to taper off

0.8x CY17 BV growth 4 Catalyst: Cleaner corporate structure with improved ROE traction and materialisation of IGNITE initiatives

10x CY17 EPS COE 11 Risk: Asset quality issues

HLFG Buy RM17.00 HLB TP Investment thesis: Potential corporate streamlining to eliminate administrative overlaps and reduce regulatory compliance costs

1.2x CY17 BV HLA 2x BV Catalyst: Potential privatisation and corporate streamlining

12x CY17 EPS HLC 1x BV Risk: Drawing new growth levers may be challenging, given the softer operating environment

MAY Hold RM7.50 ROE 11 Investment thesis: Staying cautious on susceptibility to weakness in the oil & gas sector

1.1x CY17 BV growth 4 Catalyst: Recovery in asset quality and regional operations

12x CY17 EPS COE 10 Risk: Faster-than-expected recoveries may pose upside risk to our earnings forecast

CIMB Hold RM4.80 ROE 10 Investment thesis: Valuation expected to stay range-bound until clearer pick-up in core earnings momentum is seen

0.9x CY17 BV growth 5 Catalyst: Delivery of new strategic targets

11x CY17 EPS COE 11 Risk: Quicker-than-expected delivery of its T18 strategies would prove our bearish view wrong

AMMB Hold RM4.50 ROE 9 Investment thesis: Challenging earnings outlook given the ongoing portfolio rebalancing initiatives

0.8x CY17 BV growth 3 Catalyst: Improved earnings traction

10x CY17 EPS COE 10 Risk: Inability to grow balance sheet efficiently

Affin Fully RM2.00 ROE 6 Investment thesis: Limited growth potential with weak underlying trends YTD

Valued 0.4x CY17 BV growth 3 Catalyst: New earnings driver

8x CY17 EPS COE 10 Risk: Significant turnaround in its financials and improved asset quality conditions would prove our negative view wrong

Source: DBS Bank, AllianceDBS

Malaysian Banks: 3QCY16 results snapshot

Source: DBS Bank, AllianceDBS

BankBankBankBank F inanc ialF inanc ialF inanc ialF inanc ial v s ourv s ourv s ourv s our v s consensusv s consensusv s consensusv s consensus

quartersquartersquartersquarters est imatesest imatesest imatesest imates est imatesest imatesest imatesest imates

RMRMRMRM RMRMRMRM

Affin 3QFY16 Above Above Yes (▲) Earnings beat expectations on lower

than expected credit cost

◄► Fully Valued Fully Valued ▲ 1.90 2.00

AFG 2QFY17 NA Inline N/A NANANANA NR NR NANANANA NA NA

AMMB 2QFY17 Inline Inline Yes (▼) Lower loan and deposit growth

assumption

◄► Hold Hold ▼ 4.60 4.50

CIMB 3QFY16 Inline Below No ◄► Hold Hold ◄► 4.80 4.80

HLB 1QFY17 Inline Inline No ◄► Buy Buy ◄► 15.00 15.00

MAY 3QFY16 Inline Inline Yes (▲) Lower loan and deposit growth

assumption. Imputing one off gains for

FY16.

◄► Hold Hold ◄► 7.50 7.50

PBK 3QFY16 Inline Inline Yes (▼) Revise earnings on softer non-interest

income

◄► Buy Buy ◄► 22.60 22.60

RHB 3QFY16 Inline Inline Yes (▼) Lower loan growth and higher credit

cost assumptions.

◄► Buy Buy ▼ 5.50 5.40

HLFG 1QFY17 Inline Inline No Lower TP as we reinstate the historical

average holding company discount

◄► Buy Buy ▼ 18.00 17.00

BIMB 3QFY16 NA Inline N/A ◄► Hold Hold NANANANA NA NA

Rev ised Rev ised Rev ised Rev ised

TPTPTPTP

Call Call Call Call

ChangeChangeChangeChange

Prev ious Prev ious Prev ious Prev ious

CallCallCallCall Rev ised CallRev ised CallRev ised CallRev ised Call

TP TP TP TP

ChangeChangeChangeChange

Prev ious Prev ious Prev ious Prev ious

TPTPTPTP

Reasons for earnings v ariat ion and Reasons for earnings v ariat ion and Reasons for earnings v ariat ion and Reasons for earnings v ariat ion and

comment on earnings rev isioncomment on earnings rev isioncomment on earnings rev isioncomment on earnings rev ision

Earnings Earnings Earnings Earnings

rev isionrev isionrev isionrev ision

Page 10: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 10

Net profitNet profitNet profitNet profit

3Q16 sector net profit increased by 9% y-o-y/ 20% q-o-q, lifted mainly by lower provisions.

PrePrePrePre----provision profitprovision profitprovision profitprovision profit

Pre-provision profits were higher by 3% y-o-y as revenue was flat while expenses declined. On a q-o-q basis, it was flattish as higher revenues were offset by higher expenses.

NonNonNonNon----interest income interest income interest income interest income

Non-interest income trend were mixed. Swings were mainly attributable to trading and forex income. CIMB’s non-interest income includes a one-off gain from the sale of stake in Sun Life insurance.

NonNonNonNon----interest income to total revenueinterest income to total revenueinterest income to total revenueinterest income to total revenue

Consequently, non-interest income-to-total income ratios trended differently across the banks.

NIMNIMNIMNIM

Despite a cut in Base Rate during the quarter, most banks managed to sustain NIM levels. Source: Companies, DBS Bank, AllianceDBS

CostCostCostCost----totototo----income ratioincome ratioincome ratioincome ratio

CIMB and RHB reported y-o-y improvement in cost-to-income ratio, thanks to better cost containment. PBK’s ratio remains the best in class.

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

AMMB Affin AFG CIMB HLB MAY PBK RHB

Net profit (RM m)

3Q15 4Q15 1Q16 2Q16 3Q16

500

1,000

1,500

2,000

2,500

3,000

3,500

AMMB Affin AFG CIMB HLB MAY PBK RHB

Pre-provision profit (RM m)

3Q15 4Q15 1Q16 2Q16 3Q16

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

AMMB Affin AFG CIMB HLB MAY PBK RHB

Non-interest income (RM m)

3Q15 4Q15 1Q16 2Q16 3Q16

32%

32%

25% 27%

24%

31%

26% 28%

33%

34%

23%

29%

26%

31%

26%

34%36%

32%

23%

24%

23%

28%

24%

30%

38%

34%

23%

29%

27%

27%

20%

32%

39%

37%

21%

28%

25%

30%

20%

34%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

AMMB Affin AFG CIMB HLB MAY PBK RHB

Non-int income to total revenue

3Q15 4Q15 1Q16 2Q16 3Q16

2.15%

2.10%

2.19%

2.68%

1.78%

2.54%

2.13%

2.07%

2.20%

2.02%

2.04%

2.18%

2.70%

1.81%

2.41%

2.16%

2.12%

2.18%

1.91%

1.84%

2.07%

2.67%

1.74%

2.38%

2.18%

2.16%

2.12%

1.98%

1.98%

2.11%

2.60%

1.77%

2.38%

2.15%

2.06%

2.13%

2.01%

2.02%

2.16%

2.64%

1.85%

2.31%

2.16%

2.04%

2.15%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)

NIM (incl Islamic banking income)

3Q15 4Q15 1Q16 2Q16 3Q16

54% 6

0%

45%

59%

45%

45%

30%

75%

52%

63%

60%

48% 5

5%

45% 49%

30%

57%

51%

69%

64%

51% 5

7%

47%

49%

31%

48% 52%57% 60%

46%

54%

46% 49%

33%

51%

49%5

6%

57%

47%

55%

45% 49%

33%

51%

49%

0%

10%

20%

30%

40%

50%

60%

70%

80%

AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)

Cost-to-income

3Q15 4Q15 1Q16 2Q16 3Q16

Page 11: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 11

Loan growth (qLoan growth (qLoan growth (qLoan growth (q----oooo----q)q)q)q)

Sector loans grew 2% in 3Q16. Loan growth momentum remains sluggish.

Deposit growth (qDeposit growth (qDeposit growth (qDeposit growth (q----oooo----q)q)q)q)

2% deposit growth q-o-q. AMMB reported a contraction in deposits.

Loan growth (yLoan growth (yLoan growth (yLoan growth (y----oooo----y)y)y)y)

Sector loan grew 2%. Banks are reporting loans growth at low single digits, with the exception of PBK (high single digit).

Deposit growth (yDeposit growth (yDeposit growth (yDeposit growth (y----oooo----y)y)y)y)

Sector deposit growth improved at 4% y-o-y.

Loan to Loan to Loan to Loan to deposit ratio (LDR)deposit ratio (LDR)deposit ratio (LDR)deposit ratio (LDR)

Industry loan-to-deposit ratio was stable at 90%. Source: Companies, DBS Bank, AllianceDBS

CASA to total depositsCASA to total depositsCASA to total depositsCASA to total deposits

Banks continue to focus on shoring up low-cost deposits (CASA) to fight NIM compression.

1%

0%

2%

6%

2%

7%

4%

3%

5%

0%

4%

2%

0%

2%

-1%

2%

1%

0%1

%

1%

0%

-3%

1%

-4%

1%

-1%

-1%-1%

-2%

-1%

3%

2% 2% 2%

1% 2%

0%

0%

2% 2%

0%

2%

2%

1% 2

%

-6%

-4%

-2%

0%

2%

4%

6%

8%

AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)

Loan growth (q-o-q)

3Q15 4Q15 1Q16 2Q16 3Q16

-1%

-7%

0%

5%

2%

5%

0% 1%

3%

2%

9%

-1%

2%

1%

0%

2%

-1%

1%

-1%

-1%

6%

0%

1%

-2%

2%

0% 0%

-4%

-7%

-2%

0%

2% 3

%

2%

4%

1%

-4%

6%

3%

7%

1%

0%

2%

1% 2%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)

Deposit growth (q-o-q)

3Q15 4Q15 1Q16 2Q16 3Q16

0%

7%

10%

19%

11%

20%

13%

10%

15%

-1%

7% 8

%

13%

10% 12%

12%

6%

10%

0%

9%

5%

7% 7%

6%

10%

4%

6%

2% 3% 3%

6%

6%

4%

10%

5% 6%

1% 2% 3%

2%

4%

-1%

8%

2%

2%

-5%

0%

5%

10%

15%

20%

25%

AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)

Loan growth (y-o-y)

3Q15 4Q15 1Q16 2Q16 3Q16

5%

-6%

8%

18%

11%

14%

10%

7%

11%

1%

0%

5%

13%

10%

9% 9%

1%

8%

-2%

3% 3%

7% 7%

4%

7%

-1%

5%

-3%

-6%

2%

7%

6%

6%

5%

4% 5%

-7%

6%

5%

8%

4%

0%

7%

4%

4%

-10%

-5%

0%

5%

10%

15%

20%

AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)

Deposit growth (y-o-y)

3Q15 4Q15 1Q16 2Q16 3Q16

95%

90%

85% 93%

80%

96%

90%

93%

90%

94%

86%

88%

91%

81%

95%

90% 95%

90%96%

87%

83% 89%

80%

93%

90% 94%

89%

99%

92%

85% 92%

80%

93%

90%

91%

90%

103%

86%

84% 88%

80%

95%

90%

91%

90%

0%

20%

40%

60%

80%

100%

120%

AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)

LDR

3Q15 4Q15 1Q16 2Q16 3Q16

21.1%

21.1%

33.6%

34.4%

24.9%

35.0%

24.7%

23.3%

20.4%

19.2%

35.0%

34.4%

25.5%

33.7%

24.2%

24.0%

20.7%

17.7%

32.1% 35.7%

24.4%

33.5%

23.4%

24.1%

24.5%

19.5%

32.9%

35.6%

25.3%

34.1%

23.6%

24.8%

21.9%

18.2%

32.9%

34.3%

24.8%

35.1%

23.7%

24.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

AMMB Affin AFG CIMB HLB MAY PBK RHB

CASA to total deposit

3Q15 4Q15 1Q16 2Q16 3Q16

Page 12: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 12

Credit costsCredit costsCredit costsCredit costs

Credit cost for MAY and RHB declined after a sharp spike in the previous quarter. AMMB continued to ride on recoveries.

Gross NPL ratioGross NPL ratioGross NPL ratioGross NPL ratio

PBK and HLB’s NPLs remain the best in class.

Absolute impaired loanAbsolute impaired loanAbsolute impaired loanAbsolute impaired loans (qs (qs (qs (q----oooo----q) q) q) q)

Absolute impaired loans continued to climb. Higher impaired loans at RHB was caused by two oil & gas accounts from Singapore while PBK’s was due to residential mortgage.

Absolute impaired loanAbsolute impaired loanAbsolute impaired loanAbsolute impaired loans (ys (ys (ys (y----oooo----y)y)y)y)

Absolute impaired loans growth slower, but remains elevated.

CET1, TierCET1, TierCET1, TierCET1, Tier----1 CAR and total CAR (as at 1 CAR and total CAR (as at 1 CAR and total CAR (as at 1 CAR and total CAR (as at 30 Sep30 Sep30 Sep30 Sep 2016) 2016) 2016) 2016)

Capital ratios remain relatively healthy.

Total CAR remains strongTotal CAR remains strongTotal CAR remains strongTotal CAR remains strong

MAY’s capital ratios strongly held up by its dividend reinvestment plan.

-0.07%

0.07%

0.05%

0.18%

0.02%

0.17%

0.04%

0.03%

-0.08%

0.05%

0.01%

0.24%

0.05%

0.11%

-0.04%

0.16%

-0.05% 0.00%

0.00%

0.18%

0.02%

0.20%

0.02%

0.05%

-0.04%

0.01% 0.05%

0.22%

-0.04%

0.26%

0.02%

0.21%

-0.04%

0.05%

0.04%

0.19%

0.02% 0

.07%

0.03%

0.09%

-0.10%

-0.05%

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

AMMB Affin AFG CIMB HLB MAY PBK RHB

Credit cost

3Q15 4Q15 1Q16 2Q16 3Q16

2.0% 2.2%

1.2%

3.4%

0.8%

1.5%

0.5%

1.9%

1.9%

1.8%

1.9%

1.1%

3.0%

0.9%

1.9%

0.5%

1.9%

1.8%

1.9%

2.0%

1.3%

3.0%

0.8%

2.1%

0.5%

1.8%

1.9%

1.7% 2.0%

1.2%

3.2%

0.8%

2.3%

0.5%

2.1%

1.9%

1.6%

2.1%

0.9%

3.2%

0.8%

2.2%

0.5%

2.3%

1.9%

0%

1%

1%

2%

2%

3%

3%

4%

4%

AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)

Gross NPL ratio

3Q15 4Q15 1Q16 2Q16 3Q16

10.1%

8.8%

23.0%

10.0%

2.0% 5.9%

1.8%

-1.8%

6.8%

-7.9%

-11.0%

-9.6%

-10.7%

4.8%

19.4%

-4.7%

-2.3%

-0.3%

8.8%

5.0%

16.6%

-3.3%

-4.4%

9.1%

-1.2%

-4.0%

2.2%

-13.3%

-1.9%

-7.6%

7.2%

-1.3%

13.2%

3.6%

14.2%

7.6%

-3.2%

4.3%

-18.4%

3.8%

6.0%

-3.1%

7.6% 10.6%

1.5%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)

Absoulte NPL(q-o-q)

3Q15 4Q15 1Q16 2Q16 3Q16

9.7%

23.9%

12.1% 24.4%

-19.1%

12.5%

-8.0%

-6.7%

11.3%

-5.2%

11.6%

3.1% 11.0%

-3.6%

37.2%

-9.2% -1.8%

13.3%

8.1%

10.2%

28.1%

2.4%

-1.9%

49.0%

-6.0%

-6.2%

14.4%

-4.4%

-0.3%

19.8%

1.8%

0.9%

56.2%

-0.7%

5.3%

17.1%

-15.9% -4

.3%

-20.5%

-4.0%

4.8%

42.9%

5.0%

18.6%

11.4%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)

Absolute NPL (y-o-y)

3Q15 4Q15 1Q16 2Q16 3Q16

16.5%

15.6%

16.8%

15.8%

14.8%

19.0%

15.2% 17.1%

12.9%

12.8%

12.2%

12.4%

13.3% 15.4%

11.9% 13.3%

11.9%

12.8%

12.2%

10.9%

12.9%

13.7%

11.0%

13.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

AMMB Affin AFG CIMB HLB MAY PBK RHB

Total CAR Tier 1 CAR CET1 CAR

15.6%

13.5%

13.6%

13.4%

13.7%

15.0%

14.8%

15.7%

14.4%

16.2%

14.3% 17.1%

15.4%

16.2%

17.7%

15.5%

14.7%

15.9%

16.1%

14.4% 17.4%

15.4%

15.7% 17.9%

15.2%

15.5%

16.0%

16.1%

14.9%

16.3%

15.6%

14.7%

19.2%

15.4%

17.2%

16.2%

16.5%

15.6%

16.8%

15.8%

14.8%

19.0%

15.2%

17.1%

16.4%

0%

5%

10%

15%

20%

25%

AMMB Affin AFG CIMB HLB MAY PBK RHB Industry(est)

RWCAR

3Q15 4Q15 1Q16 2Q16 3Q16

Page 13: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 13

Malaysian Banks: 3QCY16 results (q-o-q and y-o-y comparison) Alliance Financial Group AMMB CIMB

RMm 2QFY17 2QFY16 1QFY17 y-o-y q-o-q 2QFY17 2QFY16 1QFY17 y-o-y q-o-q 3QFY16 3QFY15 2QFY16 y-o-y q-o-q Net interest income 204 213 212 -4% -4% 373 432 392 -14% -5% 2,445 2,416 2,352 1% 4% Islamic banking income 78 61 67 29% 17% 201 200 197 1% 2% 425 386 413 10% 3% Non-interest income 77 92 84 -16% -9% 368 299 357 23% 3% 1,103 1,038 1,138 6% -3% Operating income 360 366 364 -2% -1% 943 931 947 1% 0% 3,974 3,840 3,903 3% 2% Operating expenses (167) (166) (169) 1% -1% (524) (500) (536) 5% -2% (2,193) (2,261) (2,091) -3% 5% Pre-provision profit 192 200 195 -4% -1% 419 432 411 -3% 2% 1,781 1,580 1,812 13% -2% Provisions & Impairments (17) (19) (19) -13% -13% 42 66 44 -36% -6% (586) (529) (657) 11% -11% Associates 0 0 0 nm nm 11 4 5 187% 139% 16 24 34 nm nm Pre-tax profit 176 181 175 -3% 0% 472 501 479 -6% -2% 1,361 1,075 1,189 27% 14% Net profit 133 135 132 -2% 0% 353 383 323 -8% 9% 1,023 804 873 27% 17% NIM (%) 2.16 2.19 2.11 (0.03) 0.04 2.01 2.15 1.98 (0.14) 0.02 2.64 2.68 2.60 (0.04) 0.04 Cost-to-income (%) 46.5 45.4 46.5 1.1 0.0 55.6 53.7 56.6 2.0 (1.0) 55.2 58.9 53.57 (3.7) 1.6 ROE (%) 10.6 11.8 10.9 (1.1) (0.2) 9.1 10.3 8.4 (1.3) 0.7 9.50 8.20 8.4 1.3 1.1 ROA (%) 1.0 1.0 1.0 (0.1) 0.0 1.1 1.2 1.0 (0.0) 0.1 0.9 0.7 0.7 0.2 0.1 Gross NPL ratio (%) 0.9 1.2 1.2 (0.3) (0.2) 1.6 2.0 1.7 (0.3) (0.1) 3.2 3.4 3.2 (0.2) 0.0 Loan loss coverage (%) 101.9 85.5 83.9 16.4 18.0 83.5 92.6 81.2 (9.1) 2.3 80.6 76.6 83.5 4.0 (3.0) LD ratio (%) 83.9 85.4 84.9 (1.5) (1.0) 103.4 95.5 99.0 7.9 4.4 88.1 93.3 91.7 (5.2) (3.6) CET-1(%) 12.2 11.7 11.7 0.4 0.4 11.9 10.6 11.2 1.3 0.7 10.9 9.3 10.9 1.6 0.0 Tier-1 CAR (%) 12.2 11.7 11.7 0.4 0.4 12.9 11.8 12.2 1.1 0.7 12.4 10.6 12.2 1.8 0.2 RWCAR (%) 16.8 13.6 16.3 3.1 0.5 16.5 15.6 16.1 0.9 0.4 15.8 13.4 15.6 2.4 0.2 Net loans 38,775 37,607 38,136 3% 2% 86,068 85,270 85,807 1% 0% 296,786 290,109 290,064 2% 2% Deposits 46,230 44,055 44,920 5% 3% 83,242 89,280 86,710 -7% -4% 336,586 310,810 315,998 8% 7% Gross NPLs/Impaired Loans 368 463 451 -21% -18% 1,427 1,697 1,474 -16% -3% 9,769 10,172 9,414 -4% 4% Positives NA Stable NIM. Decline in impaired loans. Higher CET1. Higher non-interest income and Islamic banking income.

Largely stable asset quality indicators. Expenses contained.

Disappointments NA Loan growth remains dampened by auto portfolio contraction. Deposits contracted.

Lower NIM. High provisions. Softer associate contribution.

Prospects NA AMMB is targeting to achieve 8.5% to 9% ROE in FY17, driven by lower expenses (targeting ≤57%) and sustained recoveries. Volatility in the market and the levels of recoveries are key factors that may derail target.

At the current run rate, management expects ROE and loan growth to more likely reach 9% and 6% respectively. CIMB remains on track to hit its 12% CET1 ratio target by 2018 and cost-to-income ratio target of 53% for 2016.

Link to report NA AMMB: Tracking expectations well CIMB: Falling short of targets

Source: Company announcements, DBS Bank, AllianceDBS

Page 14: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 14

Malaysian Banks: 3QCY16 results (q-o-q and y-o-y comparison) (cont’d) Hong Leong Bank Maybank Public Bank

RMm 1QFY17 1QFY16 4QFY16 y-o-y q-o-q 3QFY16 3QFY15 2QFY16 y-o-y q-o-q 3QFY16 3QFY15 2QFY16 y-o-y q-o-q Net interest income 690 660 663 5% 4% 2,828 2,897 2,879 -2% -2% 1,736 1,629 1,700 7% 2% Islamic banking income 130 115 121 13% 7% 1,009 1,085 1,037 -7% -3% 249 211 233 18% 7% Non-interest income 276 249 295 11% -6% 1,621 1,766 1,430 -8% 13% 482 631 492 -24% -2% Operating income 1,096 1,023 1,079 7% 2% 5,458 5,747 5,346 -5% 2% 2,467 2,471 2,425 0% 2% Operating expenses (491) (463) (494) 6% -1% (2,700) (2,601) (2,624) 4% 3% (815) (741) (803) 10% 1% Pre-provision profit 606 560 585 8% 4% 2,758 3,146 2,722 -12% 1% 1,652 1,730 1,622 -4% 2% Provisions (26) (21) 54 nm nm (331) (797) (1,181) -58% -72% (94) (117) (69) -20% 69% Associates 95 85 85 12% 12% 29 34 43 -15% -32% (0) 1 (1) -153% -163% Pre-tax profit 675 625 724 8% -7% 2,456 2,383 1,584 3% 55% 1,558 1,614 1,552 -3% 0% Net profit 543 503 559 8% -3% 1,796 1,899 1,160 -5% 55% 1,238 1,201 1,256 3% -1% NIM (%) 1.85 1.78 1.77 0.08 0.08 2.31 2.54 2.38 (0.24) (0.07) 2.16 2.13 2.15 0.03 0.02 Cost-to-income (%) 44.8 45.2 45.8 (0.5) (1.0) 49.5 45.3 49.1 4.2 0.4 33.0 30.0 33.1 3.0 (0.1) ROE (%) 10.1 11.6 10.8 (1.5) (0.7) 11.1 13.1 7.4 (1.9) 3.7 15.2 16.3 15.8 (1.1) (0.6) ROA (%) 1.1 1.1 1.2 0.1 (0.0) 1.0 1.1 0.7 (0.1) 0.3 1.3 1.3 1.3 (0.0) (0.0) Gross NPL ratio (%) 0.8 0.8 0.8 0.0 0.0 2.2 1.5 2.3 0.7 (0.1) 0.5 0.5 0.5 (0.0) 0.0 Loan loss coverage (%) 112.6 131.0 119.8 (18.4) (7.2) 74.8 85.4 70.5 (10.5) 4.3 109.5 130.8 116.3 (21.2) (6.8) LD ratio (%) 80.3 80.1 80.4 0.1 (0.2) 95.0 96.0 92.6 (1.0) 2.4 90.2 89.8 90.5 0.3 (0.3) CET-1 (%) 12.9 10.5 12.7 2.3 0.1 13.7 11.2 13.8 2.5 (0.1) 11.0 10.2 11.1 0.8 (0.1) Tier-1 CAR (%) 13.3 11.6 13.1 1.6 0.1 15.4 12.8 15.5 2.6 (0.1) 11.9 11.4 12.0 0.5 (0.1) RWCAR (%) 14.8 13.7 14.7 1.1 0.1 19.0 15.0 19.2 4.0 (0.1) 15.2 14.8 15.4 0.4 (0.2) Net loans 119,835 115,063 119,458 4% 0% 453,778 458,464 443,886 -1% 2% 286,634 266,194 281,852 8% 2% Deposits 149,273 143,566 148,524 4% 1% 477,513 477,493 479,125 0% 0% 317,935 296,339 311,535 7% 2% Gross NPLs/Impaired Loans 1,014 967 957 5% 6% 10,240 7,167 10,568 43% -3% 1,488 1,418 1,383 5% 8% Positives Strong treasury income. NIM expansion. Decent loan and

deposit growth. Improved associate contribution. Stronger trading and forex income. Minimal NIM slippage. Higher loan loss coverage ratio.

Higher-than-industry loan and deposit growth. Stable NIM and NPL ratio. Best-in-class cost efficiency.

Disappointments Provisions normalised. Muted loan and deposit growth. Increased oil & gas exposure.

Increase in impaired loans from its Laos operations.

Prospects FY17F targets appear to skew towards a cautious mode with loan growth expected to track industry levels. Deposits would likely grow at the same pace. ROE target at 10-11%.

MAY has toned down guidance across the board and now expects loan growth of 2-3%, deposit growth of 3-4% and ROE of 10.5-11%.

In the event of further cuts in OPR, NIM pressure may be more pronounced than expected. During the quarter, PBK's NIM held up well despite the OPR cut in July.

Link to report Hong Leong Bank: Growing from strength to strength Maybank: Much ado about oil and gas Public Bank: The exception to the rule

Source: Company announcements, DBS Bank, AllianceDBS

Page 15: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 15

Malaysian Banks: 3QCY16 results (q-o-q and y-o-y comparison) (cont’d) RHB Bank Affin Holdings Banks under coverage - Cumulative

RMm 3QFY16 3QFY15 2QFY16 y-o-y q-o-q 3QFY16 3QFY15 2QFY16 y-o-y q-o-q 2QCY16 2QCY15 1QCY16 y-o-y q-o-q Net interest income 849 877 853 -3% 0% 247 248 247 -1% 0% 9,373 9,371 9,298 0% 1% Islamic banking income 234 230 227 2% 3% 69 63 65 10% 6% 2,396 2,351 2,361 2% 1% Non-interest income 546 439 509 24% 7% 189 149 164 27% 15% 4,663 4,663 4,469 0% 4% Operating income 1,629 1,546 1,589 5% 3% 504 460 477 10% 6% 16,431 16,385 16,128 0% 2% Operating expenses (827) (1,166) (808) -29% 2% (288) (275) (287) 5% 0% (8,005) (8,172) (7,811) -2% 2% Pre-provision profit 803 380 781 111% 3% 216 185 189 17% 14% 8,426 8,212 8,317 3% 1% Provisions (140) (51) (312) 176% -55% (22) (30) (2) -25% 924% (1,174) (1,498) (2,142) -22% -45% Associates 0 0 0 -15% -61% 6 4 13 46% -55% 157 152 178 3% -12% Pre-tax profit 663 329 469 101% 41% 186 149 186 24% 0% 7,546 6,856 6,358 10% 19% Net profit 505 229 350 120% 44% 140 102 137 36% 2% 5,730 5,256 4,791 9% 20% NIM (%) 2.04 2.07 2.06 (0.03) (0.03) 2.02 2.10 1.98 (0.08) 0.04 2.15 2.20 2.13 (0.06) 0.02 Cost-to-income (%) 50.7 75.4 50.9 (24.7) (0.1) 57.2 59.7 60.3 (2.56) (3.11) 49.1 51.7 49.5 (2.6) (0.4) ROE (%) 9.4 3.8 6.3 5.6 3.2 6.4 5.1 6.4 1.38 (0.01) 10.2 10.0 9.3 0.2 0.9 ROA (%) 0.9 0.3 0.6 0.5 0.3 0.8 0.6 0.8 0.19 0.03 1.0 0.9 0.9 0.1 0.1 Gross NPL ratio (%) 2.3 1.9 2.1 0.3 0.2 2.1 2.2 2.0 (0.13) 0.09 1.7 1.7 1.7 0.0 0.0 Loan loss coverage (%) 56.4 56.5 59.0 (0.2) (2.6) 59.7 61.2 65.2 (1.49) (5.46) 84.9 89.9 84.9 (5.1) (0.0) LD ratio (%) 91.0 93.0 91.3 (2.1) (0.3) 86.5 90.2 91.9 (3.72) (5.47) 89.8 90.4 90.3 (0.6) (0.5) CET-1(%) 13.0 11.9 13.0 1.1 (0.0) 12.8 12.2 12.1 0.57 0.70 12.3 11.0 12.1 1.3 0.2 Tier-1 CAR (%) 13.3 12.3 13.3 1.0 (0.1) 12.8 12.2 12.1 0.57 0.70 13.0 11.8 12.8 1.2 0.2 RWCAR (%) 17.1 15.7 17.2 1.5 (0.1) 16 13.514 14.9 2.04 0.68 16.4 14.4 16.2 1.9 0.2 Net loans 151,009 147,879 149,862 2% 1% 42,601 41,817 42,745 2% 0% 1,475,486 1,442,402 1,451,809 2% 2% Deposits 165,999 158,968 164,141 4% 1% 49,264 46,362 46,490 6% 6% 1,626,042 1,566,872 1,597,443 4% 2% Gross NPLs/Impaired Loans 3,446 2,907 3,117 19% 11% 897 937 860 -4% 4% 28,649 25,727 28,223 11% 2% Positives Improvement in cost efficiency. Higher trading income. Higher write-backs and lower provisions. Higher NIM.

Disappointments High provisions, higher impaired loans, lower loan loss coverage. Lower NIM. Sluggish loan growth.

No signs of asset quality moderation. Uninspiring loan and deposit growth.

Prospects We expect FY16F ROE to stay below its target of 10%, but we see RHB's improved cost efficiency as a bright spot for the bank. NPL ratio of <2% would be a challenge to reach if some of its oil & gas borrowers decide to restructure or reschedule loans.

Continue to take a cautious stance on provisions due to limited improvement in asset quality indicators.

Link to report RHB Bank: Keep watch on asset quality Affin Holdings: Asset quality still a concern

Source: Company announcements, DBS Bank, AllianceDBS

Page 16: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

Industry Focus

Malaysian Banks

Page 16

Company GuidesCompany GuidesCompany GuidesCompany Guides

Page 17: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY

FULLY VALUEDFULLY VALUEDFULLY VALUEDFULLY VALUED Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM2.30 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Price Price Price Target 12Target 12Target 12Target 12----mthmthmthmth :::: RM2.00 (13% downside) (Prev RM2.00) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: New earnings driver

Where we differ:Where we differ:Where we differ:Where we differ: Post earnings adjustment, our foreast is higher than

consensus, presumably on lower credit cost assumption Analyst Lynette CHENG +60 32604 3907 [email protected] Sue Lin LIM +65 8332 6843 [email protected]

What’s New • 3Q/9M16 earnings above expectation as

provisions were lower than expected

• Asset-quality indicators remain weak with absolute impaired loans increasing q-o-q and loan loss coverage at a low of 60%

• Raising earnings by 8-11% on lower credit cost assumption

• Maintain FULLY VALUED with higher TP of RM2.00

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Pre-prov. Profit 676 704 734 802 Net Profit 369 495 508 547 Net Pft (Pre Ex.) 369 495 508 547 Net Pft Gth (Pre-ex) (%) (37.7) 33.9 2.7 7.8 EPS (sen) 19.0 25.5 26.1 28.2 EPS Pre Ex. (sen) 19.0 25.5 26.1 28.2 EPS Gth Pre Ex (%) (38) 34 3 8 Diluted EPS (sen) 19.0 25.5 26.1 28.2 PE Pre Ex. (X) 12.1 9.0 8.8 8.2 Net DPS (sen) 7.99 10.2 10.5 11.3 Div Yield (%) 3.5 4.4 4.5 4.9 ROAE Pre Ex. (%) 4.6 5.9 5.8 6.0 ROAE (%) 4.6 5.9 5.8 6.0 ROA (%) 0.6 0.8 0.7 0.8 BV Per Share (sen) 426 442 457 474 P/Book Value (x) 0.5 0.5 0.5 0.5 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 23.4 24.1 25.4

Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 2 S: 4 H: 2

Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P.

Asset-quality concern remains In a tight spotIn a tight spotIn a tight spotIn a tight spot, FULLY VALUED, FULLY VALUED, FULLY VALUED, FULLY VALUED.... YTD earnings improvement was driven by lower credit cost; despite no signs of improvements in asset quality (absolute impaired loans increased 7% YTD, loan loss coverage at lowest level since 2010). Separately, growth appears to be challenging as YTD loan and deposit growth remains in negative territory at -3% and -2%, respectively. We keep our view that the stock would likely continue to trade

below BV given its weaker fundamentals vs peers.

3333Q/Q/Q/Q/9M9M9M9M16 16 16 16 earningsearningsearningsearnings beatbeatbeatbeat expectations expectations expectations expectations as provisions as provisions as provisions as provisions stayed low.stayed low.stayed low.stayed low. At the pre-provision level, earnings met expectations. Net interest income came in flat q-o-q despite lower cost of funds, as loan growth was benign at -0.4% q-o-q/1.8% y-o-y. Non-interest income was boosted by higher forex and trading gains. Cost-to-income ratio ran lower due to the higher income growth. Affin continued to enjoy low provisions on its loan portfolio (thanks to write backs), but incurred provisions for its

securities portfolio to the tune of RM19m.

Raised earnings Raised earnings Raised earnings Raised earnings on lower credit cost assumon lower credit cost assumon lower credit cost assumon lower credit cost assumptionptionptionption.... Asset-quality indicators remain weak as absolute impaired loans increased q-o-q, while loan loss coverage slid to 60%. However, given that Affin appears comfortable with the current level of loan loss coverage, we are lowering our credit cost assumption to 10/13/15bps across FY16-18F (vs 17bps each previously). As a result, earnings were raised by 8-11% and TP was adjusted to

RM2.00.

Valuation: Our RM2.00 TP implies 0.4x FY17F BV and is derived from the Gordon Growth Model. This assumes 6% ROE, 10% cost of equity and 3% growth. We expect weak underlying trends to remain a drag on its share price performance.

Key Risks to Our View: A significant turnaround.A significant turnaround.A significant turnaround.A significant turnaround. We have imputed a weak set of earnings estimates and ascribed a low valuation multiple to the bank. Its current state with weak asset quality has been accounted for. A significant turnaround in its financials and improved asset-quality conditions would prove our view wrong.

At A Glance Issued Capital (m shrs) 1,943

Mkt. Cap (RMm/US$m) 4,469 / 1,005

Major Shareholders (%)

LTAT (%) 35.2 Bank of East Asia (%) 23.5 Boustead (%) 20.7 Free Float (%) 13.1

3m Avg. Daily Val (US$m) 0.17

ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks

DBS Group Research . Equity

7 Dec 2016

Malaysia Company Guide

Affin Holdings Berhad Version 5 | Bloomberg: AHB MK | Reuters: AFIN.KL Refer to important disclosures at the end of this report

58

78

98

118

138

158

178

198

218

1.9

2.4

2.9

3.4

3.9

4.4

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Relative IndexRM

Affin Holdings Berhad (LHS) Relative KLCI (RHS)

Page 18: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES

Page 18

Company Guide

Affin Holdings Berhad

WHAT’S NEW

Provisions lower than expected but asset-quality remains a concern

HighlightsHighlightsHighlightsHighlights

Affin’s 3Q/9MFY16 earnings came in above Affin’s 3Q/9MFY16 earnings came in above Affin’s 3Q/9MFY16 earnings came in above Affin’s 3Q/9MFY16 earnings came in above our our our our expectations, expectations, expectations, expectations,

on loweron loweron loweron lower----thanthanthanthan----expected provisions.expected provisions.expected provisions.expected provisions. Pre-provision profits were

within expectations. On a q-o-q basis, earnings were flattish.

Although NIM was higher q-o-q (from lower cost of funds),

net interest income was flattish as loan growth remains

muted at -0.4% q-o-q/1.8% y-o-y/-2% YTD. Non-interest

income was boosted by higher forex and trading gains. Cost-

to-income ratio ran lower due to the higher income growth.

Affin continued to enjoy low provisions on its loan portfolio

(thanks to write backs), but incurred provisions for its

securities portfolio to the tune of RM19m. Deposit growth

was higher at 6% for both q-o-q and y-o-y, but contracted

-3% YTD due to the significant increase in 4QFY15.

Uptick in impaired loans.Uptick in impaired loans.Uptick in impaired loans.Uptick in impaired loans. Asset-quality indicators remain weak

as absolute impaired loans increased 4% q-o-q, largely led by

working capital loans (+21% q-o-q). Impaired loans ratio

inched up to 2.1% (from 2.0% in 2QFY16). Loan loss

coverage slid to 60% (87% including regulatory reserve).

Capital ratios remain strong with CET1/Tier-1/Total Capital

ratios of 12.8%/12.8%/15.6%. Affin declared an interim DPS

of 3 sen.

OutlookOutlookOutlookOutlook

Raised earnings by 8Raised earnings by 8Raised earnings by 8Raised earnings by 8----11111111% % % % on lower credit cost assumptionon lower credit cost assumptionon lower credit cost assumptionon lower credit cost assumption....

Given that Affin appears comfortable with the current level of

loan loss coverage, we are lowering our credit cost

assumption to 10/13/15bps across FY16-18F (vs 17bps each

previously).

In search for stability.In search for stability.In search for stability.In search for stability. In this current uncertain environment,

we continue to favour banks with more steady and

conservative asset-quality indicators. YTD earnings

improvement was driven by lower credit cost; despite no

signs of improvements in asset quality (absolute impaired

loans increased 7% YTD, loan loss coverage at lowest level

since 2010). We would turn less negative on Affin when signs

of asset quality stabilisation and clarity on earnings quality

emerge.

Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation

Maintain FULLY VALUED with higher TP of RM2.00. Maintain FULLY VALUED with higher TP of RM2.00. Maintain FULLY VALUED with higher TP of RM2.00. Maintain FULLY VALUED with higher TP of RM2.00. Post

earnings adjustment, our TP was nudged up to RM2.00 (from

RM1.90). Our TP implies 0.4x FY17F BV and assumes 10%

cost of equity, 3% long-term growth and 6% ROE. In our

view, there are no re-rating catalysts in sight and the stock

would likely continue to trade below book value given its

weaker fundamentals and lower ROE vs peers.

Page 19: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES

Page 19

Company Guide

Affin Holdings Berhad

Quarterly / Interim Income Statement (RMm)

FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Net Interest Income 248 247 247 (0.5) (0.3)

Islamic Income 63.0 65.3 69.1 9.6 9.6

Non-Interest Income 149 164 189 26.8 15.0

Operating IncomeOperating IncomeOperating IncomeOperating Income 460460460460 477477477477 504504504504 9.79.79.79.7 5.85.85.85.8

Operating Expenses (275) (287) (288) 5.0 0.3

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 185185185185 189189189189 216216216216 16.716.716.716.7 14.114.114.114.1

Provisions (29.7) (2.2) (22.2) (25.3) nm

Associates 3.96 12.8 5.81 46.5 (54.6)

Exceptionals 0.0 0.0 0.0 nm nm

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 149149149149 186186186186 186186186186 24.424.424.424.4 0.00.00.00.0

Taxation (45.3) (45.1) (41.5) (8.4) (8.0)

Minority Interests (1.8) (3.3) (4.7) (168.0) 42.3

Net ProfitNet ProfitNet ProfitNet Profit 102102102102 137137137137 140140140140 36.436.436.436.4 1.61.61.61.6

Growth (%)

Net Interest Income Gth 11.6 7.7 (0.3)

Net Profit Gth (26.5) 18.9 1.6

Key ratio (%)

NIM 2.1 2.0 2.0

NPL ratio 2.2 2.0 2.1

Loan-to deposit 91.4 93.1 87.6

Cost-to-income 59.7 60.3 57.2

Total CAR 13.5 14.9 15.6

Source of all data: Company, AllianceDBS

Page 20: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES

Page 20

Company Guide

Affin Holdings Berhad

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Persistent NIM squeeze.Persistent NIM squeeze.Persistent NIM squeeze.Persistent NIM squeeze. NIM is expected to remain under

pressure due to deposit competition as banks prepare to meet

the Liquidity Coverage Ratio requirement under Basel III. CASA,

the banks’ low-cost funding source, should help in managing

cost of funds. However, Affin’s CASA ratio stands at c.20%,

which is the lowest compared to Malaysian banking peers. This

could exert further pressure on cost of funds.

Corporate loan driven.Corporate loan driven.Corporate loan driven.Corporate loan driven. Affin’s loan portfolio is skewed towards

corporate loans, with this segment making up slightly more

than 50% of total loans. We have penned in 2%/5%/5% loan

growth across FY16-18F. There should be opportunities to

leverage on working capital financing of ETP projects as they are

rolled out. Affin should be able clinch a decent portion of these

given its relationship with Lembaga Tabung Angkatan Tentera

(LTAT) and Boustead, which are Affin’s major shareholders. We

expect deposit growth to track loan growth.

NonNonNonNon----interest income boost from acquisition is a challenge.interest income boost from acquisition is a challenge.interest income boost from acquisition is a challenge.interest income boost from acquisition is a challenge. Upon

acquisition of HwangDBS (completed in 2014), Affin has

boosted its non-interest income, especially for its stockbroking

and asset-management segments. Post-acquisition, Affin’s non-

interest income-to-total income ratio increased from 25% in

FY13 to 34% in FY15. However, growing non-interest income

will be a challenge going forward, given that the capital market

outlook remains weak.

CostCostCostCost----totototo----income ratio expected to stay highincome ratio expected to stay highincome ratio expected to stay highincome ratio expected to stay high. As a result of the

acquisition of HwangDBS, integration costs weighed on

expenses and drove up cost-to-income ratio. With integration

costs now a thing in the past, we expect expense growth to

gradually moderate. However, revenue drivers are expected to

remain sluggish, we assumed that cost-to-income ratio hover at

c.60%.

Expect credit cost to trend upwardsExpect credit cost to trend upwardsExpect credit cost to trend upwardsExpect credit cost to trend upwards.... A sharp spike in provision

was reported in 1QFY15 which triggered a surge in credit cost,

thus causing FY15 provisions to hit 38bps. Write backs were

reported in FY16, but we believe provisions would start to

normalise going forward

Margin Trends

Gross Loan & Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure

Source: Company, AllianceDBS

1.8%

1.8%

1.9%

1.9%

2.0%

2.0%

2.1%

2.1%

2.2%

0

100

200

300

400

500

600

700

800

900

1,000

2014A 2015A 2016F 2017F 2018F

RM m

Net Interest Income Net Interest Income Margin

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2014A 2015A 2016F 2017F 2018F

RM m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

10,000

20,000

30,000

40,000

50,000

2014A 2015A 2016F 2017F 2018F

RM m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

72%

77%

82%

87%

92%

36,443

41,443

46,443

51,443

56,443

61,443

66,443

2014A 2015A 2016F 2017F 2018F

RM bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

56.0%

57.0%

58.0%

59.0%

60.0%

61.0%

62.0%

63.0%

0

500

1,000

1,500

2,000

2,500

3,000

2014A 2015A 2016F 2017F 2018F

Net Interest Income Non-interest Income

Islamic Banking Income Cost-to-income Ratio

Page 21: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES

Page 21

Company Guide

Affin Holdings Berhad

Balance Sheet:

Asset quality at risk. Asset quality at risk. Asset quality at risk. Asset quality at risk. Absolute NPLs were on the rise in most

quarters in FY15 before declining in 4Q15. Absolute NPL stayed

elevated in 3Q16, keeping gross NPL ratio at 2.1%. Loan loss

coverage ratio (ex regulatory reserve) stood at c.60%.

Sufficient capital.Sufficient capital.Sufficient capital.Sufficient capital. Positively, Affin is well capitalised as it has one

of the highest capital ratios compared to Malaysian banking

peers. This is attributed to its RM1.2bn rights issue completed in

July 2014 which was undertaken in tandem with the acquisition

of HwangDBS. Affin is eligible to implement a dividend

reinvestment plan but has yet to utilise it. We have assumed a

40% dividend payout from FY16-18F.

Share Price Drivers:

No catalyst in sight. No catalyst in sight. No catalyst in sight. No catalyst in sight. At 0.5x BV, Affin is the cheapest bank in

the industry. Nevertheless, we believe there is downside to

share price given its low ROE and persistent challenges to

earnings growth. We see no re-rating catalysts for Affin.

Potential re-rating catalysts could arise should the partnerships

to improve its investment banking business materialise to

enhance revenues.

Key Risks:

Limited earnings upside. Limited earnings upside. Limited earnings upside. Limited earnings upside. Earnings were historically driven by

loan recoveries, which we believe could begin to taper off. NIM

will remain under pressure due to competition. Further asset-

quality deterioration could result in higher credit costs.

Company Background

Affin Bank’s (Affin) loan portfolio leans towards corporate and

business financing. Affin’s major shareholders Lembaga

Tabung Angkatan Tentera (LTAT) and Boustead have fostered

strong business alliances with the bank. Bank of East Asia

(BEA) has a 23.5% stake in Affin.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)

Source: Company, AllianceDBS

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2014A 2015A 2016F 2017F 2018F

NPL Ratio Provision Charge-Off Rate

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

2014A 2015A 2016F 2017F 2018F

Tier-1 CAR Total CAR

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2014A 2015A 2016F 2017F 2018F

Avg: 11.2x

+1sd: 13.8x

+2sd: 16.4x

-1sd: 8.6x

-2sd: 6x5.3

7.3

9.3

11.3

13.3

15.3

17.3

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

Avg: 0.72x

+1sd: 0.88x

+2sd: 1.05x

-1sd: 0.56x

-2sd: 0.39x

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

Page 22: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

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Page 22

Company Guide

Affin Holdings Berhad

Key Assumptions

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Gross Loans Growth 9.6 6.9 2.0 5.0 5.0

Customer Deposits Growth 6.9 (0.1) 2.0 5.0 5.0

Yld. On Earnings Assets 4.2 4.1 4.1 4.1 4.0

Avg Cost Of Funds 2.7 2.8 2.8 2.9 2.9

Income Statement (RMm)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Net Interest Income 969 948 932 934 970

Islamic Income 220 239 260 284 309

Non-Interest Income 630 616 653 692 733

Operating IncomeOperating IncomeOperating IncomeOperating Income 1,8201,8201,8201,820 1,8021,8021,8021,802 1,8451,8451,8451,845 1,9091,9091,9091,909 2,0122,0122,0122,012

Operating Expenses (1,059) (1,127) (1,141) (1,175) (1,210)

PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 760760760760 676676676676 704704704704 734734734734 802802802802

Provisions 16.0 (165) (46.9) (59.5) (74.6)

Associates 30.4 8.06 20.3 20.9 22.5

Exceptionals 0.0 0.0 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 807807807807 519519519519 677677677677 695695695695 750750750750

Taxation (208) (137) (169) (174) (187)

Minority Interests (5.8) (12.9) (13.6) (13.9) (15.0)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net ProfitNet ProfitNet ProfitNet Profit 593593593593 369369369369 495495495495 508508508508 547547547547

Net Profit bef Except 593 369 495 508 547

Growth (%)

Net Interest Income Gth 5.7 (2.2) (1.7) 0.2 3.8

Net Profit Gth (8.8) (37.7) 33.9 2.7 7.8

Margins, Costs & Efficiency (%)

Spread 1.5 1.3 1.3 1.2 1.2

Net Interest Margin 2.0 1.9 1.9 1.9 1.9

Cost-to-Income Ratio 58.2 62.5 61.8 61.6 60.2

Business Mix (%)

Net Int. Inc / Opg Inc. 53.3 52.6 50.5 48.9 48.2

Non-Int. Inc / Opg inc. 34.6 34.2 35.4 36.2 36.4

Fee Inc / Opg Income 34.6 34.2 35.4 36.2 36.4

Oth Non-Int Inc/Opg Inc 0.0 0.0 0.0 0.0 0.0

Profitability (%)

ROAE Pre Ex. 8.3 4.6 5.9 5.8 6.0

ROAE 8.3 4.6 5.9 5.8 6.0

ROA Pre Ex. 0.9 0.6 0.8 0.7 0.8

ROA 0.9 0.6 0.8 0.7 0.8

Source: Company, AllianceDBS

Expect provisions to increase

Page 23: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES

Page 23

Company Guide

Affin Holdings Berhad

Quarterly / Interim Income Statement (RMm)

FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016

Net Interest Income 248 241 230 247 247

Islamic Income 63.0 64.8 58.9 65.3 69.1

Non-Interest Income 149 159 138 164 189

Operating IncomeOperating IncomeOperating IncomeOperating Income 460460460460 465465465465 427427427427 477477477477 504504504504

Operating Expenses (275) (280) (273) (287) (288)

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 185185185185 184184184184 154154154154 189189189189 216216216216

Provisions (29.7) (20.6) 1.58 (2.2) (22.2)

Associates 3.96 (10.4) 11.4 12.8 5.81

Exceptionals 0.0 0.0 0.0 0.0 0.0

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 149149149149 143143143143 153153153153 186186186186 186186186186

Taxation (45.3) (42.5) (35.1) (45.1) (41.5)

Minority Interests (1.8) (3.3) (2.2) (3.3) (4.7)

Net ProfitNet ProfitNet ProfitNet Profit 102102102102 97.497.497.497.4 116116116116 137137137137 140140140140

Growth (%)

Net Interest Income Gth 11.6 (2.6) (4.9) 7.7 (0.3)

Net Profit Gth (26.5) (4.9) 18.6 18.9 1.6

Balance Sheet (RMm)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Cash/Bank Balance 7,361 4,442 3,383 4,260 5,261

Government Securities 1,832 1,782 1,770 1,864 1,964

Inter Bank Assets 384 497 512 527 543

Total Net Loans & Advs. 40,492 43,345 44,235 46,467 48,797

Investment 13,453 13,667 14,077 14,499 14,934

Associates 0.0 0.0 0.0 0.0 0.0

Fixed Assets 164 435 448 461 475

Goodwill 1,615 1,612 1,612 1,612 1,612

Other Assets 1,378 1,621 1,670 1,720 1,772

Total AssetsTotal AssetsTotal AssetsTotal Assets 66,67866,67866,67866,678 67,40267,40267,40267,402 67,70767,70767,70767,707 71,41271,41271,41271,412 75,35975,35975,35975,359

Customer Deposits 50,604 50,549 51,560 54,138 56,845

Inter Bank Deposits 5,368 3,385 3,724 4,096 4,506

Debts/Borrowings 0.0 0.0 0.0 0.0 0.0

Others 1,761 3,835 2,323 2,583 2,874

Minorities 40.8 44.7 58.2 72.1 87.1

Shareholders' Funds 7,932 8,282 8,579 8,884 9,212

Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 66,67866,67866,67866,678 67,40267,40267,40267,402 67,70767,70767,70767,707 71,41271,41271,41271,412 75,35975,35975,35975,359

Source: Company, AllianceDBS

3Q16 earnings beat expectations as provisions remained low

Page 24: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

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Page 24

Company Guide

Affin Holdings Berhad

Financial Stability Measures (%)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Balance Sheet Structure

Loan-to-Deposit Ratio 80.0 85.7 85.8 85.8 85.8

Net Loans / Total Assets 60.7 64.3 65.3 65.1 64.8

Investment / Total Assets 20.2 20.3 20.8 20.3 19.8

Cust . Dep./Int. Bear. Liab. 88.9 91.5 90.9 90.4 90.0

Interbank Dep / Int. Bear. 9.4 6.1 6.6 6.8 7.1

Asset Quality

NPL / Total Gross Loans 1.8 1.9 1.9 1.8 1.8

NPL / Total Assets 1.1 1.2 1.3 1.2 1.2

Loan Loss Reserve Coverage 75.6 64.0 61.4 62.4 61.7

Provision Charge-Off Rate 0.0 0.4 0.1 0.1 0.2

Capital Strength

Total CAR 14.9 15.6 15.5 15.1 14.7

Tier-1 CAR 13.7 13.5 13.4 13.1 12.8

Source: Company, AllianceDBS

Target Price & Ratings History

Source: AllianceDBS

Analyst: Lynette CHENG

Sue Lin LIM

S.No.S.No.S.No.S.No.Date of Date of Date of Date of

ReportReportReportReport

Closing Closing Closing Closing

PricePricePricePrice

12-mth 12-mth 12-mth 12-mth

Target Target Target Target

PricePricePricePrice

Rat ing Rat ing Rat ing Rat ing

1: 10 Dec 15 2.32 2.00 FULLY VALUED

2: 22 Jan 16 2.17 2.00 FULLY VALUED

3: 02 Feb 16 2.16 2.00 FULLY VALUED

4: 25 Feb 16 2.16 2.00 FULLY VALUED

5: 29 Feb 16 2.15 1.80 FULLY VALUED

6: 24 Mar 16 2.32 1.80 FULLY VALUED

7: 03 May 16 2.30 1.80 FULLY VALUED

8: 25 May 16 2.27 1.80 FULLY VALUED

9: 02 Jun 16 2.22 1.80 FULLY VALUED

10: 12 Jul 16 2.12 1.80 FULLY VALUED

11: 14 Jul 16 2.12 1.80 FULLY VALUED

12: 01 Aug 16 2.13 1.80 FULLY VALUED

13: 22 Aug 16 2.15 1.90 FULLY VALUED

14: 31 Oct 16 2.20 1.90 FULLY VALUED

Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 01 Dec 16 2.29 2.00 FULLY VALUED

1

2

3

4

5

6

7

8

910

11

12

13

1415

1.98

2.03

2.08

2.13

2.18

2.23

2.28

2.33

2.38

2.43

2.48

Dec-15 Apr-16 Aug-16 Dec-16

RMRMRMRM

Low loan loss coverage ratio

Page 25: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY

HOLDHOLDHOLDHOLD Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM4.23 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Price Price Price Target 12Target 12Target 12Target 12----mthmthmthmth :::: RM4.50 (6% upside) (Prev RM4.50) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Improved earnings quality

Where we differ:Where we differ:Where we differ:Where we differ: Earnings higher than consensus possibly on lower

credit cost assumptions

Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]

What’s New • 2Q/1HFY17 earnings within our/consensus

expectations; declined on slower recoveries • Absolute impaired loans declined q-o-q; CET1 ratio

lifted by 60bps q-o-q • On track with NIM management and cost savings

targets • Trim earnings on lower loan and deposit growth

assumption; Maintain HOLD, lower RM4.50 TP

Price Relative

Forecasts and Valuation FY FY FY FY MarMarMarMar ((((RMRMRMRMmmmm) ) ) ) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Pre-prov. Profit 1,519 1,756 1,987 2,227 Net Profit 1,302 1,252 1,338 1,502 Net Pft (Pre Ex.) 1,302 1,252 1,338 1,502 Net Pft Gth (Pre-ex) (%) (32.1) (3.9) 6.9 12.3 EPS (sen) 43.2 41.5 44.4 49.8 EPS Pre Ex. (sen) 43.2 41.5 44.4 49.8 EPS Gth Pre Ex (%) (32) (4) 7 12 Diluted EPS (sen) 43.2 41.5 44.4 49.8 PE Pre Ex. (X) 9.8 10.2 9.5 8.5 Net DPS (sen) 15.5 16.6 17.8 19.9 Div Yield (%) 3.7 3.9 4.2 4.7 ROAE Pre Ex. (%) 8.8 8.1 8.3 8.8 ROAE (%) 8.8 8.1 8.3 8.8 ROA (%) 1.0 1.0 1.1 1.1 BV Per Share (sen) 503 524 550 580 P/Book Value (x) 0.8 0.8 0.8 0.7 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 42.6 43.2 45.5

Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 4 S: 5 H: 13

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Tracking expectations well Keeping watch on deliveriesKeeping watch on deliveriesKeeping watch on deliveriesKeeping watch on deliveries.... For FY17, AMMB aspires to achieve ROE of 8.5-9%, annual net profit growth of 5% and cost-to-income ratio of ≤57%. These are premised on: (1) focused growth segment (mass affluent, affluent, SMEs, mid-sized corporations), (2) products focus (cards, transaction banking, markets, wealth management), and (3) sustaining its position with its current engines (corporate loans, debt capital markets, asset management). In 2QFY17, we have seen AMMB staying on track with its NIM and cost-savings targets. Re-rating catalysts would emerge when strategic initiatives start to deliver results in the coming 12 months and/or possible changes at the shareholders’ level. 2222QFY17 earnings QFY17 earnings QFY17 earnings QFY17 earnings metmetmetmet expectations; bottomline strained by expectations; bottomline strained by expectations; bottomline strained by expectations; bottomline strained by lowerlowerlowerlower recoveries.recoveries.recoveries.recoveries. Earnings were softer y-o-y, due to benign growth in income and lower recoveries. On a q-o-q basis, earnings were higher thanks to a lower effective tax rate. NIM was largely stable q-o-q, as lower cost of funds mitigated the impact of lower wholesale and retail loan yields. Loans hardly grew on continued derisking. Auto loans remain on a decline. There were positive growth tractions for mortgages and SMEs, in line with its targeted segments. Deposits contracted as the bank continues to actively manage higher cost deposits. Given the weak traction, we lower our FY16 loan and deposit growth assumption to 2% and -2%, respectively. This resulted in minimal revision to earnings (<3%) and TP (RM4.60 to RM4.50). Keep watch on real estate and oil and gas exposure.Keep watch on real estate and oil and gas exposure.Keep watch on real estate and oil and gas exposure.Keep watch on real estate and oil and gas exposure. While asset quality showed improvement in 2QFY17 (as evidenced by declines in absolute impaired loans ratio and impaired loans ratio), we remain cautious on the bank’s exposures to the oil and gas sector and real estate which currently make up 4% and 13% of gross loans, respectively. While more recoveries can be anticipated, AMMB expects the long-run average credit cost (ex-recoveries) to come in around 50bps. Valuation: AMMB is a HOLD with RM4.50 TP. Our TP is derived using the Gordon Growth Model (assuming 9% ROE, 10% cost of equity, and 3% long-term growth). AMMB’s valuations may hinge on corporate events that are expected to unfold. Key Risks to Our View: Inability to deliver on strategic goals.Inability to deliver on strategic goals.Inability to deliver on strategic goals.Inability to deliver on strategic goals. While it is still early days, we believe there will be risks to the share price performance if AMMB fails to deliver quick wins from its strategic initiatives. At A Glance Issued Capital (m shrs) 3,014

Mkt. Cap (RMm/US$m) 12,750 / 2,866

Major Shareholders (%)

ANZ (%) 23.8

EPF (%) 15.0

AmCorp Group (%) 13.0

Free Float (%) 46.7

3m Avg. Daily Val (US$m) 2.0

ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks

DBS Group Research . Equity

7 Dec 2016

Malaysia Company Guide

AMMB Holdings Version 8 | Bloomberg: AMM MK | Reuters: AMMB.KL Refer to important disclosures at the end of this report

53

73

93

113

133

153

173

193

213

3.5

4.5

5.5

6.5

7.5

8.5

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Relative IndexRM

AMMB Holdings (LHS) Relative KLCI (RHS)

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ASIAN INSIGHTS VICKERS SECURITIES

Page 26

Company Guide

AMMB Holdings

WHAT’S NEW

Meeting expectations

HighlightsHighlightsHighlightsHighlights

Strained by lower recoveriesStrained by lower recoveriesStrained by lower recoveriesStrained by lower recoveries. AMMB’s 2Q/6MFY17 earnings

came in within expectations. Earnings were softer y-o-y, on the

back of benign growth in income and lower recoveries. Non-

interest income was stronger (driven by higher gains from fixed

income trading), but was offset by lower net interest income

(as NIM fell considerably in 2HFY16). Expenses increased on

higher personnel cost and investments on the back of its

implementation of strategic initiatives.

QQQQ----oooo----q earnings lifted by lower tax.q earnings lifted by lower tax.q earnings lifted by lower tax.q earnings lifted by lower tax. Sequentially, earnings rose

q-o-q thanks to a lower effective tax rate (21% in 2QFY17;

from higher non-deductible expenses). Pre-tax profit was

slightly lower as the effect of lower expenses was more than

offset by the slower recoveries. NIM was largely stable q-o-q,

as lower cost of funds mitigated the impact of lower wholesale

and retail loan yields.

Loan growth momentum still slow;Loan growth momentum still slow;Loan growth momentum still slow;Loan growth momentum still slow;. . . . Loan growth remained

weak at +1% y-o-y/-1% YTD/+0.3% q-o-q, led by mortgages

and SME loans but eclipsed by higher corporate repayments.

Deposits contracted (-7% y-o-y/-8% YTD/-4% q-o-q), reflective

of AMMB’s intention to rein in higher cost deposits. Asset

quality improvement was evidenced by declines in absolute

impaired loans ratio (by 3% q-o-q) and impaired loans ratio (by

5bps q-o-q to 1.64%). Oil and gas exposure, real estate

exposure loans, comprised 4% and 13% of total loans,

respectively. Restructured and rescheduled loans were at 0.6%

of its total loan book. Loan loss coverage ratio stood at 84%.

CET1 ratio lifted by 60bps.CET1 ratio lifted by 60bps.CET1 ratio lifted by 60bps.CET1 ratio lifted by 60bps. Fully-loaded CET1 ratio improved

by 60bps to 11.2% as a result of higher retained earnings. This

q-o-q improvement was in spite of the higher risk weighted

assets noted. Separately, AMMB declared an interim DPS of 5

sen (23% payout).

OutlookOutlookOutlookOutlook

AMMB is AMMB is AMMB is AMMB is targeting to achieve 8.5% to 9% ROE in FY1targeting to achieve 8.5% to 9% ROE in FY1targeting to achieve 8.5% to 9% ROE in FY1targeting to achieve 8.5% to 9% ROE in FY17777,

driven by lower expenses (targeting ≤57%) and sustained

recoveries (retail recoveries expected to continue in the

medium term). Full-year loan growth is expected to tread in

positive territory. Volatility in the market and the levels of

recoveries are the key factors that may derail targets. Given the

weak traction YTD, we lower our loan and deposit growth

assumptions for FY16 to 2% and -2% respectively (from 3%

and 5%). This resulted in a slight trim in earnings, by 1-3%

across FY17-19F.

On track to meet targeted On track to meet targeted On track to meet targeted On track to meet targeted cost scost scost scost savings.avings.avings.avings. AMMB targets to

achieve RM128m savings for the full year from its strategic

initiatives. With YTD savings of RM62m, AMMB is on track to

meet its target. Apart from its targeted savings, we continue to

keep an eye on AMMB’s deliveries in 2HFY17, in its targeted

areas (products – cards & merchants, transaction banking,

markets & forex, wealth management; segments – mass

affluent, affluent, SME, mid corporates) as well as its capital

optimisation plans.

Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation

MaintainMaintainMaintainMaintain HOLDHOLDHOLDHOLD, lower RM4.50 TP, lower RM4.50 TP, lower RM4.50 TP, lower RM4.50 TP. Subsequent to our trim in

earnings, our target price is nudged down to RM4.50 (from

RM4.60). Our TP is derived using the Gordon Growth Model

(assuming 9% ROE, 10% cost of equity, and 3% long-term

growth) and implies 0.8x CY17 BV. We do not discount

catalysts arising from its medium-term aspirations and advise

investors to keep an eye on this space.

Page 27: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES

Page 27

Company Guide

AMMB Holdings

Quarterly / Interim Income Statement (RMm)

FY FY FY FY MarMarMarMar 2Q2Q2Q2Q2016201620162016 1Q1Q1Q1Q2017201720172017 2Q2Q2Q2Q2017201720172017 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Net Interest Income 432 392 373 (13.5) (4.9)

Islamic Income 200 197 201 0.6 0.6

Non-Interest Income 299 357 368 23.2 3.2

Operating IncomeOperating IncomeOperating IncomeOperating Income 931931931931 947947947947 943943943943 1.31.31.31.3 (0.4)(0.4)(0.4)(0.4)

Operating Expenses (500) (536) (525) 5.0 (2.1)

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 432432432432 411411411411 419419419419 (3.0)(3.0)(3.0)(3.0) 1.91.91.91.9

Provisions 65.6 63.7 42.4 (35.3) (33.4)

Associates 3.86 4.63 11.1 186.5 138.7

Exceptionals 0 0 0 nm nm

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 501501501501 479479479479 472472472472 (5.8)(5.8)(5.8)(5.8) (1.5)(1.5)(1.5)(1.5)

Taxation (93.1) (120) (97.0) 4.2 (19.2)

Minority Interests (25.4) (36.5) (22.6) 11.1 (38.1)

Net ProfitNet ProfitNet ProfitNet Profit 383383383383 323323323323 353353353353 (7.8)(7.8)(7.8)(7.8) 9.29.29.29.2

Growth (%)

Net Interest Income Gth 1.9 1.2 (4.9)

Net Profit Gth 12.7 15.3 9.2

Key ratio (%)

NIM 2.1 2.0 2.0

NPL ratio 2.0 1.7 1.6

Loan-to deposit 95.5 99.0 103.4

Cost-to-income 53.7 56.6 55.6

Total CAR 15.6 16.1 16.5

Source of all data: Company, DBS Bank

Page 28: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES

Page 28

Company Guide

AMMB Holdings

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

NIM to stabilise.NIM to stabilise.NIM to stabilise.NIM to stabilise. While cost of fund is expected to remain under

pressure due to deposit competition, AMMB aspires to keep

NIM stable as the group pursues high-yielding SME loans going

forward. Current account and savings account (CASA), as

banks’ low-cost funding sources, should help the bank in

managing cost of funds. Hence, AMMB is focused on shoring

up its CASA with a target of 32% by year 2020. Currently,

AMMB has one of the lowest CASA ratios among its peers, at

c.22%.

Subdued loan growth.Subdued loan growth.Subdued loan growth.Subdued loan growth. Over the past few years, AMMB has

been rebalancing its portfolio with a notable reduction in its

auto loan exposure to the vulnerable income group (defined as

households with incomes of ≤ RM3,000). Under AMMB’s Top 4

aspirations, identified areas with potential for growth include

the mass affluent, affluent, SME and mid-sized corporation

space. We have imputed 2% loan growth in our forecasts.

NearNearNearNear----term drag on underwriting profit due to determ drag on underwriting profit due to determ drag on underwriting profit due to determ drag on underwriting profit due to de----tariffication.tariffication.tariffication.tariffication.

AmGeneral Insurance (AmG) is one of the top motor insurers in

Malaysia. Due to its large exposure to motor insurance, we

expect de-tariffication (expected to be implemented in 2017) to

crimp AMMB’s earnings as insurers compete for market share.

However, in our view, pricing should normalise over time. We

also note that a strong distribution channel, alongside low

claims and combined ratio, could assist in sustaining market

share and profitability.

Banking on previous acquisitions to boost nonBanking on previous acquisitions to boost nonBanking on previous acquisitions to boost nonBanking on previous acquisitions to boost non----interest income.interest income.interest income.interest income.

AMMB’s acquisitions and tie-ups were completed in FY15 and

delivering on these is a key point for the group going forward.

Among the acquisitions AMMB embarked on were MBF Cards

and Kurnia Insurans as well as the tie-up with Metlife for its life

insurance business. AMMB is looking to scale up its cards,

transaction banking, markets and wealth management

businesses, with aspirations to be the Top 4 in these segments

by year 2020.

Cost pressures.Cost pressures.Cost pressures.Cost pressures. AMMB’s cost-to-income ratio is at 56%, which

is on the higher side of the industry average. Management

targets to lower it to at 50-55% in FY17-18, supplemented by

an emphasis on cost discipline. Although the long-term goal is

to bring this down to 40%, the ratio will remain high in the

next few years, as IT and investment-related expenses are

expected to be incurred to roll out initiatives for AMMB’s new

strategic plan.

Margin Trends

Gross Loan & Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure

Source: Company, DBS Bank

1.9%

2.0%

2.1%

2.2%

2.3%

2.4%

2.5%

2.6%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2015A 2016A 2017F 2018F 2019F

RM m

Net Interest Income Net Interest Income Margin

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2015A 2016A 2017F 2018F 2019F

RM m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2015A 2016A 2017F 2018F 2019F

RM m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

84%

89%

94%

99%

104%

109%

77,556

82,556

87,556

92,556

97,556

102,556

107,556

2015A 2016A 2017F 2018F 2019F

RM bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2015A 2016A 2017F 2018F 2019F

Net Interest Income Non-interest Income

Islamic Banking Income Cost-to-income Ratio

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ASIAN INSIGHTS VICKERS SECURITIES

Page 29

Company Guide

AMMB Holdings

Balance Sheet:

Gross NPL ratio targeted at below 2%. Gross NPL ratio targeted at below 2%. Gross NPL ratio targeted at below 2%. Gross NPL ratio targeted at below 2%. Its asset quality has

deteriorated, as absolute NPLs increased y-o-y and gross NPL

ratio increased to just slightly below 2% in FY16. Consequently,

AMMB’s loan loss coverage ratio slid to a 3-year low of 81%.

While retail gross NPL ratio continues to show resilient trends,

we remain cautious on its asset quality in a soft operating

environment.

Capital ratios below peers.Capital ratios below peers.Capital ratios below peers.Capital ratios below peers. AMMB’s consolidated fully loaded

CET1 ratio currently sits at c.11%. AMMB is building up

advanced internal rating-based (AIRB) capabilities to further

enhance its capital ratios, and this is targeted to complete by

2017. Other capital enhancing options include rationalising

non-core operations (AMMB has closed approximately 20 of

such small entities within the group) and streamlining internal

organisation structure to improve efficiency. AMMB aspires to

keep its dividend payout at 40%.

Share Price Drivers:

Limited catalysts.Limited catalysts.Limited catalysts.Limited catalysts. AMMB is currently trading at 0.8x CY17F BV.

Although valuations are undemanding, a re-rating appears

unlikely in the near term, no thanks to its subdued earnings

outlook. Its share price would likely move in response to

newsflow.

Key Risks:

Inability to grow balance sheet efficientlyInability to grow balance sheet efficientlyInability to grow balance sheet efficientlyInability to grow balance sheet efficiently. AMMB has been

rebalancing its portfolio over the past few years. Inability to

translate growth into earnings would limit earnings

momentum. The liberalisation of (general) insurance tariffs,

possibly in 2017, could crimp underwriting margins for its

general insurance business.

Company Background

AMMB Holdings Berhad is an investment holding company.

The company, through its subsidiaries, provides commercial

banking, retail financing, stock and futures broking, and

investment advisory. AMMB also underwrites general

insurance, provides asset and unit trust management, and

nominee services.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)

Source: Company, DBS Bank

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2015A 2016A 2017F 2018F 2019F

NPL Ratio Provision Charge-Off Rate

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

2015A 2016A 2017F 2018F 2019F

Tier-1 CAR Total CAR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2015A 2016A 2017F 2018F 2019F

Avg: 11.8x

+1sd: 13.2x

+2sd: 14.5x

-1sd: 10.5x

-2sd: 9.1x

8.1

9.1

10.1

11.1

12.1

13.1

14.1

15.1

16.1

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

Avg: 1.35x

+1sd: 1.71x

+2sd: 2.07x

-1sd: 0.99x

-2sd: 0.62x0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

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Page 30

Company Guide

AMMB Holdings

Key Assumptions

FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Gross Loans Growth (1.6) 0.1 2.0 5.0 5.0

Customer Deposits Growth 2.7 (1.9) (2.0) 5.0 5.0

Yld. On Earnings Assets 3.6 3.4 3.4 3.3 3.3

Avg Cost Of Funds 2.1 2.2 2.2 2.2 2.3

Income Statement (RMm)

FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Net Interest Income 1,981 1,638 1,561 1,514 1,493

Islamic Income 865 806 927 1,066 1,226

Non-Interest Income 1,876 1,250 1,486 1,669 1,815

Operating IncomeOperating IncomeOperating IncomeOperating Income 4,7214,7214,7214,721 3,6933,6933,6933,693 3,9743,9743,9743,974 4,2494,2494,2494,249 4,5344,5344,5344,534

Operating Expenses (2,158) (2,174) (2,218) (2,262) (2,307)

PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 2,5642,5642,5642,564 1,5191,5191,5191,519 1,7561,7561,7561,756 1,9871,9871,9871,987 2,2272,2272,2272,227

Provisions 72.9 211 (29.2) (141) (155)

Associates 3.19 2.50 2.50 2.50 2.50

Exceptionals (214) 0.0 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 2,3902,3902,3902,390 1,7311,7311,7311,731 1,7291,7291,7291,729 1,8481,8481,8481,848 2,0752,0752,0752,075

Taxation (560) (332) (380) (407) (456)

Minority Interests (126) (97.3) (97.2) (104) (117)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net ProfitNet ProfitNet ProfitNet Profit 1,7041,7041,7041,704 1,3021,3021,3021,302 1,2521,2521,2521,252 1,3381,3381,3381,338 1,5021,5021,5021,502

Net Profit bef Except 1,919 1,302 1,252 1,338 1,502

Growth (%)

Net Interest Income Gth (12.8) (17.3) (4.7) (3.0) (1.3)

Net Profit Gth (4.4) (23.6) (3.9) 6.9 12.3

Margins, Costs & Efficiency (%)

Spread 1.5 1.2 1.1 1.1 1.0

Net Interest Margin 2.4 2.0 2.1 2.1 2.1

Cost-to-Income Ratio 45.7 58.9 55.8 53.2 50.9

Business Mix (%)

Net Int. Inc / Opg Inc. 42.0 44.3 39.3 35.6 32.9

Non-Int. Inc / Opg inc. 39.7 33.8 37.4 39.3 40.0

Fee Inc / Opg Income 13.9 14.2 16.5 17.7 18.3

Oth Non-Int Inc/Opg Inc 25.8 19.7 20.9 21.6 21.8

Profitability (%)

ROAE Pre Ex. 13.9 8.8 8.1 8.3 8.8

ROAE 12.4 8.8 8.1 8.3 8.8

ROA Pre Ex. 1.5 1.0 1.0 1.1 1.1

ROA 1.4 1.0 1.0 1.1 1.1

Source: Company, DBS Bank

Loans contraction in FY15 and FY16 reflects AMMB’s portfolio rebalancing initiatives

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Company Guide

AMMB Holdings

Quarterly / Interim Income Statement (RMm)

FY FY FY FY MarMarMarMar 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 2Q2Q2Q2Q2017201720172017

Net Interest Income 432 395 388 392 373

Islamic Income 200 208 190 197 201

Non-Interest Income 299 295 323 357 368

Operating IncomeOperating IncomeOperating IncomeOperating Income 931931931931 898898898898 901901901901 947947947947 943943943943

Operating Expenses (500) (567) (621) (536) (525)

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 432432432432 331331331331 280280280280 411411411411 419419419419

Provisions 65.6 80.1 58.0 63.7 42.4

Associates 3.86 (5.4) 3.82 4.63 11.1

Exceptionals 0 0 0 0 0

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 501501501501 406406406406 342342342342 479479479479 472472472472

Taxation (93.1) (94.1) (30.6) (120) (97.0)

Minority Interests (25.4) (11.5) (31.2) (36.5) (22.6)

Net ProfitNet ProfitNet ProfitNet Profit 383383383383 300300300300 280280280280 323323323323 353353353353

Growth (%)

Net Interest Income Gth 1.9 (8.6) (1.8) 1.2 (4.9)

Net Profit Gth 12.7 (21.5) (6.7) 15.3 9.2

Balance Sheet (RMm)

FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Cash/Bank Balance 10,759 11,988 7,303 6,429 5,478

Government Securities 0.0 0.0 0.0 0.0 0.0

Inter Bank Assets 4,069 1,334 1,400 1,470 1,544

Total Net Loans & Advs. 86,174 86,513 88,154 92,568 97,214

Investment 18,926 20,769 22,599 24,601 26,790

Associates 662 674 674 674 674

Fixed Assets 479 293 302 311 320

Goodwill 3,348 3,370 3,370 3,370 3,370

Other Assets 8,954 8,309 9,031 9,483 9,957

Total AssetsTotal AssetsTotal AssetsTotal Assets 133,804133,804133,804133,804 133,764133,764133,764133,764 133,373133,373133,373133,373 139,472139,472139,472139,472 145,941145,941145,941145,941

Customer Deposits 92,130 90,377 88,569 92,998 97,648

Inter Bank Deposits 2,302 1,744 1,831 1,923 2,019

Debts/Borrowings 8,302 8,608 8,608 8,608 8,608

Others 13,018 14,155 14,540 15,062 15,610

Minorities 1,052 951 1,048 1,152 1,269

Shareholders' Funds 14,455 15,168 15,781 16,583 17,484

Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 133,804133,804133,804133,804 133,764133,764133,764133,764 133,373133,373133,373133,373 139,472139,472139,472139,472 145,941145,941145,941145,941

Source: Company, DBS Bank

Pre-tax profit lower q-o-q due to slower recoveries

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ASIAN INSIGHTS VICKERS SECURITIES

Page 32

Company Guide

AMMB Holdings

Financial Stability Measures (%)

FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Balance Sheet Structure

Loan-to-Deposit Ratio 93.5 95.7 99.5 99.5 99.6

Net Loans / Total Assets 64.4 64.7 66.1 66.4 66.6

Investment / Total Assets 14.1 15.5 16.9 17.6 18.4

Cust . Dep./Int. Bear. Liab. 89.7 89.7 89.5 89.8 90.2

Interbank Dep / Int. Bear. 2.2 1.7 1.8 1.9 1.9

Asset Quality

NPL / Total Gross Loans 1.8 1.9 1.9 1.8 1.8

NPL / Total Assets 1.2 1.3 1.3 1.2 1.2

Loan Loss Reserve Coverage 104.9 81.1 87.9 92.4 91.4

Provision Charge-Off Rate (0.1) (0.2) 0.0 0.1 0.2

Capital Strength

Total CAR 16.2 16.5 17.6 17.7 17.8

Tier-1 CAR 12.2 12.5 13.6 13.8 14.0

Source: Company, DBS Bank

Target Price & Ratings History

Source: DBS Bank

Analyst: Sue Lin LIM

Lynette CHENG

S.No.S.No.S.No.S.No.Date of Date of Date of Date of

ReportReportReportReport

Closing Closing Closing Closing

PricePricePricePrice

12-mth 12-mth 12-mth 12-mth

Target Target Target Target

PricePricePricePrice

Rat ing Rat ing Rat ing Rat ing

1: 10 Dec 15 4.48 4.80 HOLD

2: 22 Jan 16 4.32 4.80 HOLD

3: 02 Feb 16 4.36 4.80 HOLD

4: 25 Feb 16 4.34 4.80 HOLD

5: 29 Feb 16 4.33 4.60 HOLD

6: 01 Mar 16 4.47 4.60 HOLD

7: 24 Mar 16 4.58 4.60 HOLD

8: 03 May 16 4.48 4.60 HOLD

9: 12 May 16 4.52 4.60 HOLD

10: 30 May 16 4.35 4.50 HOLD

11: 02 Jun 16 4.35 4.50 HOLD

12: 20 Jun 16 4.40 4.50 HOLD

13: 12 Jul 16 4.36 4.50 HOLD

14: 14 Jul 16 4.33 4.50 HOLD

Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 01 Aug 16 4.39 4.50 HOLD

16: 23 Aug 16 4.46 4.60 HOLD

17: 05 Sep 16 4.32 4.60 HOLD

18: 31 Oct 16 4.20 4.60 HOLD

19: 22 Nov 16 4.11 4.50 HOLD

1 2

3

4

5

67

8

9 10

11

12

13

14

15

16

1718

19

3.70

3.90

4.10

4.30

4.50

4.70

4.90

Dec-15 Apr-16 Aug-16 Dec-16

RMRMRMRM

Fully loaded CET1 estimated at 11%

Page 33: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY

HOLDHOLDHOLDHOLD Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM4.64 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Price Price Price Target 12Target 12Target 12Target 12----mthmthmthmth :::: RM4.80 (3% upside) (Prev RM4.80) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Delivery of new strategic targets

Where we differ:Where we differ:Where we differ:Where we differ: Earnings below consensus as we imputed higher credit

costs

Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]

What’s New • 3Q16 earnings inline; lifted by lower provisions

and one-off gain from sale of stake in Sun Life insurance

• Judging from the current run rate, CIMB is likely to miss targets set early this year

• In negotiations for strategic partnership in stockbroking business; expect improvement in cost-to-income ratio if agreement is reached

• Maintain HOLD, RM4.80 TP

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Pre-prov. Profit 6,146 7,014 7,106 7,576 Net Profit 2,850 3,573 3,998 4,378 Net Pft (Pre Ex.) 2,848 3,573 3,998 4,378 Net Pft Gth (Pre-ex) (%) (5.3) 25.4 11.9 9.5 EPS (sen) 33.6 41.6 45.8 49.5 EPS Pre Ex. (sen) 33.6 41.6 45.8 49.5 EPS Gth Pre Ex (%) (10) 24 10 8 Diluted EPS (sen) 33.4 41.3 45.5 49.1 PE Pre Ex. (X) 13.8 11.2 10.1 9.4 Net DPS (sen) 14.0 18.0 20.0 22.0 Div Yield (%) 3.0 3.9 4.3 4.7 ROAE Pre Ex. (%) 7.3 8.4 8.6 8.7 ROAE (%) 7.3 8.4 8.6 8.7 ROA (%) 0.7 0.8 0.8 0.8 BV Per Share (sen) 481 513 549 587 P/Book Value (x) 1.0 0.9 0.8 0.8 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 42.4 48.8 54.4

Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 10 S: 1 H: 14

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Falling short of targets

2016 2016 2016 2016 proved to be a challenging yearproved to be a challenging yearproved to be a challenging yearproved to be a challenging year, HOLD. , HOLD. , HOLD. , HOLD. On a normalised basis, YTD loan growth of 2.2% and annualised ROE of 8.5%, point to clear challenges in achieving its full-year targets. Across its regional operations, asset quality should still be keenly tracked. Asset quality indicators in its Malaysian operations have held up better than expected, but we expect provisions to remain elevated in Indonesia and to increase in Thailand. Positively, expense trends are well on track to meet a cost-to-income ratio of <53% while its capital ratio, CET1, is expected to hit 11%. 3Q163Q163Q163Q16 results lifted by lower provisionsresults lifted by lower provisionsresults lifted by lower provisionsresults lifted by lower provisions and oneand oneand oneand one----off gainoff gainoff gainoff gain.... Based on pre-provision operating profit, earnings were higher y-o-y on the back of higher non-interest income and Islamic banking income. A RM150m one-off gain arose from the sale of its stake in Sun Life insurance. Loan growth stood at +2% YTD, underpinned by its Malaysian book. Singapore and Indonesia loans registered negative growth, reflective of its portfolio rebalancing initiatives (in Indonesia) and the weaker macroeconomic backdrop (in Singapore). Asset quality remained resilient in Malaysia, but Indonesia continues to see strains in its SME and commercial segments. Oil and gas exposure was generally unchanged at 2.7% of loan book. Hopeful for a better 2017Hopeful for a better 2017Hopeful for a better 2017Hopeful for a better 2017. FY16 targets remain unchanged, but judging from the current momentum, we expect CIMB to miss its targets. Credit cost is expected to decline from the high base to 55bps in FY17F (FY16F 73bps), which should lift earnings and translate to ROE of 9%. NIM compression may feature in the event of more rate cuts by BNM as well as from its Indonesian portfolio rebalancing. Our forecast currently imputes 10bps y-o-y compression in FY17. 2017 may be more positive for Indonesia while it remains hopeful that Malaysian operations stay resilient. Valuation: CIMB is a HOLD with TP at RM4.80 that is based on the Gordon Growth Model and implies 0.9x FY17F BV. Our TP assumes 10% ROE, 5% long-term growth and 11% cost of equity. Key Risks to Our View: FasterFasterFasterFaster----thanthanthanthan----expected delivery of T18 strategies and core expected delivery of T18 strategies and core expected delivery of T18 strategies and core expected delivery of T18 strategies and core earnings recovery. earnings recovery. earnings recovery. earnings recovery. We have imputed a weak year for CIMB’s Indonesian operations in FY16, so a better-than-expected improvement would pose upside risk to our earnings forecasts. A quicker-than-expected delivery of its T18 strategies would prove our bearish view on CIMB wrong. At A Glance Issued Capital (m shrs) 8,868

Mkt. Cap (RMm/US$m) 41,149 / 9,250

Major Shareholders (%)

Khazanah 29.7

EPF 17.3

Free Float (%) 41.6

3m Avg. Daily Val (US$m) 14.3

ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks

DBS Group Research . Equity

7 Dec 2016

Malaysia Company Guide

CIMB Group Hldgs Version 7 | Bloomberg: CIMB MK | Reuters: CIMB.KL Refer to important disclosures at the end of this report

47

67

87

107

127

147

167

187

207

3.5

4.5

5.5

6.5

7.5

8.5

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Relative IndexRM

CIMB Group Hldgs (LHS) Relative KLCI (RHS)

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ASIAN INSIGHTS VICKERS SECURITIES

Page 34

Company Guide

CIMB Group Hldgs

WHAT’S NEW

Earnings lifted by lower provisions and one-off gain

HighlightsHighlightsHighlightsHighlights

Provisions remain a sore pointProvisions remain a sore pointProvisions remain a sore pointProvisions remain a sore point. CIMB’s 3Q16 net profit met

our/consensus expectations. Earnings were lifted by lower

provisions and one-off RM150m gain in the sale of stake in

Sun Life insurance booked during the quarter. Based on pre-

provision operating profit, earnings were higher y-o-y on the

back of higher non-interest income (3Q15 was pulled down by

forex losses under its wholesale banking activities) and Islamic

banking income (mainly due to stronger revenues and lower

provisions). NIM was lower q-o-q, dragged mainly by its

Malaysian operations which experienced deposit competition

as well as a rate cut in 3Q16 (BNM lowered OPR by 25bps in

July). Cost-to-income inched up q-o-q in the absence of

expense write backs booked in 2Q16. On a business-as-usual

(BAU) basis, 9M16 cost growth was relatively flat, reflecting

the bank’s initiatives to contain expenses. Provisions remain

elevated, largely due to its Indonesian operations. Associates

contribution fell on the back of softer performance by its

associate, Bank of Yingkou.

Robust loan growth and asset quality in Malaysia, but dragged Robust loan growth and asset quality in Malaysia, but dragged Robust loan growth and asset quality in Malaysia, but dragged Robust loan growth and asset quality in Malaysia, but dragged

by CIMB Niaga.by CIMB Niaga.by CIMB Niaga.by CIMB Niaga. Loan growth stood at +2% q-o-q/+2% YTD,

underpinned by its Malaysian operations. Singapore and

Indonesia registered negative growth, reflective of its portfolio

rebalancing initiatives (in Indonesia) and the weaker

macroeconomic backdrop (in Singapore). Deposits recorded

growth of 7% q-o-q/ 6% YTD. The stronger deposit growth

lowered LDR to 88%. Gross impaired loans ratio was flat q-o-q

at 3.2%. Asset quality remained resilient in Malaysia, but

Indonesia continues to see strains in its SME and commercial

segments. Overall oil and gas exposure was generally

unchanged at 2.7% of loan book. Loan loss coverage dipped

q-o-q to 81% (93% including regulatory reserve) from 84% in

2Q16. Fully-loaded CET1/Tier-1/Total capital ratios stand at

10.9%/12.4%/15.8%.

OutlookOutlookOutlookOutlook

Unlikely to meet initial targets set for 2016Unlikely to meet initial targets set for 2016Unlikely to meet initial targets set for 2016Unlikely to meet initial targets set for 2016.... At the current run

rate, management expects ROE and loan growth to more likely

reach 9% and 6%, respectively, vs initial targets of 10% for

both metrics. CIMB remains on track to hit its 12% CET1 ratio

target by 2018. Management expects more uplift from the

optimisation of its risk-weighted assets and potentially some

non-core asset divestment. CIMB is also committed to achieve

its cost-to-income ratio target of 53% for 2016, as the bank

continues to roll out initiatives to lower expenses.

In negotiaIn negotiaIn negotiaIn negotiation for strategic partnership for itstion for strategic partnership for itstion for strategic partnership for itstion for strategic partnership for its stockbroking stockbroking stockbroking stockbroking

businessbusinessbusinessbusiness.... CIMB is still in the midst of exploring a 50:50 joint

venture with China Galaxy Securities in its stockbroking

business (which includes institutional and retail brokerage,

equities research as well as associated securities businesses). In

the event an agreement is reached, management expects cost-

to-income to improve by 100bps. The negotiations will take

place for three months from mid-October.

Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation

Maintain HOLD, RM4.80 TP.Maintain HOLD, RM4.80 TP.Maintain HOLD, RM4.80 TP.Maintain HOLD, RM4.80 TP. As CIMB’s earnings were within

our expectations, we keep our earnings and TP unchanged.

Our TP assumes 10% ROE, 5% growth and 11% cost of

equity. We believe 2017 will remain a challenging year for

CIMB, making the stock difficult to re-rate beyond 1x BV for

now. Across its regional operations, asset quality should be

keenly tracked. Although indicators in Malaysia have held up

better than expected, we expect provisions to remain elevated

in Indonesia and to increase in Thailand for 2016.

Page 35: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES

Page 35

Company Guide

CIMB Group Hldgs

Quarterly / Interim Income Statement (RMm)

FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Net Interest Income 2,416 2,352 2,445 1.2 4.0

Islamic Income 386 413 425 10.1 10.1

Non-Interest Income 1,038 1,138 1,103 6.3 (3.0)

Operating IncomeOperating IncomeOperating IncomeOperating Income 3,8403,8403,8403,840 3,9033,9033,9033,903 3,9743,9743,9743,974 3.53.53.53.5 1.81.81.81.8

Operating Expenses (2,261) (2,091) (2,193) (3.0) 4.9

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 1,5801,5801,5801,580 1,8121,8121,8121,812 1,7811,7811,7811,781 12.712.712.712.7 (1.7)(1.7)(1.7)(1.7)

Provisions (529) (657) (586) 10.7 (10.9)

Associates 23.7 33.5 15.6 (34.0) (53.3)

Exceptionals 0.0 0.0 150 nm nm

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 1,0751,0751,0751,075 1,1891,1891,1891,189 1,3611,3611,3611,361 26.626.626.626.6 14.514.514.514.5

Taxation (256) (313) (312) 21.7 (0.3)

Minority Interests (14.3) (3.1) (25.7) (79.3) 733.2

Net ProfitNet ProfitNet ProfitNet Profit 804804804804 873873873873 1,0231,0231,0231,023 27.327.327.327.3 17.217.217.217.2

Growth (%)

Net Interest Income Gth 6.5 (1.3) 4.0

Net Profit Gth 25.7 7.3 17.2

Key ratio (%)

NIM 2.7 2.6 2.6

NPL ratio 3.4 3.2 3.2

Loan-to deposit 93.3 91.7 88.1

Cost-to-income 58.9 53.6 55.2

Total CAR 13.4 15.6 15.8

Source of all data: Company, DBS Bank

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ASIAN INSIGHTS VICKERS SECURITIES

Page 36

Company Guide

CIMB Group Hldgs

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

No escape from NIM compression.No escape from NIM compression.No escape from NIM compression.No escape from NIM compression. We expect NIM to contract,

dragged by its Malaysian and Indonesian operations. In

Malaysia, deposit competition remains rife while in Indonesia,

CIMB Niaga is shifting its focus to better quality loans, putting

pressure on asset yields.

We forecast We forecast We forecast We forecast 5%5%5%5% loan growth in FY16loan growth in FY16loan growth in FY16loan growth in FY16. Targeting 6% may even

pose a challenge given 9M16 YTD loan growth of 2%. Loan

growth has been driven by its Malaysian consumer operations

but expect loan growth to stay dull in Indonesia, Singapore and

Thailand. CIMB continues to shed expensive deposits and focus

on CASA but even then it was unable to fend off funding cost

pressures in Malaysian. We assume deposits will grow at the

same pace as loans, keeping the loan-to-deposit ratio intact.

Capital markets still soft.Capital markets still soft.Capital markets still soft.Capital markets still soft. Although a pick-up was noted in 2Q

and 3Q16, capital markets as a whole is expected to stay soft

compared to previous years. CIMB regularly tops the Malaysian

league table for equity and debt issuance, and is one of the key

players within the ASEAN region. Growth of non-interest

income is likely to stay muted.

Cost management is the key focus for CIMB Cost management is the key focus for CIMB Cost management is the key focus for CIMB Cost management is the key focus for CIMB as it aspires to

drive cost-to-income ratio to below 50% by FY18. To achieve

this, CIMB is looking to reduce the overall IB operating cost and

realign its cost structure and operating efficiencies. CIMB did a

voluntary Mutual Separation Scheme (MSS) in May 2015 for

employees in Malaysia and Indonesia as part of this initiative.

The materialisation of the joint-venture arrangement for its

stockbroking business with China Galaxy could further

accelerate cost reduction.

Regional performance remains a drag in 2016.Regional performance remains a drag in 2016.Regional performance remains a drag in 2016.Regional performance remains a drag in 2016. Historically,

overseas operations contribute 40% of CIMB’s total PBT, with

Indonesia taking the lead at 30%, followed by Thailand and

Singapore at c.5% each. However, the Indonesian operations

have been plagued by high provisions since 4Q14, resulting in

its contribution declining significantly. We expect CIMB Niaga’s

performance to remain dismal in FY16.

T18 transformation targets may be challenginT18 transformation targets may be challenginT18 transformation targets may be challenginT18 transformation targets may be challenging to achieve. g to achieve. g to achieve. g to achieve. The

T18 plan kicked off in 1Q15 with a reorganisation

encompassing changes to key management positions and a

shift to more regional-focused entities. CIMB strives to reduce

costs (targeted at its overall processes and investment banking

division) and build up three key businesses (Commercial and

SME Banking, Transaction Banking and Digital Banking). The

T18 initiatives aim to reduce the cost-to-income ratio to below

50%, increase consumer banking contribution to 60% of

income and targeting CET1 ratio to hit 11%, but we view these

as challenging targets.

Margin Trends

Gross Loan & Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure

Source: Company, DBS Bank

2.4%

2.5%

2.6%

2.7%

2.8%

2.9%

3.0%

3.1%

0

2,000

4,000

6,000

8,000

10,000

2014A 2015A 2016F 2017F 2018F

RM m

Net Interest Income Net Interest Income Margin

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2014A 2015A 2016F 2017F 2018F

RM m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2014A 2015A 2016F 2017F 2018F

RM m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

81%

83%

85%

87%

89%

91%

93%

95%

97%

99%

101%

232,213

282,213

332,213

382,213

432,213

2014A 2015A 2016F 2017F 2018F

RM bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

53.0%

54.0%

55.0%

56.0%

57.0%

58.0%

59.0%

60.0%

61.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2014A 2015A 2016F 2017F 2018F

Net Interest Income Non-interest Income

Islamic Banking Income Cost-to-income Ratio

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ASIAN INSIGHTS VICKERS SECURITIES

Page 37

Company Guide

CIMB Group Hldgs

Balance Sheet:

Asset quality issues in Singapore and Thailand; Indonesia Asset quality issues in Singapore and Thailand; Indonesia Asset quality issues in Singapore and Thailand; Indonesia Asset quality issues in Singapore and Thailand; Indonesia

stabilising but warrants attention. stabilising but warrants attention. stabilising but warrants attention. stabilising but warrants attention. CIMB Niaga's outlook

remains uncertain and we would not discount the possibility of

some stress in its retail portfolio. CIMB’s NPL ratio is the highest

among peers at c.3% (vs industry average of less than 2%).

Meanwhile, in Malaysia, asset quality has remained surprisingly

benign.

CIMB’s CETCIMB’s CETCIMB’s CETCIMB’s CET----1 ratio picking up as it optimises its risk1 ratio picking up as it optimises its risk1 ratio picking up as it optimises its risk1 ratio picking up as it optimises its risk----weighted weighted weighted weighted

assets. assets. assets. assets. Management guided for no capital raising but it is

instead looking at initiatives to optimise risk-weighted assets.

Meanwhile, we believe CIMB’s dividend reinvestment plan (DRP)

will remain in place to provide support to its capital position.

Under T18, CIMB is targeting CET-1 to surpass 11% by 2018,

which we believe is a challenge.

Share Price Drivers:

Limited valuation upside. Limited valuation upside. Limited valuation upside. Limited valuation upside. CIMB is currently trading just below

1.0x BV, which is significantly below its average mean valuation.

Although valuations are undemanding, a pick-up in earnings

momentum remains uncertain as the operating environment

remains a challenge. So, as long as there is no visibility for an

earnings pick-up, we expect valuations to stay range-bound.

ShortShortShortShort----term pain for longterm pain for longterm pain for longterm pain for long----term gain.term gain.term gain.term gain. Delivery of the T18 strategy

would be a re-rating catalyst for CIMB. Post-restructuring, CIMB

will be a leaner outfit with improved cost efficiency. In our view,

the bank will subsequently emerge as a sturdier organisation to

strengthen its footing, especially within the commercial banking

space.

Key Risks:

Ability to rebuild Indonesian business. Ability to rebuild Indonesian business. Ability to rebuild Indonesian business. Ability to rebuild Indonesian business. Expect Indonesian

operations to remain soft in 2H16 and if momentum does not

pick up in 2017, there could be downside risk to earnings.

Delays in Delays in Delays in Delays in delivery of T18 strategies. delivery of T18 strategies. delivery of T18 strategies. delivery of T18 strategies. Although the 3-year plan

with costs as its initial key agenda paints a positive picture for

the group for the longer term, cost overruns could derail its

aim to achieve >15% ROE by FY18. The consumer banking

business is not easy to build up and the group may not achieve

60% income contribution from this segment.

Company Background

CIMB Group Holdings Berhad provides commercial banking

and related financial services. The company and its subsidiaries

operate as a regional universal bank, offering a full range of

financial products and services, covering corporate and

investment banking, consumer banking, treasury and asset

management.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)

Source: Company, DBS Bank

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2014A 2015A 2016F 2017F 2018F

NPL Ratio Provision Charge-Off Rate

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

2014A 2015A 2016F 2017F 2018F

Tier-1 CAR Total CAR

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2014A 2015A 2016F 2017F 2018F

Avg: 15.3x

+1sd: 18.9x

+2sd: 22.6x

-1sd: 11.6x

-2sd: 8x7.1

9.1

11.1

13.1

15.1

17.1

19.1

21.1

23.1

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

Avg: 1.44x

+1sd: 1.87x

+2sd: 2.3x

-1sd: 1x

-2sd: 0.57x0.5

1.0

1.5

2.0

2.5

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

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ASIAN INSIGHTS VICKERS SECURITIES

Page 38

Company Guide

CIMB Group Hldgs

Key Assumptions

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Gross Loans Growth 12.8 12.5 5.0 6.0 8.0

Customer Deposits Growth 7.2 12.5 6.0 6.0 8.0

Yld. On Earnings Assets 4.4 4.5 4.4 4.3 4.3

Avg Cost Of Funds 2.1 2.2 2.2 2.2 2.2

Income Statement (RMm)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Net Interest Income 8,656 9,337 9,893 10,190 10,875

Islamic Income 1,461 1,569 1,695 1,830 1,977

Non-Interest Income 3,931 4,489 4,219 4,338 4,459

Operating IncomeOperating IncomeOperating IncomeOperating Income 14,04814,04814,04814,048 15,39515,39515,39515,395 15,80715,80715,80715,807 16,35716,35716,35716,357 17,31117,31117,31117,311

Operating Expenses (8,292) (9,249) (8,793) (9,251) (9,734)

PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 5,7565,7565,7565,756 6,1466,1466,1466,146 7,0147,0147,0147,014 7,1067,1067,1067,106 7,5767,5767,5767,576

Provisions (1,701) (2,318) (2,290) (1,816) (1,780)

Associates 123 85.6 111 122 135

Exceptionals 98.0 1.14 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 4,2764,2764,2764,276 3,9143,9143,9143,914 4,8364,8364,8364,836 5,4125,4125,4125,412 5,9315,9315,9315,931

Taxation (1,102) (1,018) (1,209) (1,353) (1,483)

Minority Interests (67.8) (46.4) (53.4) (61.4) (70.6)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net ProfitNet ProfitNet ProfitNet Profit 3,1073,1073,1073,107 2,8502,8502,8502,850 3,5733,5733,5733,573 3,9983,9983,9983,998 4,3784,3784,3784,378

Net Profit bef Except 3,009 2,848 3,573 3,998 4,378

Growth (%)

Net Interest Income Gth 8.8 7.9 6.0 3.0 6.7

Net Profit Gth (31.6) (8.3) 25.4 11.9 9.5

Margins, Costs & Efficiency (%)

Spread 2.4 2.3 2.3 2.1 2.1

Net Interest Margin 2.8 2.7 2.7 2.6 2.5

Cost-to-Income Ratio 59.0 60.1 55.6 56.6 56.2

Business Mix (%)

Net Int. Inc / Opg Inc. 61.6 60.6 62.6 62.3 62.8

Non-Int. Inc / Opg inc. 28.0 29.2 26.7 26.5 25.8

Fee Inc / Opg Income 13.5 12.8 12.7 12.6 12.3

Oth Non-Int Inc/Opg Inc 14.4 16.4 14.0 13.9 13.5

Profitability (%)

ROAE Pre Ex. 8.9 7.3 8.4 8.6 8.7

ROAE 9.2 7.3 8.4 8.6 8.7

ROA Pre Ex. 0.8 0.7 0.8 0.8 0.8

ROA 0.8 0.7 0.8 0.8 0.8

Source: Company, DBS Bank

Plagued by restructuring costs related to the investment banking (IB) rationalisation in 1Q15 (RM202m) and MSS costs over 2Q-3Q15 (RM450m)

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ASIAN INSIGHTS VICKERS SECURITIES

Page 39

Company Guide

CIMB Group Hldgs

Quarterly / Interim Income Statement (RMm)

FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016

Net Interest Income 2,416 2,461 2,384 2,352 2,445

Islamic Income 386 417 438 413 425

Non-Interest Income 1,038 1,167 904 1,138 1,103

Operating IncomeOperating IncomeOperating IncomeOperating Income 3,8403,8403,8403,840 4,0454,0454,0454,045 3,7253,7253,7253,725 3,9033,9033,9033,903 3,9743,9743,9743,974

Operating Expenses (2,261) (2,211) (2,137) (2,091) (2,193)

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 1,5801,5801,5801,580 1,8331,8331,8331,833 1,5881,5881,5881,588 1,8121,8121,8121,812 1,7811,7811,7811,781

Provisions (529) (717) (515) (657) (586)

Associates 23.7 19.3 49.8 33.5 15.6

Exceptionals 0.0 (3.1) 0.0 0.0 150

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 1,0751,0751,0751,075 1,1321,1321,1321,132 1,1231,1231,1231,123 1,1891,1891,1891,189 1,3611,3611,3611,361

Taxation (256) (297) (293) (313) (312)

Minority Interests (14.3) (9.9) (16.0) (3.1) (25.7)

Net ProfitNet ProfitNet ProfitNet Profit 804804804804 826826826826 814814814814 873873873873 1,0231,0231,0231,023

Growth (%)

Net Interest Income Gth 6.5 1.9 (3.1) (1.3) 4.0

Net Profit Gth 25.7 2.7 (1.4) 7.3 17.2

Balance Sheet (RMm)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Cash/Bank Balance 33,463 29,319 28,190 28,143 32,791

Government Securities 4,758 9,714 14,571 21,857 32,785

Inter Bank Assets 4,239 1,829 1,738 1,651 1,569

Total Net Loans & Advs. 258,015 290,296 304,402 322,568 348,515

Investment 81,535 90,916 102,797 116,460 132,173

Associates 1,086 1,037 1,141 1,255 1,381

Fixed Assets 1,607 2,404 3,364 4,710 6,594

Goodwill 9,762 10,118 10,118 10,118 10,118

Other Assets 19,692 25,944 28,084 30,510 33,409

Total AssetsTotal AssetsTotal AssetsTotal Assets 414,156414,156414,156414,156 461,577461,577461,577461,577 494,406494,406494,406494,406 537,272537,272537,272537,272 599,334599,334599,334599,334

Customer Deposits 282,069 317,424 336,469 356,657 385,190

Inter Bank Deposits 32,150 23,692 17,459 12,866 9,481

Debts/Borrowings 30,310 34,009 38,382 43,561 49,703

Others 31,237 44,220 56,417 74,673 101,257

Minorities 831 982 1,035 1,097 1,167

Shareholders' Funds 37,560 41,251 44,642 48,419 52,536

Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 414,156414,156414,156414,156 461,577461,577461,577461,577 494,406494,406494,406494,406 537,272537,272537,272537,272 599,334599,334599,334599,334

Source: Company, DBS Bank

3Q16 earnings lifted by lower provisions and one-off gain from sale of stake in Sun Life insurance

Page 40: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES

Page 40

Company Guide

CIMB Group Hldgs

Financial Stability Measures (%)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Balance Sheet Structure

Loan-to-Deposit Ratio 91.5 91.5 90.5 90.4 90.5

Net Loans / Total Assets 62.3 62.9 61.6 60.0 58.2

Investment / Total Assets 19.7 19.7 20.8 21.7 22.1

Cust . Dep./Int. Bear. Liab. 81.9 84.6 85.8 86.3 86.7

Interbank Dep / Int. Bear. 9.3 6.3 4.5 3.1 2.1

Asset Quality

NPL / Total Gross Loans 3.1 3.0 3.2 3.2 3.1

NPL / Total Assets 2.0 2.0 2.0 1.9 1.8

Loan Loss Reserve Coverage 82.7 84.7 84.7 87.0 88.6

Provision Charge-Off Rate 0.6 0.8 0.7 0.5 0.5

Capital Strength

Total CAR 15.1 16.1 16.8 16.1 15.1

Tier-1 CAR 12.2 12.8 13.6 13.2 12.5

Source: Company, DBS Bank

Target Price & Ratings History

Source: DBS Bank

Analyst: Sue Lin LIM

Lynette CHENG

S.No.S.No.S.No.S.No.Date of Date of Date of Date of

ReportReportReportReport

Closing Closing Closing Closing

PricePricePricePrice

12-mth 12-mth 12-mth 12-mth

Target Target Target Target

PricePricePricePrice

Rat ing Rat ing Rat ing Rat ing

1: 10 Dec 15 4.47 4.80 HOLD

2: 26 Feb 16 4.42 4.60 HOLD

3: 21 Apr 16 4.86 4.60 HOLD

4: 27 May 16 4.32 4.60 HOLD

5: 20 Jul 16 4.19 4.60 HOLD

6: 05 Sep 16 4.74 4.80 HOLD

7: 31 Oct 16 5.03 4.80 HOLD

8: 17 Nov 16 4.70 4.80 HOLD

Note Note Note Note : Share price and Target price are adjusted for corporate actions.

1

2

3

4

5

67

8

3.70

3.90

4.10

4.30

4.50

4.70

4.90

5.10

5.30

Dec-15 Apr-16 Aug-16 Dec-16

RMRMRMRM

NPL ratios highest among peers

Page 41: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES ed: CK/ sa: BC, PY

BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM13.48 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Target 12Price Target 12Price Target 12Price Target 12----mthmthmthmth :::: RM15.00 (11% upside) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Improved earnings traction

Where we differ:Where we differ:Where we differ:Where we differ: We are more bullish on non-interest income growth as

we expect HLB’s wealth management contribution to gain traction

Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]

What’s New • Resilient 1QFY17 earnings supported by solid revenue growth; associate contribution improved

• NIM expansion from effective funding cost management; loan growth led by mortgage and SME segments

• Retaining cautious stance and ROE target of 10-11% for FY17F

• Maintain BUY, RM15.00 TP

Price Relative

Forecasts and Valuation FY FY FY FY JunJunJunJun ((((RMRMRMRMmmmm) ) ) ) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Pre-prov. Profit 2,263 2,521 2,811 3,153 Net Profit 1,903 2,265 2,497 2,773 Net Pft (Pre Ex.) 2,041 2,265 2,497 2,773 Net Pft Gth (Pre-ex) (%) (6.7) 11.0 10.2 11.1 EPS (sen) 87.8 104 115 128 EPS Pre Ex. (sen) 94.1 104 115 128 EPS Gth Pre Ex (%) (10) 11 10 11 Diluted EPS (sen) 87.8 104 115 128 PE Pre Ex. (X) 14.3 12.9 11.7 10.5 Net DPS (sen) 41.0 38.6 39.9 42.2 Div Yield (%) 3.0 2.9 3.0 3.1 ROAE Pre Ex. (%) 10.0 10.4 10.7 11.0 ROAE (%) 10.0 10.4 10.7 11.0 ROA (%) 1.0 1.2 1.2 1.3 BV Per Share (sen) 974 1,040 1,115 1,201 P/Book Value (x) 1.4 1.3 1.2 1.1 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 105 110 113

Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 3 S: 9 H: 9

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Growing from strength to strength

BackedBackedBackedBacked by solid fundamentals; BUY.by solid fundamentals; BUY.by solid fundamentals; BUY.by solid fundamentals; BUY. Hong Leong Bank’s (HLB) banking franchise remains undervalued in our view. We believe the market is not attributing sufficient premium to its key attributes of solid asset quality indicators and strong liquidity position. In this current uncertain environment, balancing liquidity versus profitability will be crucial. We expect HLB to grow cautiously in the current operating environment, ensuring asset quality and liquidity preservation while delivering decent earnings growth and ROEs. Bank of Chengdu (BOCD), its 20% associate remains a wildcard; it has shown improvement in the recent quarter. Sturdy start to the financial yearSturdy start to the financial yearSturdy start to the financial yearSturdy start to the financial year.... HLB registered robust earnings growth in 1QFY17, underpinned by solid income growth. Net interest income was led by loan growth of 4% y-o-y/0.3% q-o-q and NIM uplift (from effective funding cost management). Meanwhile, treasury gains propped up non-interest income growth. Positively, contribution from Bank of Chengdu has improved, thanks to cost discipline and decline in provisions. Liquidity continues to be a strong point for HLB, as its loan-to-deposit ratio was kept low at c.80%. NPL ratio stood stable and low at 0.8% despite the classification of one account. Cautious outlook for FY17F. Cautious outlook for FY17F. Cautious outlook for FY17F. Cautious outlook for FY17F. FY17F targets were retained, and appear to skew towards a cautious mode with loan growth expected to at least track industry levels. Deposits would likely grow at the same pace. HLB aims to keep NIM stable by managing its liability mix, as demonstrated in 1QFY17. Non-interest income to total income ratio is targeted at above 25%, driven by transactions and customer flows. Cost-to-income ratio is targeted to be below 46%. Credit costs excluding recoveries are guided to normalise at 25-35bps; there are still some recoveries that could be expected but chunky ones are largely done. Post-rights and with slower growth expected, ROE is targeted at 10-11%. Valuation: HLB is a BUY, with a target price of RM15.00.HLB is a BUY, with a target price of RM15.00.HLB is a BUY, with a target price of RM15.00.HLB is a BUY, with a target price of RM15.00. Our TP is derived using the Gordon Growth Model and assumes 11% ROE, 9% cost of equity and 4% long-term growth rate; it implies 1.4x CY17 BV. Key Risks to Our View: SlowerSlowerSlowerSlower----thanthanthanthan----expected materialisation of growth plans.expected materialisation of growth plans.expected materialisation of growth plans.expected materialisation of growth plans. Inability to deliver growth plans for wealth management and excessive NIM compression could limit earnings growth. At A Glance Issued Capital (m shrs) 2,052

Mkt. Cap (RMm/US$m) 27,663 / 6,219

Major Shareholders (%)

Hong Leong Financial Group (%) 64.4 EPF (%) 14.0 Free Float (%) 21.6

3m Avg. Daily Val (US$m) 1.9

ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks

DBS Group Research . Equity

7 Dec 2016

Malaysia Company Guide

Hong Leong Bank Version 6 | Bloomberg: HLBK MK | Reuters: HLBB.KL Refer to important disclosures at the end of this report

72

92

112

132

152

172

192

212

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Relative IndexRM

Hong Leong Bank (LHS) Relative KLCI (RHS)

Page 42: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES

Page 42

Company Guide

Hong Leong Bank

WHAT’S NEW

Starting the year on a strong footing

HighlightsHighlightsHighlightsHighlights

Earnings boosted by strong topline growthEarnings boosted by strong topline growthEarnings boosted by strong topline growthEarnings boosted by strong topline growth. HLB’s 1QFY17 net

profit of RM543m was within expectations. Net profit grew

strongly y-o-y, on the back of robust income growth. Net

interest income was underpinned by expansion in NIM as yields

were largely stable while cost of funds fell (from maturity of

higher cost deposits). Meanwhile, non-interest income was

boosted by treasury income. Expenses were higher due to

increase in personnel and marketing costs, but cost-to-income

ratio was kept at 45%. Income from associate, Bank of

Chengdu, has improved – thanks to cost discipline and decline

in provisions. On a q-o-q basis, earnings were lower as

provisions normalised (as opposed to write backs in previous

quarter).

Loan growth driven by mortgage and SME; Loan growth driven by mortgage and SME; Loan growth driven by mortgage and SME; Loan growth driven by mortgage and SME; liquidity remains liquidity remains liquidity remains liquidity remains

ample. ample. ample. ample. Loan growth stood at 4% y-o-y/0.3% q-o-, largely

driven by mortgage and SME, which are in line with HLB’s

targeted segments. Deposit grew at 3% y-o-y/1% q-o-q, led

by fixed deposits. Liquidity remains healthy as the loan-to-

deposit ratio was kept low at 80%.

Stable asset quality indicatorsStable asset quality indicatorsStable asset quality indicatorsStable asset quality indicators. Impaired loans ratio was largely

stable at 0.84%. Exposure to oil and gas (<1% of total loans)

in addition to commodities was relatively unchanged at 3% of

total loans. Loan loss coverage remains relatively high at 113%

(excluding regulatory reserve). Higher impaired loans were

noted in the working capital segment q-o-q and this was

attributed to an oil and gas account. Little provisions were

required as the account is largely secured.

Capital ratios remained robust.Capital ratios remained robust.Capital ratios remained robust.Capital ratios remained robust. CET1/Tier-1/Total capital ratio

stood at 12.9%/13.3%/14.8% for the quarter. No dividends

were declared.

OutlookOutlookOutlookOutlook

KeepingKeepingKeepingKeeping cautious stancecautious stancecautious stancecautious stance for FY17Ffor FY17Ffor FY17Ffor FY17F. FY17F targets were

retained, and appear to skew towards a cautious mode with

loan growth expected to at least track industry levels. It is

crucial to manage loan growth to ensure NIM trends would

not be significantly compromised. Deposits would likely grow

at the same pace, keeping the loan-to-deposit ratio at c.80%.

HLB aims to keep NIM stable by managing its liability mix, as

demonstrated in 1QFY17. Non-interest income to total income

ratio is targeted at above 25%, driven by transactions and

customer flows. Cost savings from the MSS will be reinvested

to enhance digital capabilities. Digital-banking initiatives are

expected to drive transaction banking volumes higher over

time. Cost-to-income ratio is targeted to be below 46%.

Credit costs excluding recoveries are guided to normalise at

25-35bps; there are still some recoveries that could be

expected but chunky ones are largely done. Post-rights and

with slower growth expected, ROE is targeted at 10-11%.

ValuationValuationValuationValuation

Maintain BUY with RM15.00 TPMaintain BUY with RM15.00 TPMaintain BUY with RM15.00 TPMaintain BUY with RM15.00 TP. We keep our earnings

forecast and TP unchanged, as HLB’s 1QFY17 trends were in

line with our expectations. HLB’s banking franchise remains

undervalued in our view. We believe market is not attributing

sufficient premium to its key attributes of solid asset quality

indicators and strong liquidity position. Our TP of RM15.00 is

based on the Gordon Growth Model and implies 1.4x CY17

BV. Our TP assumes 11% ROE, 9% cost of equity and 4%

long-term growth rate.

Page 43: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES

Page 43

Company Guide

Hong Leong Bank

Quarterly / Interim Income Statement (RMm)

FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Net Interest Income 660 663 690 4.6 4.1

Islamic Income 115 121 130 13.2 13.2

Non-Interest Income 249 295 276 11.0 (6.3)

Operating IncomeOperating IncomeOperating IncomeOperating Income 1,0231,0231,0231,023 1,0791,0791,0791,079 1,0961,0961,0961,096 7.17.17.17.1 1.61.61.61.6

Operating Expenses (463) (494) (491) 6.0 (0.6)

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 561561561561 585585585585 606606606606 8.08.08.08.0 3.53.53.53.5

Provisions (21.1) 54.1 (26.4) 25.0 (148.9)

Associates 85.5 85.3 95.5 11.7 11.9

Exceptionals 0.0 0.0 0.0 nm nm

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 625625625625 724724724724 675675675675 8.08.08.08.0 (6.9)(6.9)(6.9)(6.9)

Taxation (122) (166) (132) 8.3 (20.4)

Minority Interests 0.0 0.0 0.0 nm nm

Net ProfitNet ProfitNet ProfitNet Profit 503503503503 559559559559 543543543543 7.97.97.97.9 (2.8)(2.8)(2.8)(2.8)

Growth (%)

Net Interest Income Gth 0.4 1.3 4.1

Net Profit Gth (18.2) 12.2 (2.8)

Key ratio (%)

NIM 1.8 1.8 1.9

NPL ratio 0.8 0.8 0.8

Loan-to-deposit 80.1 80.4 80.3

Cost-to-income 45.2 45.8 44.8

Total CAR 13.7 14.7 14.8

Source of all data: Company, DBS Bank

Page 44: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES

Page 44

Company Guide

Hong Leong Bank

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

NIM compression largely unavoidable.NIM compression largely unavoidable.NIM compression largely unavoidable.NIM compression largely unavoidable. Although we expect

funding cost pressures, we believe HLB’s active treasury

functions would strive to keep NIM as stable as possible. CASA,

as a low-cost funding source, should help to alleviate NIM

compression as well. HLB’s CASA-to-total deposits ratio

currently stands at 26% of total deposits and it intends to build

up this portfolio to 28-30% over the next 3-5 years.

Room to scale up loan growth; loanRoom to scale up loan growth; loanRoom to scale up loan growth; loanRoom to scale up loan growth; loan----totototo----deposit ratio is still deposit ratio is still deposit ratio is still deposit ratio is still

among the lowestamong the lowestamong the lowestamong the lowest. HLB’s loan growth is driven by mortgage

and SME loans. We are assuming 6% loan growth in our

forecasts, while deposit should track loan growth. With a loan-

to-deposit ratio still among the lowest in the industry, HLB

would have room to further leverage its asset-liability mix to

accelerate loan growth and optimise NIM. We expect its loan-

to-deposit ratio to hover around 80%.

Wealth management a crucial new driver.Wealth management a crucial new driver.Wealth management a crucial new driver.Wealth management a crucial new driver. Recurring fee income

(loan-related and credit card fees) remains HLB’s key non-

interest income driver. However, it is also building up income

from wealth management. HLB has established a regional

wealth management and private banking platform in Singapore.

Wealth management is expected to be HLB’s new growth driver

as it gradually gains prominence.

Addressing efficiency issues.Addressing efficiency issues.Addressing efficiency issues.Addressing efficiency issues. From a business-as-usual (BAU)

perspective, costs should remain nimble, and cost-to-income

ratio should hover below 45%. HLB announced a Mutual

Separation Scheme (MSS) on 20 Oct which resulted in an

acceptance rate of 12.5%. The MSS cost incurred was RM172m

while savings are expected to be RM109m per annum from as

early as Jan 16. Cost savings are likely to be used for

investments in the bank’s digitisation agenda

Bank of Chengdu contribution should Bank of Chengdu contribution should Bank of Chengdu contribution should Bank of Chengdu contribution should stabilistabilistabilistabilisssseeee, but remains a , but remains a , but remains a , but remains a

wildcard.wildcard.wildcard.wildcard. After a weak showing in FY16, BOCD is expected to

see its NPLs peak out by 1QFY17 given the signs of stabilising

NPLs in the recent quarters. Our forecast assumes contribution

from BOCD to drop to around 15% of pre-tax profit in FY17-

19F. This, however, remains a wildcard.

Margin Trends

Gross Loan & Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure

Source: Company, DBS Bank

1.8%

1.8%

1.9%

1.9%

2.0%

2.0%

2.1%

2.1%

0

500

1,000

1,500

2,000

2,500

3,000

2015A 2016A 2017F 2018F 2019F

RM m

Net Interest Income Net Interest Income Margin

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2015A 2016A 2017F 2018F 2019F

RM m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2015A 2016A 2017F 2018F 2019F

RM m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

71%

73%

75%

77%

79%

81%

83%

85%

87%

89%

100,912

120,912

140,912

160,912

180,912

200,912

2015A 2016A 2017F 2018F 2019F

RM bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

36.0%

37.0%

38.0%

39.0%

40.0%

41.0%

42.0%

43.0%

44.0%

45.0%

46.0%

47.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

2015A 2016A 2017F 2018F 2019F

Net Interest Income Non-interest Income

Islamic Banking Income Cost-to-income Ratio

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ASIAN INSIGHTS VICKERS SECURITIES

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Company Guide

Hong Leong Bank

Balance Sheet:

Superior asset quality.Superior asset quality.Superior asset quality.Superior asset quality. At <1%, HLB’s NPL ratio is second only to

Public Bank (PBK). Similar to PBK, HLB also boasts a prudent

credit culture. We expect HLB to continue recording resilient

asset-quality indicators. Normalised credit cost is expected to

hover around 25-35bps, excluding recoveries.

Stronger capital ratios post rights.Stronger capital ratios post rights.Stronger capital ratios post rights.Stronger capital ratios post rights. Post-rights, capital ratios are

now stronger, comfortably above the minimum required CET1

of 9.5% (inclusive of conservation and countercyclical buffers)

by 2019 as per Basel III requirements. Any capital overhang

should be removed with this rights issue. HLB does not have a

dividend reinvestment plan in place, but we expect at least 35%

payout for FY17F.

Share Price Drivers:

Charting the next Charting the next Charting the next Charting the next course.course.course.course. HLB is currently trading below -1SD of

its 10-year P/BV mean. We believe that the current valuation has

unfairly priced this strong banking franchise with solid asset

quality and liquidity indicators. In addition, the stock provides a

decent dividend yield of 3-4%.

Book value growth has been underappreciated.Book value growth has been underappreciated.Book value growth has been underappreciated.Book value growth has been underappreciated. HLB has been

consistently seeing its book value and earnings grow at c.10%

p.a., save for the year when it raised capital to acquire EON

Capital and the recent rights issue. This however, has not been

reflected in its share price performance. Furthermore, we

believe HLB's resilient earnings, with wealth management and

SME businesses as the key drivers, coupled with strong liquidity

indicators and asset-quality parameters, should act as a catalyst

for the stock.

Key Risks:

SlowerSlowerSlowerSlower----thanthanthanthan----expected materialisation of plans.expected materialisation of plans.expected materialisation of plans.expected materialisation of plans. This could be

due to the inability to deliver growth plans for wealth

management and a slowdown in regional operations. While its

loan-to-deposit ratio is at 80%, which is the lowest among

peers, slower-than-expected loan growth and excessive NIM

compression could limit earnings growth.

Company Background

Hong Leong Bank Berhad provides commercial banking and

related financial services. The company's services include

leasing and hire purchase, nominee, Islamic banking, and unit

trust management.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)

Source: Company, DBS Bank

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

2015A 2016A 2017F 2018F 2019F

NPL Ratio Provision Charge-Off Rate

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

2015A 2016A 2017F 2018F 2019F

Tier-1 CAR Total CAR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2015A 2016A 2017F 2018F 2019F

Avg: 13.4x

+1sd: 14x

+2sd: 14.7x

-1sd: 12.8x

-2sd: 12.1x

10.6

11.6

12.6

13.6

14.6

15.6

16.6

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

Avg: 1.82x

+1sd: 2.15x

+2sd: 2.49x

-1sd: 1.49x

-2sd: 1.15x

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

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Page 46

Company Guide

Hong Leong Bank

Key Assumptions

FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Gross Loans Growth 8.9 6.3 6.0 6.0 8.0

Customer Deposits Growth 7.7 5.9 6.0 6.0 8.0

Yld. On Earnings Assets 3.7 3.8 3.6 3.6 3.6

Avg Cost Of Funds 2.2 2.2 2.2 2.2 2.2

Income Statement (RMm)

FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Net Interest Income 2,741 2,655 2,765 2,928 3,124

Islamic Income 420 467 514 555 600

Non-Interest Income 906 1,055 1,214 1,359 1,522

Operating IncomeOperating IncomeOperating IncomeOperating Income 4,0674,0674,0674,067 4,1784,1784,1784,178 4,4934,4934,4934,493 4,8424,8424,8424,842 5,2465,2465,2465,246

Operating Expenses (1,859) (1,915) (1,972) (2,031) (2,092)

PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 2,2082,2082,2082,208 2,2632,2632,2632,263 2,5212,5212,5212,521 2,8112,8112,8112,811 3,1533,1533,1533,153

Provisions 75.4 (42.8) (114) (158) (207)

Associates 418 333 425 468 520

Exceptionals 45.0 (172) 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 2,7462,7462,7462,746 2,3822,3822,3822,382 2,8322,8322,8322,832 3,1213,1213,1213,121 3,4663,4663,4663,466

Taxation (513) (478) (566) (624) (693)

Minority Interests 0.0 0.0 0.0 0.0 0.0

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net ProfitNet ProfitNet ProfitNet Profit 2,2332,2332,2332,233 1,9031,9031,9031,903 2,2652,2652,2652,265 2,4972,4972,4972,497 2,7732,7732,7732,773

Net Profit bef Except 2,188 2,075 2,265 2,497 2,773

Growth (%)

Net Interest Income Gth 3.0 (3.1) 4.2 5.9 6.7

Net Profit Gth 6.2 (14.8) 19.0 10.2 11.1

Margins, Costs & Efficiency (%)

Spread 1.6 1.5 1.5 1.5 1.5

Net Interest Margin 1.9 1.9 1.9 1.9 1.9

Cost-to-Income Ratio 45.7 45.8 43.9 42.0 39.9

Business Mix (%)

Net Int. Inc / Opg Inc. 67.4 63.6 61.5 60.5 59.5

Non-Int. Inc / Opg inc. 22.3 25.3 27.0 28.1 29.0

Fee Inc / Opg Income 14.8 14.8 15.8 16.4 17.0

Oth Non-Int Inc/Opg Inc 7.5 10.5 11.2 11.7 12.1

Profitability (%)

ROAE Pre Ex. 14.3 10.0 10.4 10.7 11.0

ROAE 14.3 10.0 10.4 10.7 11.0

ROA Pre Ex. 1.2 1.1 1.2 1.2 1.3

ROA 1.3 1.0 1.2 1.2 1.3

Source: Company, DBS Bank

Provisions to normalise over time as recoveries taper off

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Page 47

Company Guide

Hong Leong Bank

Quarterly / Interim Income Statement (RMm)

FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017

Net Interest Income 660 678 654 663 690

Islamic Income 115 118 114 121 130

Non-Interest Income 249 278 234 295 276

Operating IncomeOperating IncomeOperating IncomeOperating Income 1,0231,0231,0231,023 1,0741,0741,0741,074 1,0021,0021,0021,002 1,0791,0791,0791,079 1,0961,0961,0961,096

Operating Expenses (463) (486) (472) (494) (491)

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 561561561561 587587587587 530530530530 585585585585 606606606606

Provisions (21.1) (58.0) (17.7) 54.1 (26.4)

Associates 85.5 68.5 94.2 85.3 95.5

Exceptionals 0.0 (172) 0.0 0.0 0.0

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 625625625625 426426426426 607607607607 724724724724 675675675675

Taxation (122) (81.7) (109) (166) (132)

Minority Interests 0.0 0.0 0.0 0.0 0.0

Net ProfitNet ProfitNet ProfitNet Profit 503503503503 344344344344 498498498498 559559559559 543543543543

Growth (%)

Net Interest Income Gth 0.4 2.7 (3.5) 1.3 4.1

Net Profit Gth (18.2) (31.6) 44.7 12.2 (2.8)

Balance Sheet (RMm)

FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Cash/Bank Balance 6,230 7,474 8,476 9,352 10,922

Government Securities 3,476 4,296 3,853 4,079 4,396

Inter Bank Assets 3,982 2,057 2,160 2,268 2,382

Total Net Loans & Advs. 112,125 119,457 126,451 133,885 144,513

Investment 42,421 41,712 43,797 45,987 48,287

Associates 3,107 3,323 3,747 4,216 4,736

Fixed Assets 679 1,382 1,410 1,438 1,467

Goodwill 2,149 2,096 2,096 2,096 2,096

Other Assets 9,852 8,030 8,190 8,354 8,521

Total AssetsTotal AssetsTotal AssetsTotal Assets 184,020184,020184,020184,020 189,827189,827189,827189,827 200,182200,182200,182200,182 211,676211,676211,676211,676 227,319227,319227,319227,319

Customer Deposits 140,276 148,524 157,435 166,881 180,232

Inter Bank Deposits 7,096 6,201 6,511 6,837 7,179

Debts/Borrowings 8,847 4,523 4,138 4,138 4,138

Others 11,010 9,463 9,550 9,640 9,732

Minorities 0.0 0.0 0.0 0.0 0.0

Shareholders' Funds 16,790 21,117 22,547 24,180 26,038

Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 184,020184,020184,020184,020 189,828189,828189,828189,828 200,182200,182200,182200,182 211,676211,676211,676211,676 227,319227,319227,319227,319

Source: Company, DBS Bank

Earnings led by encouraging growth in net interest income and non-interest income

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Company Guide

Hong Leong Bank

Financial Stability Measures (%)

FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Balance Sheet Structure

Loan-to-Deposit Ratio 79.9 80.4 80.3 80.2 80.2

Net Loans / Total Assets 60.9 62.9 63.2 63.2 63.6

Investment / Total Assets 23.1 22.0 21.9 21.7 21.2

Cust . Dep./Int. Bear. Liab. 89.8 93.3 93.7 93.8 94.1

Interbank Dep / Int. Bear. 4.5 3.9 3.9 3.8 3.7

Asset Quality

NPL / Total Gross Loans 0.8 0.8 0.8 0.8 0.7

NPL / Total Assets 0.5 0.5 0.5 0.5 0.5

Loan Loss Reserve Coverage 136.3 119.8 135.8 150.0 179.5

Provision Charge-Off Rate (0.1) 0.0 0.1 0.1 0.1

Capital Strength

Total CAR 14.7 15.1 15.3 16.1 16.7

Tier-1 CAR 12.3 13.6 13.8 14.7 15.4

Source: Company, DBS Bank

Target Price & Ratings History

Source: DBS Bank

Analyst: Sue Lin LIM

Lynette CHENG

S.No.S.No.S.No.S.No.Date of Date of Date of Date of

ReportReportReportReport

Closing Closing Closing Closing

PricePricePricePrice

12-mth 12-mth 12-mth 12-mth

Target Target Target Target

PricePricePricePrice

Rat ing Rat ing Rat ing Rat ing

1: 10 Dec 15 13.20 14.80 BUY

2: 15 Dec 15 13.40 14.80 BUY

3: 14 Jan 16 13.04 14.80 BUY

4: 22 Jan 16 12.90 14.80 BUY

5: 02 Feb 16 13.36 14.80 BUY

6: 24 Feb 16 13.12 14.70 BUY

7: 01 Mar 16 13.10 14.70 BUY

8: 02 Mar 16 13.16 14.70 BUY

9: 24 Mar 16 13.32 14.70 BUY

10: 04 Apr 16 13.62 14.70 BUY

11: 03 May 16 13.20 14.70 BUY

12: 04 May 16 13.40 14.70 BUY

13: 25 May 16 13.40 14.70 BUY

14: 02 Jun 16 13.16 14.70 BUY

Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 03 Jun 16 13.16 14.70 BUY

16: 12 Jul 16 13.24 14.70 BUY

17: 14 Jul 16 13.26 14.70 BUY

18: 01 Aug 16 13.22 14.70 BUY

19: 05 Aug 16 13.06 14.70 BUY

20: 30 Aug 16 13.08 15.00 BUY

21: 02 Sep 16 13.10 15.00 BUY

22: 05 Sep 16 13.10 15.00 BUY

23: 06 Oct 16 13.10 15.00 BUY

24: 10 Oct 16 13.16 15.00 BUY

25: 21 Oct 16 13.28 15.00 BUY

26: 24 Oct 16 13.30 15.00 BUY

27: 31 Oct 16 13.32 15.00 BUY

28: 07 Nov 16 13.14 15.00 BUY

29: 23 Nov 16 13.20 15.00 BUY

1

2

3

45

6

7

8

9

10

11

12

1314

15

16

17

18

19

20

21

22

23

24

25

26

2728

29

12.06

12.56

13.06

13.56

14.06

Dec-15 Apr-16 Aug-16 Dec-16

RMRMRMRM

Low loan-to-deposit ratio

Page 49: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY

HOLDHOLDHOLDHOLD Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM7.88 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Target 12Price Target 12Price Target 12Price Target 12----mthmthmthmth :::: RM7.50 (5% downside) (Prev RM7.50) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Recovery in asset quality and regional operations

Where we differ:Where we differ:Where we differ:Where we differ: We have imputed higher credit cost assumptions Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]

What’s New • 3Q16 earnings within expectations; mainly lifted

by writebacks

• Asset quality remain vulnerable to weakness in oil

and gas sector

• Adjusted earnings on lower loan and deposit

growth assumptions and to account for disposal

gains of Visa shares (FY16F)

• Maintain HOLD with unchanged TP of RM7.50

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Pre-prov. Profit 10,953 10,867 11,195 12,006 Net Profit 6,836 6,260 6,832 7,550 Net Pft (Pre Ex.) 6,836 5,960 6,832 7,550 Net Pft Gth (Pre-ex) (%) 1.8 (12.8) 14.6 10.5 EPS (sen) 71.7 63.0 66.5 71.0 EPS Pre Ex. (sen) 71.7 60.0 66.5 71.0 EPS Gth Pre Ex (%) (3) (16) 11 7 Diluted EPS (sen) 70.0 62.0 65.3 69.8 PE Pre Ex. (X) 11.0 13.1 11.9 11.1 Net DPS (sen) 54.0 46.5 46.8 47.4 Div Yield (%) 6.9 5.9 5.9 6.0 ROAE Pre Ex. (%) 11.9 9.1 10.0 10.6 ROAE (%) 11.9 9.7 10.0 10.6 ROA (%) 1.0 0.9 0.9 1.0 BV Per Share (sen) 632 663 664 669 P/Book Value (x) 1.2 1.2 1.2 1.2 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 61.0 65.8 66.6

Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 5 S: 5 H: 12

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Much ado about oil and gas Vulnerability remainsVulnerability remainsVulnerability remainsVulnerability remains; HOLD.; HOLD.; HOLD.; HOLD. Despite showing traction on reclassification of rescheduled and restructured (R&R) loans to performing loans in 3Q16, we remain cautious on Maybank’s (MAY) susceptibility to weakness in the oil and gas sector. Exposure increased (+RM1bn q-o-q) and oil and gas loans under watchlist rose (+RM4bn q-o-q). While dividend yields remain attractive, asset quality would remain a key risk in our view, thus limiting any share price upside.

3Q163Q163Q163Q16 earnings within expectations; largely held up by write earnings within expectations; largely held up by write earnings within expectations; largely held up by write earnings within expectations; largely held up by write backsbacksbacksbacks.... Non-interest income increased on improved trading and forex income. NIM slippage was minimal q-o-q in spite of a 25bps rate cut during the quarter. Loan growth remains muted at +0.4% YTD, led by mortgages and working capital loans but dampened by contraction in loans for construction and purchase of securities. Impaired loans ratio reduced to 2.22% on the back of reclassification of R&R loans. Given the reduction in impaired loans, loan loss coverage was bumped up to 75%.

Aiming lowerAiming lowerAiming lowerAiming lower in FY16in FY16in FY16in FY16.... Loan growth is now expected to range at 2-3% while deposit growth is expected at 3-4%. With hopes pinned on more recoveries, credit cost guidance is at c.50bps. This should translate to ROE of 10.5-11%. This prompted us to lower loan growth and deposit growth assumptions across FY16-18F. For FY16, we have also lowered credit cost assumption and imputed the expected gains from Visa share disposal. All in, our earnings were adjusted by -2% to +8%. Our FY16 credit cost assumption remains higher than guided as we are taking a more cautious view on MAY’s oil and gas exposure.

Valuation: MAY is a HOLD with target price of RM7.50. Our TP is equivalent to 1.1x FY17 BV and based on the Gordon Growth Model (assuming 11% ROE, 4% growth and 10.2% cost of equity). Key Risks to Our View: FasterFasterFasterFaster----thanthanthanthan----expected recoveriesexpected recoveriesexpected recoveriesexpected recoveries.... Our credit cost assumption (63bps) is higher than guided (c.50 bps). Faster-than-expected recoveries may pose upside risk to earnings forecast. Based on our sensitivity analysis, every 10bps reduction in credit cost increases net profit by 5%. At A Glance Issued Capital (m shrs) 10,193

Mkt. Cap (RMm/US$m) 80,322 / 18,056

Major Shareholders (%)

Amanah Saham Bumiputera (%) 37.0 EPF (%) 15.7 Permodalan Nasional Bhd (%) 5.7

Free Float (%) 41.6

3m Avg. Daily Val (US$m) 11.6

ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks

DBS Group Research . Equity

7 Dec 2016

Malaysia Company Guide

Maybank Version 5 | Bloomberg: MAY MK | Reuters: MBBM.KL Refer to important disclosures at the end of this report

72

92

112

132

152

172

192

212

6.8

7.8

8.8

9.8

10.8

11.8

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Relative IndexRM

Maybank (LHS) Relative KLCI (RHS)

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Page 50

Company Guide

Maybank

WHAT’S NEW

Lifted by writebacks but asset quality remains vulnerable

HighlightsHighlightsHighlightsHighlights

Earnings largely inEarnings largely inEarnings largely inEarnings largely in----line, supported by write backs in collective line, supported by write backs in collective line, supported by write backs in collective line, supported by write backs in collective

allowances.allowances.allowances.allowances. Non-interest income increased on improved

trading and forex income. Despite the cut in interest rate, MAY

experienced minimal NIM slippage thanks to effective funding

cost management. Loan growth remains muted at -0.7% y-o-

y/ +2.2% q-o-q/ +0.4% YTD, led by mortgages and working

capital but dampened by contraction in loans for construction

and purchase of securities. Deposit (including investment

accounts) growth stood at +5.6% y-o-y/ -0.4% q-o-q/ +2.4%

YTD.

Impaired loansImpaired loansImpaired loansImpaired loans ratio reduced to 2.22%ratio reduced to 2.22%ratio reduced to 2.22%ratio reduced to 2.22% (from 2.34% in 2Q16)

on the back of reclassification of restructured and rescheduled

(R&R) loans to performing status. About RM600m loans were

reclassified. Of this, the bulk came from its Singapore books.

This explains the significant decline in its Singapore impaired

loans ratio to 0.98% (from 1.38%). Given the reduction in

impaired loans, overall loan loss coverage was bumped up to

75% (from 71%). Separately, MAY’s capital ratios remain one

of the highest among peers with CET1/ Tier 1/Total capital

ratio of 13.7/15.4/19.0%.

Much ado about oil and gas.Much ado about oil and gas.Much ado about oil and gas.Much ado about oil and gas. Although impaired loans

reduced, there was a notable increase of c.RM4bn in

borrowers under MAY’s watchlist status. Part of the increase

comprises newly reclassified loans, while the remainder came

from a few concentrated oil and gas accounts from Malaysia.

Management attributes the increase to prudent judgmental

triggers and reiterated that the increase does not necessarily

indicate an imminent increase in restructured and rescheduled

loans. Separately, MAY’s exposure to oil and gas has increased

from 4.19% to 4.31% due to additional loan drawdowns in

Singapore. While management continues to view oil and gas

as a high risk sector, the contention to increase the exposure is

made from assessing borrowers on a case-by-case basis, on

metrics such as certainty of income and strength of

shareholder.

OutlookOutlookOutlookOutlook

Toning down guidanceToning down guidanceToning down guidanceToning down guidance. Given the lacklustre performance thus

far, MAY has toned down its guidance across the board. Loan

growth is now expected to range at 2-3% (previously guidance

8-9%) while deposit growth is expected at 3-4% (previously

10-11%). While MAY is not discounting more R&R incidences,

hopes are still pinned on some accounts exiting the R&R status

(allowed upon observance of continuous repayment for at

least six months). Hence, credit cost was guided at c.50bps

even though YTD credit cost has exceeded this (52bps). This

should translate to ROE of 10.5-11% (previously 11-12%).

Adjust Adjust Adjust Adjust earnings by earnings by earnings by earnings by ----2222 to +8to +8to +8to +8%.%.%.%. To account for the strong write

backs reported this quarter, we lowered our FY16 credit cost

assumption to 63bps (from 70bps). We kept our credit cost

assumption for FY17-18F intact at 43/38bps. Loan and deposit

growth assumptions are also slashed to 3/5/5% (from 5/7/8%)

and 4/5/5% (from 8% each), respectively. We also raised FY16

earnings to impute the gains in disposal of Visa shares

(c.RM407m) announced in mid-November. All in, our earnings

were bumped up in FY16 by 8%, but cut by 2% each for

FY17-18F. Our forecast conservatively assumes provisions will

remain elevated, as we retain our cautious stance on the

vulnerability of MAY’s oil and gas exposure given the increase

in exposure and loans under watchlist for the sector. In this

vein, our forecasted ROE of slightly below 10% is lower vs

MAY’s guidance. Faster-than- expected recoveries and

reclassifications (from impaired to performing loans) may pose

upside risk to our earnings forecast. Based on our sensitivity

analysis, every 10bps reduction in credit cost increases net

profit by 5%.

Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation

Maintain HOLD with Maintain HOLD with Maintain HOLD with Maintain HOLD with unchanged TP of RM7.50.unchanged TP of RM7.50.unchanged TP of RM7.50.unchanged TP of RM7.50. Our TP is

based on 11% ROE, 4% growth and 10.2% cost of equity.

Our TP implies 1.1x FY17 BV. While dividend yields remain

attractive, asset quality would remain a key risk in our view,

thus limiting any share price upside.

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Page 51

Company Guide

Maybank

Quarterly / Interim Income Statement (RMm)

FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Net Interest Income 2,897 2,879 2,828 (2.4) (1.8)

Islamic Income 1,085 1,037 1,009 (7.0) (7.0)

Non-Interest Income 1,766 1,430 1,621 (8.2) 13.3

Operating IncomeOperating IncomeOperating IncomeOperating Income 5,7475,7475,7475,747 5,3465,3465,3465,346 5,4585,4585,4585,458 (5.0)(5.0)(5.0)(5.0) 2.12.12.12.1

Operating Expenses (2,601) (2,624) (2,700) 3.8 2.9

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 3,1463,1463,1463,146 2,7222,7222,7222,722 2,7582,7582,7582,758 (12.3)(12.3)(12.3)(12.3) 1.31.31.31.3

Provisions (797) (1,181) (331) (58.5) (72.0)

Associates 34.2 43.0 29.3 (14.5) (32.0)

Exceptionals 0.0 0.0 0.0 nm nm

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 2,3832,3832,3832,383 1,5841,5841,5841,584 2,4562,4562,4562,456 3.13.13.13.1 55.155.155.155.1

Taxation (457) (385) (593) 29.6 54.0

Minority Interests (26.8) (39.4) (67.9) (153.9) 72.5

Net ProfitNet ProfitNet ProfitNet Profit 1,8991,8991,8991,899 1,1601,1601,1601,160 1,7961,7961,7961,796 (5.4)(5.4)(5.4)(5.4) 54.854.854.854.8

Growth (%)

Net Interest Income Gth 8.1 (0.8) (1.8)

Net Profit Gth 19.8 (18.7) 54.8

Key ratio (%)

NIM 2.5 2.4 2.3

NPL ratio 1.5 2.3 2.2

Loan-to deposit 96.0 92.6 95.0

Cost-to-income 45.3 49.1 49.5

Total CAR 15.0 19.2 19.0

Source of all data: Company, DBS Bank

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ASIAN INSIGHTS VICKERS SECURITIES

Page 52

Company Guide

Maybank

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

NIM trends still on downside bias.NIM trends still on downside bias.NIM trends still on downside bias.NIM trends still on downside bias. OPR cuts could result in

further pressure to its NIM. MAY’s strong CASA growth was,

however, offset by high campaign fixed deposit rates, further

exerting pressure on its funding costs. Renewed competition in

lending rates could push NIM more toward a downside bias.

Sustainable fee income from core banking activities.Sustainable fee income from core banking activities.Sustainable fee income from core banking activities.Sustainable fee income from core banking activities. The

outlook remains cloudy for capital markets, which would drag

market-related income. However, the share of non-interest

income at MAY, which is largely driven by transactional fees

from core banking services, should remain stable. MAY’s solid

deposit franchise and high CASA share give it a natural

advantage over peers to strengthen its transaction banking

segment. MAY’s recurring fee income is high at close to 60% of

non-interest income. Growing fee-based income remains a

strategic priority for MAY.

Guiding for ROE of 10.5Guiding for ROE of 10.5Guiding for ROE of 10.5Guiding for ROE of 10.5----11%11%11%11%.... We expect FY16 loan growth to

moderate to 3%. Along with NIM compression (albeit smaller in

quantum vs FY15) and high credit cost, we expect ROE to be

below MAY’s guidance of 10.5%. Positively, operating costs

should remain well contained. However, slower profit growth

coupled with the expanded equity base arising from the DRP

would drag ROE lower.

Outlook remains uncertain for its regional operations.Outlook remains uncertain for its regional operations.Outlook remains uncertain for its regional operations.Outlook remains uncertain for its regional operations. Maybank

Singapore historically contributes c.16% to group PBT and MAY

is the only Malaysian bank with a Qualified Full Banking (QFB)

licence in Singapore. Over in Indonesia, MAY is represented by

PT Bank Maybank Indonesia Tbk (formerly known as Bank

Internasional Indonesia). Maybank Indonesia which used to

contribute c.8% to group PBT has seen its operations stabilising.

However, the outlook for Indonesia banks remains uncertain as

the momentum has yet to pick up. We conservatively expect

Maybank Indonesia’s earnings to remain sluggish as it focuses

on fixing its books and dealing with costs. Our concern lies with

its Singapore operations which have loans extended to the oil &

gas sector, which continues to be under pressure.

MAY has presence in 18 othMAY has presence in 18 othMAY has presence in 18 othMAY has presence in 18 other countrieser countrieser countrieser countries, but individual

contributions will remain small in the near future. MAY has also

started work to get a toehold in Myanmar following the Central

Bank of Myanmar’s decision to grant a foreign banking licence

in 2014. Overseas operations (ex-Singapore and Indonesia)

contributed c.8% to group PBT in FY15.

Margin Trends

Gross Loan & Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure

Source: Company, DBS Bank

2.2%

2.3%

2.4%

2.5%

2.6%

2.7%

0

2,000

4,000

6,000

8,000

10,000

2014A 2015A 2016F 2017F 2018F

RM m

Net Interest Income Net Interest Income Margin

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

100,000

200,000

300,000

400,000

500,000

2014A 2015A 2016F 2017F 2018F

RM m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

100,000

200,000

300,000

400,000

500,000

2014A 2015A 2016F 2017F 2018F

RM m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

82%

87%

92%

97%

102%

363,162

413,162

463,162

513,162

563,162

613,162

2014A 2015A 2016F 2017F 2018F

RM bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

47.8%

48.0%

48.2%

48.4%

48.6%

48.8%

49.0%

49.2%

49.4%

49.6%

49.8%

0

5,000

10,000

15,000

20,000

2014A 2015A 2016F 2017F 2018F

Net Interest Income Non-interest Income

Islamic Banking Income Cost-to-income Ratio

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ASIAN INSIGHTS VICKERS SECURITIES

Page 53

Company Guide

Maybank

Balance Sheet:

Cautious on asset quality.Cautious on asset quality.Cautious on asset quality.Cautious on asset quality. YTD, MAY has reported blips in NPL.

All eyes will remain on the bank’s asset-quality position,

particularly on its oil & gas exposure. Credit costs are likely to

remain elevated at current levels in FY16F. Faster-than-expected

recoveries and reclassifications (from impaired to performing

loans) may pose upside risk to our earnings forecast. Based on

our sensitivity analysis, every 10bps reduction in credit cost

increases net profit by 5%.

DRP supporting capital ratios.DRP supporting capital ratios.DRP supporting capital ratios.DRP supporting capital ratios. MAY’s capital ratios are high

compared to peers. This is aided by the DRP, which MAY will

continue to utilise as a strategic capital management tool to

build capital, rather than the rights issue option taken by some

of its peers. The DRP has served well to raise and preserve

capital, but if this continues, profit growth must at least equal

or exceed equity base growth to remain accretive. Management

has made it clear that it intends to keep the DRP in view of

capital requirements for certain events on the horizon.

Attractive dividend yield.Attractive dividend yield.Attractive dividend yield.Attractive dividend yield. Maybank has generously paid out

above 70% of profits since FY10, well above its dividend policy

of 40-60%. MAY intends to maintain this level of dividend

payout as long as the DRP remains in place. We have assumed

dividend payout to be c.75%.

Share Price Drivers:

AssetAssetAssetAsset----quality concerns weigh on valuations.quality concerns weigh on valuations.quality concerns weigh on valuations.quality concerns weigh on valuations. Currently trading

at 1.2x FY17 BV, MAY is trading close to -2SD of its 10-year

mean P/BV. We believe valuations are weighed down by

concerns over the bank’s asset quality. Re-rating catalysts could

come from a recovery of its Indonesian operations and the

easing of asset-quality concerns.

Key Risks:

AssetAssetAssetAsset----quality upset.quality upset.quality upset.quality upset. Further asset-quality deterioration could

pose downside risks to our recommendation, target price and

earnings.

Change in Change in Change in Change in dividend policy.dividend policy.dividend policy.dividend policy. A lower dividend payout ratio could

cause MAY to lose its appeal as a yield stock.

Company Background

Malayan Banking Berhad provides commercial and Islamic

banking services in Malaysia, Singapore, and other locations. It

also owns an Indonesian subsidiary from an acquisition it made

in 2008. Through its subsidiaries, the bank provides services

such as general and life insurance, stock and futures broking,

and leasing and factoring.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)

Source: Company, DBS Bank

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2014A 2015A 2016F 2017F 2018F

NPL Ratio Provision Charge-Off Rate

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

2014A 2015A 2016F 2017F 2018F

Tier-1 CAR Total CAR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2014A 2015A 2016F 2017F 2018F

Avg: 13.3x

+1sd: 14.1x

+2sd: 14.8x

-1sd: 12.6x

-2sd: 11.8x

10.3

11.3

12.3

13.3

14.3

15.3

16.3

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

Avg: 1.63x

+1sd: 1.89x

+2sd: 2.16x

-1sd: 1.36x

-2sd: 1.1x

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

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ASIAN INSIGHTS VICKERS SECURITIES

Page 54

Company Guide

Maybank

Key Assumptions

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Gross Loans Growth 13.3 12.3 3.0 5.0 5.0

Customer Deposits Growth 11.1 8.8 4.0 5.0 5.0

Yld. On Earnings Assets 3.2 3.2 3.2 3.2 3.2

Avg Cost Of Funds 1.6 1.5 1.6 1.7 1.7

Income Statement (RMm)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Net Interest Income 9,704 11,114 11,276 11,212 11,584

Islamic Income 3,271 3,939 4,017 4,339 4,686

Non-Interest Income 5,556 6,185 6,168 6,661 7,194

Operating IncomeOperating IncomeOperating IncomeOperating Income 18,53118,53118,53118,531 21,23821,23821,23821,238 21,46121,46121,46121,461 22,21222,21222,21222,212 23,46423,46423,46423,464

Operating Expenses (9,111) (10,285) (10,594) (11,017) (11,458)

PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 9,4199,4199,4199,419 10,95310,95310,95310,953 10,86710,86710,86710,867 11,19511,19511,19511,195 12,00612,00612,00612,006

Provisions (471) (2,013) (2,965) (2,114) (1,959)

Associates 163 211 222 233 245

Exceptionals 0.0 0.0 400 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 9,1129,1129,1129,112 9,1529,1529,1529,152 8,5248,5248,5248,524 9,3149,3149,3149,314 10,29210,29210,29210,292

Taxation (2,201) (2,165) (2,131) (2,328) (2,573)

Minority Interests (195) (150) (133) (153) (169)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net ProfitNet ProfitNet ProfitNet Profit 6,7166,7166,7166,716 6,8366,8366,8366,836 6,2606,2606,2606,260 6,8326,8326,8326,832 7,5507,5507,5507,550

Net Profit bef Except 6,716 6,836 5,860 6,832 7,550

Growth (%)

Net Interest Income Gth 1.2 14.5 1.5 (0.6) 3.3

Net Profit Gth 2.5 1.8 (8.4) 9.1 10.5

Margins, Costs & Efficiency (%)

Spread 1.6 1.6 1.6 1.5 1.5

Net Interest Margin 2.3 2.4 2.3 2.3 2.3

Cost-to-Income Ratio 49.2 48.4 49.4 49.6 48.8

Business Mix (%)

Net Int. Inc / Opg Inc. 52.4 52.3 52.5 50.5 49.4

Non-Int. Inc / Opg inc. 30.0 29.1 28.7 30.0 30.7

Fee Inc / Opg Income 7.7 6.9 6.9 6.8 6.6

Oth Non-Int Inc/Opg Inc 22.3 22.3 21.8 23.2 24.1

Profitability (%)

ROAE Pre Ex. 13.6 11.9 9.1 10.0 10.6

ROAE 13.6 11.9 9.7 10.0 10.6

ROA Pre Ex. 1.2 1.0 0.8 0.9 1.0

ROA 1.2 1.0 0.9 0.9 1.0

Source: Company, DBS Bank

Expect provisions to slow, but remain elevated

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ASIAN INSIGHTS VICKERS SECURITIES

Page 55

Company Guide

Maybank

Quarterly / Interim Income Statement (RMm)

FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016

Net Interest Income 2,897 2,932 2,903 2,879 2,828

Islamic Income 1,085 954 978 1,037 1,009

Non-Interest Income 1,766 1,728 1,511 1,430 1,621

Operating IncomeOperating IncomeOperating IncomeOperating Income 5,7475,7475,7475,747 5,6155,6155,6155,615 5,3925,3925,3925,392 5,3465,3465,3465,346 5,4585,4585,4585,458

Operating Expenses (2,601) (2,776) (2,620) (2,624) (2,700)

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 3,1463,1463,1463,146 2,8392,8392,8392,839 2,7722,7722,7722,772 2,7222,7222,7222,722 2,7582,7582,7582,758

Provisions (797) (522) (878) (1,181) (331)

Associates 34.2 59.0 38.2 43.0 29.3

Exceptionals 0.0 0.0 0.0 0.0 0.0

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 2,3832,3832,3832,383 2,3762,3762,3762,376 1,9311,9311,9311,931 1,5841,5841,5841,584 2,4562,4562,4562,456

Taxation (457) (649) (480) (385) (593)

Minority Interests (26.8) (75.3) (24.2) (39.4) (67.9)

Net ProfitNet ProfitNet ProfitNet Profit 1,8991,8991,8991,899 1,6521,6521,6521,652 1,4271,4271,4271,427 1,1601,1601,1601,160 1,7961,7961,7961,796

Growth (%)

Net Interest Income Gth 8.1 1.2 (1.0) (0.8) (1.8)

Net Profit Gth 19.8 (13.0) (13.6) (18.7) 54.8

Balance Sheet (RMm)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Cash/Bank Balance 52,853 55,647 41,802 37,068 31,478

Government Securities 3,625 7,692 8,461 9,308 10,238

Inter Bank Assets 16,106 13,618 14,299 15,014 15,765

Total Net Loans & Advs. 403,513 453,493 466,122 489,381 513,624

Investment 115,911 122,166 134,383 147,821 162,603

Associates 2,528 3,121 3,342 3,575 3,820

Fixed Assets 3,284 3,378 3,547 3,654 3,763

Goodwill 6,261 6,958 6,958 6,958 6,958

Other Assets 31,247 37,915 44,438 51,828 60,880

Total AssetsTotal AssetsTotal AssetsTotal Assets 640,300640,300640,300640,300 708,345708,345708,345708,345 727,928727,928727,928727,928 769,411769,411769,411769,411 814,172814,172814,172814,172

Customer Deposits 439,569 478,151 497,277 522,140 548,247

Inter Bank Deposits 57,387 39,014 40,965 43,013 45,163

Debts/Borrowings 40,064 56,945 62,049 67,664 73,840

Others 23,739 46,882 32,446 36,188 40,497

Minorities 1,767 1,818 1,951 2,104 2,273

Shareholders' Funds 52,975 61,695 67,016 69,456 72,420

Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 640,300640,300640,300640,300 708,345708,345708,345708,345 727,928727,928727,928727,928 769,411769,411769,411769,411 814,172814,172814,172814,172

Source: Company, DBS Bank

3Q16 earnings lifted by write backs

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ASIAN INSIGHTS VICKERS SECURITIES

Page 56

Company Guide

Maybank

Financial Stability Measures (%)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Balance Sheet Structure

Loan-to-Deposit Ratio 91.8 94.8 93.7 93.7 93.7

Net Loans / Total Assets 63.0 64.0 64.0 63.6 63.1

Investment / Total Assets 18.1 17.2 18.5 19.2 20.0

Cust . Dep./Int. Bear. Liab. 81.9 83.3 82.8 82.5 82.2

Interbank Dep / Int. Bear. 10.7 6.8 6.8 6.8 6.8

Asset Quality

NPL / Total Gross Loans 1.5 1.9 2.2 2.0 1.9

NPL / Total Assets 1.0 1.2 1.4 1.3 1.2

Loan Loss Reserve Coverage 95.6 72.0 70.3 77.8 84.1

Provision Charge-Off Rate 0.1 0.4 0.6 0.4 0.4

Capital Strength

Total CAR 15.3 16.7 17.9 17.5 17.1

Tier-1 CAR 12.0 13.1 14.4 14.2 14.0

Source: Company, DBS Bank

Target Price & Ratings History

Source: DBS Bank

Analyst: Sue Lin LIM

Lynette CHENG

S.No.S.No.S.No.S.No.Date of Date of Date of Date of

ReportReportReportReport

Closing Closing Closing Closing

PricePricePricePrice

12-mth 12-mth 12-mth 12-mth

Target Target Target Target

PricePricePricePrice

Rat ing Rat ing Rat ing Rat ing

1: 10 Dec 15 8.41 9.00 HOLD

2: 14 Jan 16 8.35 9.00 HOLD

3: 22 Jan 16 8.31 9.00 HOLD

4: 02 Feb 16 8.54 9.00 HOLD

5: 26 Feb 16 8.53 8.90 HOLD

6: 01 Mar 16 8.64 8.90 HOLD

7: 24 Mar 16 8.95 8.90 HOLD

8: 03 May 16 8.78 8.90 HOLD

9: 30 May 16 8.23 8.80 HOLD

10: 02 Jun 16 8.27 8.80 HOLD

11: 04 Jul 16 8.23 8.80 HOLD

12: 12 Jul 16 8.20 8.60 HOLD

13: 14 Jul 16 8.02 8.60 HOLD

14: 01 Aug 16 8.03 8.60 HOLD

Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 26 Aug 16 8.00 7.50 HOLD

16: 05 Sep 16 7.89 7.50 HOLD

17: 31 Oct 16 7.90 7.50 HOLD

18: 25 Nov 16 7.80 7.50 HOLD

1

2

3

4 56 7

8

9

10

11

12

13

14

15

16

17

18

7.12

7.62

8.12

8.62

9.12

9.62

Dec-15 Apr-16 Aug-16 Dec-16

RMRMRMRM

Low loan loss coverage

Page 57: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY

BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM19.62 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Target 12Price Target 12Price Target 12Price Target 12----mthmthmthmth :::: RM22.60 (15% upside) (Prev RM22.60) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Sustainable and robust earnings deliveries

Where we differ:Where we differ:Where we differ:Where we differ: Our TP is higher than consensus as we believe its

consistent earnings delivery could help re-rate its share price

Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]

What’s New • 3Q/9M16 earnings within expectations; revenue

growth supported by robust loan growth and stable NIM

• NIM pressure alleviated by lower wholesale funding costs; loan growth still outpacing the industry’s

• Challenges aplenty for the Malaysian banking sector; but expect PBK to defy headwinds and continue to deliver better-than-industry metrics

• Maintain BUY, TP of RM22.60; remains our top pick among Malaysian banks

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Pre-prov. Profit 6,631 6,791 7,413 8,073 Net Profit 5,062 5,106 5,588 6,080 Net Pft (Pre Ex.) 5,062 5,106 5,588 6,080 Net Pft Gth (Pre-ex) (%) 12.0 0.9 9.4 8.8 EPS (sen) 130 132 144 157 EPS Pre Ex. (sen) 130 132 144 157 EPS Gth Pre Ex (%) 12 1 9 9 Diluted EPS (sen) 130 132 144 157 PE Pre Ex. (X) 15.0 14.9 13.6 12.5 Net DPS (sen) 56.0 58.0 62.0 66.0 Div Yield (%) 2.9 3.0 3.2 3.4 ROAE Pre Ex. (%) 17.1 15.6 15.7 15.6 ROAE (%) 17.1 15.6 15.7 15.6 ROA (%) 1.4 1.4 1.4 1.4 BV Per Share (sen) 804 878 960 1,051 P/Book Value (x) 2.4 2.2 2.0 1.9 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 151 N/A N/A

Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 12 S: 3 H: 9

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

The exception to the rule

Still making headway amid challenging times, BUY.Still making headway amid challenging times, BUY.Still making headway amid challenging times, BUY.Still making headway amid challenging times, BUY. Public Bank (PBK) is our top pick among Malaysian banks. Our BUY rating is premised on its sustainable earnings and robust asset quality. Despite macro headwinds, we expect PBK to continue to deliver above-industry growth and dominant market share in mortgages, auto and SME segments. Contribution from the unit trust business will continue to differentiate it from peers. PBK’s ability to safeguard its asset quality despite years of outperforming industry growth attests to the success of its prudent practices.

3Q16/9M3Q16/9M3Q16/9M3Q16/9M16 net profit largely within our and consensus 16 net profit largely within our and consensus 16 net profit largely within our and consensus 16 net profit largely within our and consensus expectations.expectations.expectations.expectations. Revenue growth remained strong, underpinned by strong loan/deposit growth (7.2%/7.4% y-o-y respectively), outpacing industry metrics, and surprisingly stable NIM despite the OPR cut in July. We understand that the stable NIM was held up by lower wholesale funding costs which offset most of the re-pricing effect from retail loans. Non-interest income was lower largely due to forex, prompting us to trim our non-interest income forecasts by 4% across FY16-18F. Provisions increased but were still within expectations. Absolute NPLs increased 5% y-o-y, but NPL ratio stayed low at 0.5%. The increase came mainly from its Laos operations; domestic NPLs were largely stable. Residential mortgage NPLs arose from pockets of its mass-market customers but recovery efforts are underway. Positively, impaired loans from the hire-purchase stayed healthy despite earlier caution on the vulnerability of this segment.

Sector will be challenging in Sector will be challenging in Sector will be challenging in Sector will be challenging in 2017201720172017; PBK will still defy headwinds. ; PBK will still defy headwinds. ; PBK will still defy headwinds. ; PBK will still defy headwinds. Further cuts in OPR may pose sector-wide downside risk to NIM. Although growth expectations have moderated slightly and the industry appears to be seeing more challenges to come, PBK remains the silver lining in the banking sector as its financial metrics (such as loan growth, deposit growth, asset quality and cost efficiency) remain superior to its peers.

Valuation: Our target price of RM22.60, which implies 2.3x FY17F BV, is derived using the Gordon Growth Model and assumes 9% cost of equity, 4% long-term growth and 16% ROE. PBK’s premium valuation vs. peers is justified, as it continues to deliver solid growth and quality trends, contrary to peers.

Key Risks to Our View: Failure tFailure tFailure tFailure to sustain aboveo sustain aboveo sustain aboveo sustain above----industry growth and asset qualityindustry growth and asset qualityindustry growth and asset qualityindustry growth and asset quality. A key de-rating factor for PBK would be the failure to sustain its excellent growth and asset quality track record, as well as faltering market share in segments which it excels in.

At A Glance Issued Capital (m shrs) 3,861

Mkt. Cap (RMm/US$m) 75,763 / 17,031

Major Shareholders (%)

Tan Sri Dato' Dr Teh Hong Piow (%) 21.8%

Employees Provident Fund (%) 15.4%

Free Float (%) 62.4

3m Avg. Daily Val (US$m) 27.2

ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks

DBS Group Research . Equity

7 Dec 2016

Malaysia Company Guide

Public Bank Version 5 | Bloomberg: PBK MK | Reuters: PUBM.KL Refer to important disclosures at the end of this report

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Company Guide

Public Bank

WHAT’S NEW

Still making headway amid challenging times

HighlightsHighlightsHighlightsHighlights

Strong revenues led by robust loan growthStrong revenues led by robust loan growthStrong revenues led by robust loan growthStrong revenues led by robust loan growth and stable NIMand stable NIMand stable NIMand stable NIM....

PBK’s net profit came in largely within our and consensus

expectations. Net interest income growth remained strong,

underpinned by stable NIM and strong loan growth of 7.5% y-

o-y. NIM held up, despite the lowering of its Base Rate (BR)

and Base Lending Rate (BLR) by 23bps (effective 27 July)

following a cut in the Overnight Policy Rate (OPR) by 25bps, as

wholesale deposit costs eased, offsetting the effect of the

lower lending yields. Non-interest income fell due to lower

gains on financial instruments and forex transactions. There

were some structural non-operational forex gains recorded last

year which were not recurring. PBK’s cost efficiency remains

best in class, with cost-to-income ratio of 33% (unchanged q-

o-q).

Superior loan and deposit growthSuperior loan and deposit growthSuperior loan and deposit growthSuperior loan and deposit growth. The segments contributing

to its healthy loan growth include residential and construction

loans. Deposit growth stood at 7.3% y-o-y, led by growth in

fixed deposits (+10% y-o-y). Given the similar growth pace of

its loans and deposits, its loan to deposit ratio was relatively

unchanged at 90%. Annualised domestic loan/deposit growth

stood at 7.2%/7.4% which outpaced industry metrics of

2.8%/-1.4%.

Asset quality in check.Asset quality in check.Asset quality in check.Asset quality in check. Absolute NPLs increased by 5% y-o-y,

attributable to an increase in residential and working capital

impaired loans. Nonetheless, gross NPL ratio remained low at

0.5% (vs the industry’s 1.7%). Provisions increased but were

within expectations, keeping its loan loss coverage ratio high

at 110% (247% including regulatory reserve). No dividends

were declared, as expected. PBK is sufficiently capitalised with

Total/Tier 1/CET1 ratio of 15.2/11.9/11.0%.

OutlookOutlookOutlookOutlook

Further cut in OPR pose downside risk to NIMsFurther cut in OPR pose downside risk to NIMsFurther cut in OPR pose downside risk to NIMsFurther cut in OPR pose downside risk to NIMs.... Despite

challenging times ahead, we believe PBK will continue to

deliver sustainable earnings growth. This should be supported

by resilient loan growth, best-in-class cost-to-income ratio, and

unrivalled asset quality. Contribution from its asset

management business will continue to set the bank apart from

peers. Our base-case assumption is for PBK to experience a

slight decline in NIM of 4bps from FY16 to FY17. Deposit

competition which could be seasonal during the yearend

period could etch that trend in 4Q. In the event of further cuts

in OPR, NIM pressure may be more pronounced than expected.

PBK has seen it NIM hold up well despite the OPR cut in July.

The slower forex income trends prompted us to reduce our

FY16-18F earnings forecasts by 4% per annum. As the revision

to our risk-free rate assumption has offset the changes to our

Gordon Growth assumptions, our TP is unchanged.

Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation

Maintain BUY,Maintain BUY,Maintain BUY,Maintain BUY, RM22.60 TP. RM22.60 TP. RM22.60 TP. RM22.60 TP. PBK remains the top pick in our

Malaysian bank universe. Our TP, which implies 2.3x FY17F BV,

is derived using the Gordon Growth Model and assumes 9%

cost of equity, 4% long-term growth and 16% ROE. In our

view, PBK’s premium valuation vs. its Malaysian and ASEAN

peers is justified for a quality defensive bank.

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Company Guide

Public Bank

Quarterly / Interim Income Statement (RMm)

FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Net Interest Income 1,629 1,700 1,736 6.6 2.2

Islamic Income 211 233 249 18.0 18.0

Non-Interest Income 631 492 482 (23.7) (2.1)

Operating IncomeOperating IncomeOperating IncomeOperating Income 2,4712,4712,4712,471 2,4252,4252,4252,425 2,4672,4672,4672,467 (0.2)(0.2)(0.2)(0.2) 1.81.81.81.8

Operating Expenses (741) (803) (815) 9.9 1.5

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 1,7301,7301,7301,730 1,6221,6221,6221,622 1,6521,6521,6521,652 (4.5)(4.5)(4.5)(4.5) 1.91.91.91.9

Provisions (117) (68.9) (93.7) (19.7) 35.9

Associates 0.76 (1.2) (0.4) nm 66.8

Exceptionals 0.0 0.0 0.0 nm nm

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 1,6141,6141,6141,614 1,5521,5521,5521,552 1,5581,5581,5581,558 (3.4)(3.4)(3.4)(3.4) 0.40.40.40.4

Taxation (397) (281) (306) (23.0) 8.8

Minority Interests (15.6) (14.4) (14.4) 7.7 (0.5)

Net ProfitNet ProfitNet ProfitNet Profit 1,2011,2011,2011,201 1,2561,2561,2561,256 1,2381,2381,2381,238 3.13.13.13.1 (1.4)(1.4)(1.4)(1.4)

Growth (%)

Net Interest Income Gth 4.4 0.9 2.2

Net Profit Gth 0.4 2.1 (1.4)

Key ratio (%)

NIM 2.1 2.1 2.2

NPL ratio 0.5 0.5 0.5

Loan-to deposit 89.8 90.5 90.2

Cost-to-income 30.0 33.1 33.0

Total CAR 14.8 15.4 15.2

Source of all data: Company, DBS Bank

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Company Guide

Public Bank

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

NIM compression largely from funding cost pressures.NIM compression largely from funding cost pressures.NIM compression largely from funding cost pressures.NIM compression largely from funding cost pressures. Like its

peers, PBK expects continued pressure on NIM arising from

higher cost of funds and is guiding for NIM to decline by 8-

10bps in FY16F. PBK will be focusing on garnering core deposits

(CASA and FD) while managing expensive wholesale deposits.

Loan yields are expected to stay stable.

Strong consumer franchise to defy headwindsStrong consumer franchise to defy headwindsStrong consumer franchise to defy headwindsStrong consumer franchise to defy headwinds. PBK has

consistently beat industry loan growth and for 2016, it targets

around 8% growth. The bank expects growth in deposit to be a

tad bit lower at 7%. Despite the weaker consumer sentiment,

we expect loan growth to remain resilient as its key portfolio lies

in the mass market. The bank is expected to maintain its market

share positions, particularly in the mortgages, auto and SME

segments. Consumer loans make up close to 60% of PBK’s loan

book.

Asset management contribution drives nonAsset management contribution drives nonAsset management contribution drives nonAsset management contribution drives non----intereintereintereinterest income.st income.st income.st income.

Sustainable and growing contribution from its asset

management arm, Public Mutual, continues to differentiate PBK

from its peers. Despite the volatile market, Public Mutual

continued to deliver profits and grow its assets under

management (FY15: RM65bn). This business unit is a key driver

of recurring income. PBK’s recurring income to non-interest

income ratio is among the highest in the industry at c.75%. On

top of that, PBK also has a strategic bancassurance partnership

with AIA Group that enables the group to offer life, health and

investment-linked products to its customers. Although

bancassurance’s contribution is still small as a percentage of

non-interest income, its growth has been strong.

PBK has the lowest costPBK has the lowest costPBK has the lowest costPBK has the lowest cost----totototo----income ratioincome ratioincome ratioincome ratio in the industry at

c.30%. The bank intends to keep that under 33% in 2016. We

forecast its cost-to-income ratio to remain flat. The cost

containment measures, coupled with its targeted income

growth, should keep ROE above 16% (taking into account the

full dilution impact of the rights issue completed in July 2014).

Small regional franchise.Small regional franchise.Small regional franchise.Small regional franchise. Apart from domestic operations, PBK

also has a regional presence, in Hong Kong, Sri Lanka, Laos,

Cambodia, and Vietnam. That said, overseas operations remain

a small contributor to PBK, at about 9% of PBT. Since April

2016, PBK has full control of its Vietnam operations. At this

juncture, operations remain small. PBK intends to build its

franchise in Vietnam in the retail segment. While it is still keen

on expanding regionally, PBK’s mode of expansion will remain

organic.

Margin Trends

Gross Loan & Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure

Source: Company, DBS Bank

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Company Guide

Public Bank

Balance Sheet:

Unrivalled asset quality.Unrivalled asset quality.Unrivalled asset quality.Unrivalled asset quality. PBK leads the industry in terms of asset

quality with an enviable NPL ratio of 0.5%. The bank’s ability to

safeguard its asset quality despite years of outperforming

industry growth attests to the success of its prudent practices.

Given its strong credit culture, we expect its NPL ratio to remain

low and stable.

PBK is wellPBK is wellPBK is wellPBK is well----capitalised,capitalised,capitalised,capitalised, boosted by the RM5bn rights issue

completed in 2014. PBK aims to keep total capital ratio at not

less than 13%. It does not have a dividend reinvestment plan

but its dividend payout ratio has been stable at slightly more

than 40%.

Share Price Drivers:

PBK is trading at premium valuation vs. peersPBK is trading at premium valuation vs. peersPBK is trading at premium valuation vs. peersPBK is trading at premium valuation vs. peers. This is justified

for a quality defensive bank. PBK is currently trading close to -

2SD of its 10-year P/BV mean. This represents a good

opportunity to accumulate the stock to gain exposure to long-

term sustainable earnings.

Consistent earnings delivery.Consistent earnings delivery.Consistent earnings delivery.Consistent earnings delivery. PBK’s consistent earnings delivery

and robust underlying trends amid a challenging operating

environment could act as the key catalysts for the stock.

Key Risks:

Sharp deterioration in retail growth prospects.Sharp deterioration in retail growth prospects.Sharp deterioration in retail growth prospects.Sharp deterioration in retail growth prospects. PBK’s consumer

loan growth did not weaken following Bank Negara’s

tightening measures over the last three years, although we

expect pockets of speculative and high-end properties to

soften. As PBK’s key portfolio focus is the mass market, we

expect its loan growth to remain resilient.

Company Background

Public Bank Berhad provides a range of commercial banking

and financial services which include unit trust management,

financing for the purchase of licensed public vehicles, and

other financial services. The group's overseas operations

include branches in Hong Kong, Sri Lanka, Laos, Cambodia,

and Vietnam.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)

Source: Company, DBS Bank

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Public Bank

Key Assumptions

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Gross Loans Growth 10.8 11.6 8.0 8.0 8.0

Customer Deposits Growth 10.2 8.9 8.0 8.0 8.0

Yld. On Earnings Assets 4.1 4.2 4.2 4.2 4.1

Avg Cost Of Funds 2.4 2.6 2.6 2.6 2.6

Income Statement (RMm)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Net Interest Income 5,930 6,377 6,613 6,994 7,422

Islamic Income 831 829 903 985 1,073

Non-Interest Income 1,912 2,340 2,316 2,676 3,035

Operating IncomeOperating IncomeOperating IncomeOperating Income 8,6738,6738,6738,673 9,5469,5469,5469,546 9,8329,8329,8329,832 10,65510,65510,65510,655 11,53011,53011,53011,530

Operating Expenses (2,606) (2,915) (3,041) (3,241) (3,456)

PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 6,0676,0676,0676,067 6,6316,6316,6316,631 6,7916,7916,7916,791 7,4137,4137,4137,413 8,0738,0738,0738,073

Provisions (258) (147) (268) (274) (305)

Associates 4.98 7.56 7.56 7.56 7.56

Exceptionals 0.0 0.0 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 5,8145,8145,8145,814 6,4916,4916,4916,491 6,5306,5306,5306,530 7,1477,1477,1477,147 7,7767,7767,7767,776

Taxation (1,251) (1,370) (1,378) (1,508) (1,641)

Minority Interests (44.5) (59.1) (45.7) (50.0) (54.4)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net ProfitNet ProfitNet ProfitNet Profit 4,5194,5194,5194,519 5,0625,0625,0625,062 5,1065,1065,1065,106 5,5885,5885,5885,588 6,0806,0806,0806,080

Net Profit bef Except 4,519 5,062 5,106 5,588 6,080

Growth (%)

Net Interest Income Gth 6.5 7.5 3.7 5.8 6.1

Net Profit Gth 11.2 12.0 0.9 9.4 8.8

Margins, Costs & Efficiency (%)

Spread 1.7 1.6 1.6 1.6 1.5

Net Interest Margin 2.2 2.1 2.1 2.1 2.0

Cost-to-Income Ratio 30.0 30.5 30.9 30.4 30.0

Business Mix (%)

Net Int. Inc / Opg Inc. 68.4 66.8 67.3 65.6 64.4

Non-Int. Inc / Opg inc. 22.0 24.5 23.6 25.1 26.3

Fee Inc / Opg Income 15.9 16.3 16.4 17.4 18.5

Oth Non-Int Inc/Opg Inc 6.1 8.2 7.1 7.7 7.8

Profitability (%)

ROAE Pre Ex. 18.7 17.1 15.6 15.7 15.6

ROAE 18.7 17.1 15.6 15.7 15.6

ROA Pre Ex. 1.4 1.4 1.4 1.4 1.4

ROA 1.4 1.4 1.4 1.4 1.4

Source: Company, DBS Bank

Expect loan growth to outpace the industry’s

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Public Bank

Quarterly / Interim Income Statement (RMm)

FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016

Net Interest Income 1,629 1,654 1,685 1,700 1,736

Islamic Income 211 204 227 233 249

Non-Interest Income 631 638 592 492 482

Operating IncomeOperating IncomeOperating IncomeOperating Income 2,4712,4712,4712,471 2,4972,4972,4972,497 2,5042,5042,5042,504 2,4252,4252,4252,425 2,4672,4672,4672,467

Operating Expenses (741) (749) (788) (803) (815)

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 1,7301,7301,7301,730 1,7481,7481,7481,748 1,7161,7161,7161,716 1,6221,6221,6221,622 1,6521,6521,6521,652

Provisions (117) 106 (67.0) (68.9) (93.7)

Associates 0.76 4.41 2.88 (1.2) (0.4)

Exceptionals 0.0 0.0 0.0 0.0 0.0

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 1,6141,6141,6141,614 1,8581,8581,8581,858 1,6521,6521,6521,652 1,5521,5521,5521,552 1,5581,5581,5581,558

Taxation (397) (351) (407) (281) (306)

Minority Interests (15.6) (14.7) (15.3) (14.4) (14.4)

Net ProfitNet ProfitNet ProfitNet Profit 1,2011,2011,2011,201 1,4921,4921,4921,492 1,2301,2301,2301,230 1,2561,2561,2561,256 1,2381,2381,2381,238

Growth (%)

Net Interest Income Gth 4.4 1.6 1.8 0.9 2.2

Net Profit Gth 0.4 24.2 (17.6) 2.1 (1.4)

Balance Sheet (RMm)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Cash/Bank Balance 16,817 14,831 17,178 19,898 23,052

Government Securities 6,314 4,379 4,817 5,299 5,829

Inter Bank Assets 0.0 0.0 0.0 0.0 0.0

Total Net Loans & Advs. 243,222 271,814 293,529 317,017 342,384

Investment 64,237 54,955 58,361 61,990 65,857

Associates 157 191 191 191 191

Fixed Assets 1,476 1,423 1,494 1,569 1,647

Goodwill 2,083 2,376 2,376 2,376 2,376

Other Assets 11,415 13,789 14,746 15,774 16,879

Total AssetsTotal AssetsTotal AssetsTotal Assets 345,722345,722345,722345,722 363,758363,758363,758363,758 392,691392,691392,691392,691 424,113424,113424,113424,113 458,215458,215458,215458,215

Customer Deposits 276,540 301,157 325,250 351,270 379,371

Inter Bank Deposits 20,670 9,970 10,966 12,063 13,269

Debts/Borrowings 11,428 11,667 11,667 11,667 11,667

Others 8,209 8,657 9,600 10,674 11,896

Minorities 850 1,077 1,122 1,172 1,227

Shareholders' Funds 28,025 31,231 34,085 37,267 40,784

Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 345,722345,722345,722345,722 363,758363,758363,758363,758 392,691392,691392,691392,691 424,113424,113424,113424,113 458,215458,215458,215458,215

Source: Company, DBS Bank

Consistent earnings delivery

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Public Bank

Financial Stability Measures (%)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Balance Sheet Structure

Loan-to-Deposit Ratio 88.0 90.3 90.2 90.2 90.3

Net Loans / Total Assets 70.4 74.7 74.7 74.7 74.7

Investment / Total Assets 18.6 15.1 14.9 14.6 14.4

Cust . Dep./Int. Bear. Liab. 89.6 93.3 93.5 93.7 93.8

Interbank Dep / Int. Bear. 6.7 3.1 3.2 3.2 3.3

Asset Quality

NPL / Total Gross Loans 0.6 0.5 0.5 0.4 0.4

NPL / Total Assets 0.4 0.4 0.4 0.3 0.3

Loan Loss Reserve Coverage 122.4 120.8 129.4 135.8 142.5

Provision Charge-Off Rate 0.1 0.1 0.1 0.1 0.1

Capital Strength

Total CAR 15.8 15.5 15.3 15.3 15.4

Tier-1 CAR 12.2 12.0 12.5 12.7 13.0

Source: Company, DBS Bank

Target Price & Ratings History

Source: DBS Bank

Analyst: Sue Lin LIM

Lynette CHENG

Lowest NPL ratio among peers

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ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY

BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM4.79 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Price Price Price Target 12Target 12Target 12Target 12----mthmthmthmth :::: RM5.40 (13% upside) (Prev RM5.40) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Cleaner corporate structure with improved ROE

traction from cost savings and materialisation of IGNITE initiatives

Where we differ:Where we differ:Where we differ:Where we differ: Higher credit cost assumption Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]

What’s New • 3Q16 earnings improved on lower overall

provisions, higher trading income and lower costs

• Loan momentum still sluggish on corporate loan repayments; trimming loan growth forecasts

• FY16-18F earnings cut by 1-4% on lower loan growth and higher credit cost

• ROE traction improving on better cost discipline;

Maintain BUY with lower TP of RM5.40

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRMmmmm) ) ) ) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Pre-prov. Profit 2,398 3,206 3,597 4,002 Net Profit 1,511 1,837 2,247 2,630 Net Pft (Pre Ex.) 1,511 1,837 2,247 2,630 Net Pft Gth (Pre-ex) (%) (25.8) 21.5 22.3 17.0 EPS (sen) 53.5 49.5 55.2 64.0 EPS Pre Ex. (sen) 53.5 49.5 55.2 64.0 EPS Gth Pre Ex (%) (30) (8) 12 16 Diluted EPS (sen) 49.2 45.3 54.9 63.6 PE Pre Ex. (X) 8.9 9.7 8.7 7.5 Net DPS (sen) 12.0 13.6 16.5 19.1 Div Yield (%) 2.5 2.8 3.4 4.0 ROAE Pre Ex. (%) 8.3 8.6 8.6 9.4 ROAE (%) 8.3 8.6 8.6 9.4 ROA (%) 0.7 0.8 0.8 0.9 BV Per Share (sen) 575 621 656 697 P/Book Value (x) 0.8 0.8 0.7 0.7 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 60.3 64.7 68.0

Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 8 S: 4 H: 7

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Keep watch on asset quality

Restructuring upside negated partially by asset quality concerns. Restructuring upside negated partially by asset quality concerns. Restructuring upside negated partially by asset quality concerns. Restructuring upside negated partially by asset quality concerns. With the restructuring overhang removed, RHB should see better share price performance going forward. However, concerns over its asset quality outlook may weigh down valuations in the near term. To see a stronger re-rating beyond 1x BV, we would need a pick-up in business growth on a more sustainable basis and for asset-quality concerns to taper off. RHB is still trading below book value and we believe this partially reflects the concerns over its asset quality. 3Q16 earnings largely in3Q16 earnings largely in3Q16 earnings largely in3Q16 earnings largely in----line; sluggish loan momentumline; sluggish loan momentumline; sluggish loan momentumline; sluggish loan momentum. . . . RHB’s 3Q16 earnings significantly improved in the absence of a one-off huge provision recorded in 2Q16. Excluding this, provisions rose q-o-q on higher NPL incidences, still largely related to the oil & gas sector in Singapore. NIM fell following the OPR cut in July coupled with competitive pressures. Non-interest income surprised on the upside from trading income but this may not recur. Loan growth was sluggish at only 1% 9M16 YTD. Expenses were the only positive trend noted with cost savings still expected ahead. Cut earnings by Cut earnings by Cut earnings by Cut earnings by 1111----4444% for higher credit cost and slower loan % for higher credit cost and slower loan % for higher credit cost and slower loan % for higher credit cost and slower loan growth. growth. growth. growth. We raise our credit cost assumption to 46/35/27bps (from 38/29/27bps) and lower loan growth assumption to 3%/5%/5% across FY16-17F (from 5%/6%/8%). The impact was mitigated by lower expense growth assumption. YTD FY16 loan growth has been flattish. NPL ratio of <2% would also be a challenge if some of its oil & gas borrowers decide to restructure or reschedule loans. Its overseas contribution target of 10% will fall short due to the impairment booked from its Singapore operations. We expect FY16F ROE to stay below its target of 10% but we see RHB’s improved cost efficiency as a bright spot for the bank. Valuation: RHB remains a BUY.RHB remains a BUY.RHB remains a BUY.RHB remains a BUY. RHB continued to trade at below book value, reflecting concerns over its asset-quality outlook, in our view. Our lower TP of RM5.40 (post earnings revision) implies 0.8x FY17 BV and is derived using the Gordon Growth Model (10% ROE, 11% cost of equity and 4% growth). Key Risks to Our View: Further deterioration in asset quality.Further deterioration in asset quality.Further deterioration in asset quality.Further deterioration in asset quality. RHB’s oil & gas and steel exposure comprise 2.8% and 1% of its total loans respectively. Further deterioration in these segments poses earnings risk. At A Glance Issued Capital (m shrs) 3,075

Mkt. Cap (RMm/US$m) 14,728 / 3,311

Major Shareholders (%)

EPF (%) 42.2 Aabar Investment (%) 17.8 OSK Holdings (%) 10.1 Free Float (%) 29.9

3m Avg. Daily Val (US$m) 1.2

ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks

DBS Group Research . Equity

7 Dec 2016

Malaysia Company Guide

RHB Bank Version 8 | Bloomberg: RHBBANK MK | Reuters: RHBC.KL Refer to important disclosures at the end of this report

55

75

95

115

135

155

175

195

215

4.1

5.1

6.1

7.1

8.1

9.1

10.1

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Relative IndexRM

RHB Bank (LHS) Relative KLCI (RHS)

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RHB Bank

WHAT’S NEW

Improved cost efficiency but loan growth remains

benign

HighlightsHighlightsHighlightsHighlights

Earnings largely inEarnings largely inEarnings largely inEarnings largely in----line; sluggish loan momentum notedline; sluggish loan momentum notedline; sluggish loan momentum notedline; sluggish loan momentum noted. 3Q16

earnings were largely in-line thanks to lower overall provisions

(recall a one-off provision of RM254m was made in relation to

its exposure to Swiber bonds), higher non-interest income

(trading income and fixed income origination activities) and

lower expenses. NIM fell as a result of loan re-pricing following

the OPR cut in July despite active liability management.

Expenses were lower and further cost savings are expected in

coming quarters. Non-interest income was boosted by trading

gains, but this is unlikely to recur. Loan growth was sluggish

largely due to corporate loan repayments, lower auto loans

and Amanah Saham Bumiputra (ASB) loans, although

mortgages and SME loans grew by 10% YTD each.

International business operations performance was dented by

its Singapore operations.

Additional provisions from higher impaired loans.Additional provisions from higher impaired loans.Additional provisions from higher impaired loans.Additional provisions from higher impaired loans. Impaired

loan ratio rose to 2.3% (2Q16: 2.1%) mainly on account of

additional impaired accounts from the oil & gas sector (two

accounts). The new NPLs were two oil & gas accounts from

Singapore amounting to <RM130m; approximately one-third

was provided for. Provisions were higher q-o-q (excluding the

one-off provisions made for Swiber in 2Q16). Loan loss

coverage fell further to 56% (from 59% in 2Q16). As at end-

3Q16, its oil & gas exposure (loans and bonds) stood at 3.2%

of total loans, while its steel exposure stood at RM2bn (c.1%

of total loans). Restructured and rescheduled (R&R) loans

account for 17% of total impaired loans.

Capital remained strongCapital remained strongCapital remained strongCapital remained strong with CET1, Tier-1 and Total CAR at

13%, 13.3% and 17.1% respectively. No dividends were

declared during the quarter.

OutlookOutlookOutlookOutlook

Earnings trimmed by Earnings trimmed by Earnings trimmed by Earnings trimmed by 1111----4444% over FY16% over FY16% over FY16% over FY16----18F18F18F18F. We reduce our loan

growth assumption to 3% (from 5%) for FY16F as 9M16 YTD

loan growth stayed sluggish at 1%. We opine that RHB will fall

short of its 10% loan growth target for 2016. We have also

reduced our loan growth forecasts for FY17-18F to 5% (from

6%/8%). Loan growth drivers include mortgage and SME

loans and some corporate loan drawdowns. Key risk to our

loan growth forecasts would be further corporate loan

repayments. We raised credit costs over FY16-18F as well (see

paragraph below for details), but this is partially offset by

lower expense growth assumptions in light of RHB’s

commendable cost discipline thus far. As such, we now

assume cost-to-income ratio to stay below 50%, as targeted.

Overall, our FY16-18F earnings are reduced by 1-4%.

AssetAssetAssetAsset----quality issues to linger for a while more.quality issues to linger for a while more.quality issues to linger for a while more.quality issues to linger for a while more. Management

expects NPL ratio to hit a high of 2.3% in FY16F, taking into

account further R&R loans in coming quarters. As such, we

have raised credit costs to 46/35/27bps (from 38/29/27bps)

over FY16-18F. Positively, RHB’s non-corporate book has not

seen any deterioration.

Valuation and recommendationValuation and recommendationValuation and recommendationValuation and recommendation

Maintain BUY, Maintain BUY, Maintain BUY, Maintain BUY, lower TPlower TPlower TPlower TP of of of of RM5.40RM5.40RM5.40RM5.40.... After accounting for the

earnings adjustments, our TP drops to RM5.40 (from RM5.50).

Our TP assumes 10% ROE, 11% cost of equity and 4%

growth and implies 0.8x BV. We maintain our BUY call as we

expect the share price to re-rate on the back of better earnings

traction in FY16 from cost savings despite higher provisions

booked YTD. RHB’s improved cost efficiency is a bright spot for

the bank. However, to see a stronger re-rating beyond 1x BV,

we would need a pick-up in business growth on a more

sustainable basis and for asset-quality concerns to taper off.

RHB is still trading below book value and we believe this

partially reflects the concerns over its asset quality.

Page 67: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES

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Company Guide

RHB Bank

Quarterly / Interim Income Statement (RMm)

FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Net Interest Income 877 853 849 (3.2) (0.5)

Islamic Income 230 227 234 1.8 1.8

Non-Interest Income 439 509 546 24.3 7.3

Operating IncomeOperating IncomeOperating IncomeOperating Income 1,5461,5461,5461,546 1,5891,5891,5891,589 1,6291,6291,6291,629 5.45.45.45.4 2.52.52.52.5

Operating Expenses (1,166) (808) (827) (29.1) 2.3

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 380380380380 781781781781 803803803803 111.4111.4111.4111.4 2.82.82.82.8

Provisions (50.7) (312) (140) 176.3 (55.1)

Associates 0.11 0.25 0.10 (15.2) (61.2)

Exceptionals 0.0 0.0 0.0 nm nm

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 329329329329 469469469469 663663663663 101.3101.3101.3101.3 41.241.241.241.2

Taxation (99.8) (116) (152) 52.3 31.3

Minority Interests (0.1) (3.4) (5.3) (5,451.0) 56.5

Net ProfitNet ProfitNet ProfitNet Profit 229229229229 350350350350 505505505505 120.4120.4120.4120.4 44.344.344.344.3

Growth (%)

Net Interest Income Gth 8.0 (4.4) (0.5)

Net Profit Gth (59.0) (38.0) 44.3

Key ratio (%)

NIM 2.1 2.1 2.0

NPL ratio 1.9 2.1 2.3

Loan-to deposit 93.0 91.3 91.0

Cost-to-income 75.4 50.9 50.7

Total CAR 15.7 17.2 17.1

Source of all data: Company, DBS Bank

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ASIAN INSIGHTS VICKERS SECURITIES

Page 68

Company Guide

RHB Bank

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

NIM may contract after policy rate cutsNIM may contract after policy rate cutsNIM may contract after policy rate cutsNIM may contract after policy rate cuts. NIM may still see a

slight decline following the policy rate cut. Lending yields are

expected to remain competitive while deposit costs may still stay

high, albeit less intense compared to a year ago. RHB is focused

on driving CASA growth, following its strategy to rebalance its

deposit mix. This is expected to mitigate NIM compression

moving forward.

Improved loan momentumImproved loan momentumImproved loan momentumImproved loan momentum. RHB’s FY15 loan traction was

impacted by a large repayment earlier in the year, resulting in

loan growth of a mere 6%. Loan growth YTD in 2Q16 has been

sluggish. As such FY16F loan growth could at best be at mid-

single-digit levels. These would likely be supported by mortgage

and SME loans.

Enlarged investment banking business has done wellEnlarged investment banking business has done wellEnlarged investment banking business has done wellEnlarged investment banking business has done well. RHB’s

investment banking business is doing well post-OSK acquisition,

with a strong non-interest income lift from higher brokerage

income, fund management and unit trust income, and

corporate advisory and underwriting fees. However, growing

non-interest income will be a challenge going forward, given

that the capital market outlook remains weak. Positively, a pick-

up in wealth management and insurance could mitigate the

weakness from capital market-related fees.

CostCostCostCost----totototo----income ratio higher than industry averageincome ratio higher than industry averageincome ratio higher than industry averageincome ratio higher than industry average. RHB’s cost-

to-income ratio is above the industry average of 50%. To keep

a tighter lid on its cost-to-income ratio, RHB rolled out a Career

Transition Scheme (voluntary staff rationalisation exercise) in

Sep 2015. The exercise was completed in Oct 2015 and resulted

in a headcount cut of 12% of its total workforce. RHB expects

this to bring in cost savings from FY16F onwards. Its cost-to-

income ratio target stands at c.50% in FY16F. We believe this

target would be achieved, driven by its overall cost efficiency

programmes.

International contributionInternational contributionInternational contributionInternational contribution. RHB’s overseas operations are mainly

in Singapore, where it operates seven branches. Other countries

that RHB operates in include Laos, Cambodia and Thailand,

whose contribution remains small to the group. RHB’s

international operations will fall short of its 10% target in FY16F

as its Singapore operations is expected to post losses after a

huge impairment booked in 2Q16.

Corporate restructuring completed.Corporate restructuring completed.Corporate restructuring completed.Corporate restructuring completed. RHB Capital completed a

rights issue of RM2.5bn and an internal restructuring plan in

Dec 2015 and June 2016 respectively. The key differences to be

noted in the financials under RHB (from RHB Capital) include

interest savings and removal of goodwill, coupled with an

enlarged capital base.

Margin Trends

Gross Loan & Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure

Source: Company, DBS Bank

1.8%

1.9%

1.9%

2.0%

2.0%

2.1%

2.1%

2.2%

2.2%

2.3%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2014A 2015A 2016F 2017F 2018F

RM m

Net Interest Income Net Interest Income Margin

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2014A 2015A 2016F 2017F 2018F

RM m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2014A 2015A 2016F 2017F 2018F

RM m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

76%

81%

86%

91%

96%

101%

126,624

146,624

166,624

186,624

206,624

226,624

246,624

266,624

2014A 2015A 2016F 2017F 2018F

RM bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2014A 2015A 2016F 2017F 2018F

Net Interest Income Non-interest Income

Islamic Banking Income Cost-to-income Ratio

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Company Guide

RHB Bank

Balance Sheet:

Asset quality to be monitoredAsset quality to be monitoredAsset quality to be monitoredAsset quality to be monitored. RHB suffered from asset-quality

deterioration in early 2013 due to a specific corporate account.

Since then, its gross NPL ratio has been trending down and

management targets to keep it below 2%. With the model risk

adjustment made to its regulatory reserves, its loan loss

coverage should rise close to 75%, inching towards 80% over

time. However, asset-quality risks have risen again in 2Q16 and

RHB is unlikely to keep its NPL ratio target of <2%. Its oil & gas

exposure will continue to be monitored. Potential restructuring

and rescheduling of these loans could push NPL ratios higher.

Stronger capital ratios post restructuring.Stronger capital ratios post restructuring.Stronger capital ratios post restructuring.Stronger capital ratios post restructuring. Under the new

corporate structure, RHB’s capital ratios are now stronger,

comfortably above the minimum required CET1 of 9.5%

(inclusive of conservation and countercyclical buffers) by 2019,

as per Basel III requirements. While its dividend payout ratio was

lower in 2014 and 2015, upon the completion of its corporate

restructuring, we believe RHB could revert to its 30% minimum

payout dividend policy with a dividend reinvestment plan. The

dividend reinvestment plan will require the Board’s approval

given that it is now “new” entity post restructuring.

Share Price Drivers:

RestructuRestructuRestructuRestructuring impact priced in; asset quality only partially priced ring impact priced in; asset quality only partially priced ring impact priced in; asset quality only partially priced ring impact priced in; asset quality only partially priced

in.in.in.in. RHB’s share price has partially priced in the success of its

corporate restructuring and is currently trading below -1SD of

its 5-year P/BV mean. While we believe market has priced in the

cleaner structure post its internal reorganisation, asset-quality

concerns could keep valuations below book value. To see a

stronger re-rating beyond 1x BV, we would need to see a pick-

up in business growth on a more sustainable basis and for

asset-quality concerns to taper off. RHB is still trading below

book value and we believe this partially reflects the concerns on

its asset quality.

Key Risks:

AssetAssetAssetAsset----quality upset.quality upset.quality upset.quality upset. This has been largely priced in, but further

asset-quality deterioration could pose downside risks to our

recommendation, target price and earnings.

Sluggish capital market.Sluggish capital market.Sluggish capital market.Sluggish capital market. Post-acquisition of OSK, RHB is now

one of the key players in the Malaysian capital market. As the

outlook for capital markets remains soft, the growth of non-

interest income could be weaker than expected.

Company Background

RHB Bank Berhad provides commercial and merchant banking

services. Through its subsidiaries, the company provides

finance and leasing services and trades securities. RHB Bank

also provides nominee, unit trust, asset management, and

insurance services.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)

Source: Company, DBS Bank

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2014A 2015A 2016F 2017F 2018F

NPL Ratio Provision Charge-Off Rate

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

2014A 2015A 2016F 2017F 2018F

Tier-1 CAR Total CAR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2014A 2015A 2016F 2017F 2018F

Avg: 11.7x

+1sd: 13.5x

+2sd: 15.3x

-1sd: 9.9x

-2sd: 8.1x

7.3

8.3

9.3

10.3

11.3

12.3

13.3

14.3

15.3

16.3

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

Avg: 1.12x

+1sd: 1.29x

+2sd: 1.45x

-1sd: 0.96x

-2sd: 0.79x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

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Company Guide

RHB Bank

Key Assumptions

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Gross Loans Growth 17.0 6.3 3.0 5.0 5.0

Customer Deposits Growth 14.1 0.7 8.0 8.0 8.0

Yld. On Earnings Assets 3.9 3.8 3.7 3.7 3.7

Avg Cost Of Funds 2.4 2.4 2.5 2.5 2.5

Income Statement (RMm)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Net Interest Income 3,291 3,300 3,519 3,860 4,205

Islamic Income 732 876 937 1,050 1,176

Non-Interest Income 2,211 2,015 2,076 2,180 2,289

Operating IncomeOperating IncomeOperating IncomeOperating Income 6,2356,2356,2356,235 6,1916,1916,1916,191 6,5326,5326,5326,532 7,0897,0897,0897,089 7,6697,6697,6697,669

Operating Expenses (3,411) (3,793) (3,326) (3,492) (3,667)

PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 2,8242,8242,8242,824 2,3982,3982,3982,398 3,2063,2063,2063,206 3,5973,5973,5973,597 4,0024,0024,0024,002

Provisions (88.9) (292) (739) (580) (470)

Associates 0.28 0.30 0.45 0.54 0.65

Exceptionals 0.0 0.0 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 2,7352,7352,7352,735 2,1072,1072,1072,107 2,4672,4672,4672,467 3,0183,0183,0183,018 3,5333,5333,5333,533

Taxation (672) (583) (617) (755) (883)

Minority Interests (25.5) (12.6) (13.9) (17.0) (19.9)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net ProfitNet ProfitNet ProfitNet Profit 2,0382,0382,0382,038 1,5111,5111,5111,511 1,8371,8371,8371,837 2,2472,2472,2472,247 2,6302,6302,6302,630

Net Profit bef Except 2,038 1,511 1,837 2,247 2,630

Growth (%)

Net Interest Income Gth 0.5 0.3 6.6 9.7 8.9

Net Profit Gth 11.3 (25.8) 21.5 22.3 17.0

Margins, Costs & Efficiency (%)

Spread 1.5 1.3 1.3 1.2 1.2

Net Interest Margin 2.1 2.0 2.0 1.9 1.9

Cost-to-Income Ratio 54.7 61.3 50.9 49.3 47.8

Business Mix (%)

Net Int. Inc / Opg Inc. 52.8 53.3 53.9 54.4 54.8

Non-Int. Inc / Opg inc. 35.5 32.6 31.8 30.7 29.8

Fee Inc / Opg Income 23.3 21.0 20.5 19.8 19.2

Oth Non-Int Inc/Opg Inc 12.2 11.6 11.3 10.9 10.6

Profitability (%)

ROAE Pre Ex. 11.5 8.3 8.6 8.6 9.4

ROAE 11.5 8.3 8.6 8.6 9.4

ROA Pre Ex. 1.0 0.7 0.8 0.8 0.9

ROA 1.0 0.7 0.8 0.8 0.9

Source: Company, DBS Bank

Positive traction from cost savings negated by higher provisions

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Company Guide

RHB Bank

Quarterly / Interim Income Statement (RMm)

FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016

Net Interest Income 877 872 891 853 849

Islamic Income 230 237 233 227 234

Non-Interest Income 439 573 487 509 546

Operating IncomeOperating IncomeOperating IncomeOperating Income 1,5461,5461,5461,546 1,6821,6821,6821,682 1,6121,6121,6121,612 1,5891,5891,5891,589 1,6291,6291,6291,629

Operating Expenses (1,166) (962) (777) (808) (827)

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 380380380380 720720720720 835835835835 781781781781 803803803803

Provisions (50.7) (245) (79.9) (312) (140)

Associates 0.11 0.06 0.06 0.25 0.10

Exceptionals 0.0 0.0 0.0 0.0 0.0

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 329329329329 475475475475 755755755755 469469469469 663663663663

Taxation (99.8) (152) (189) (116) (152)

Minority Interests (0.1) (7.0) (1.8) (3.4) (5.3)

Net ProfitNet ProfitNet ProfitNet Profit 229229229229 316316316316 565565565565 350350350350 505505505505

Growth (%)

Net Interest Income Gth 8.0 (0.5) 2.2 (4.4) (0.5)

Net Profit Gth (59.0) 37.9 78.7 (38.0) 44.3

Balance Sheet (RMm)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Cash/Bank Balance 16,237 12,881 34,099 51,392 72,601

Government Securities 492 188 72.2 75.8 79.6

Inter Bank Assets 2,299 1,199 625 657 690

Total Net Loans & Advs. 140,693 149,580 153,855 161,515 169,554

Investment 43,003 46,897 47,473 48,879 50,352

Associates 21.0 15.8 16.6 17.4 18.3

Fixed Assets 1,031 1,042 1,053 1,064 1,075

Goodwill 5,274 2,649 2,649 2,649 2,649

Other Assets 10,306 13,486 16,164 16,884 17,639

Total AssetsTotal AssetsTotal AssetsTotal Assets 219,354219,354219,354219,354 227,938227,938227,938227,938 256,006256,006256,006256,006 283,132283,132283,132283,132 314,658314,658314,658314,658

Customer Deposits 157,134 158,158 170,810 184,475 199,233

Inter Bank Deposits 21,350 20,646 26,840 34,892 45,359

Debts/Borrowings 12,386 10,737 10,184 11,142 12,196

Others 9,590 20,705 22,985 25,720 28,984

Minorities 99.8 24.6 38.5 55.5 75.4

Shareholders' Funds 18,794 17,668 25,148 26,848 28,810

Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 219,354219,354219,354219,354 227,938227,938227,938227,938 256,006256,006256,006256,006 283,132283,132283,132283,132 314,658314,658314,658314,658

Source: Company, DBS Bank

3QFY16 earnings lifted by lower overall provisions, higher trading income and lower expenses

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Company Guide

RHB Bank

Financial Stability Measures (%)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Balance Sheet Structure

Loan-to-Deposit Ratio 89.5 94.6 90.1 87.6 85.1

Net Loans / Total Assets 64.1 65.6 60.1 57.0 53.9

Investment / Total Assets 19.6 20.6 18.5 17.3 16.0

Cust . Dep./Int. Bear. Liab. 82.3 83.4 82.2 80.0 77.6

Interbank Dep / Int. Bear. 11.2 10.9 12.9 15.1 17.7

Asset Quality

NPL / Total Gross Loans 2.0 1.9 2.3 2.2 2.1

NPL / Total Assets 1.3 1.2 1.4 1.3 1.2

Loan Loss Reserve Coverage 61.1 63.2 56.4 59.9 63.8

Provision Charge-Off Rate 0.1 0.2 0.5 0.4 0.3

Capital Strength

Total CAR 15.6 15.5 16.4 16.5 16.0

Tier-1 CAR 12.7 12.2 13.4 13.3 12.8

Source: Company, DBS Bank

Target Price & Ratings History

Source: DBS Bank

Analyst: Sue Lin LIM

Lynette CHENG

S.No.S.No.S.No.S.No.Date of Date of Date of Date of

ReportReportReportReport

Closing Closing Closing Closing

PricePricePricePrice

12-mth 12-mth 12-mth 12-mth

Target Target Target Target

PricePricePricePrice

Rat ing Rat ing Rat ing Rat ing

1: 10 Dec 15 5.94 7.10 BUY

2: 22 Jan 16 5.13 7.10 BUY

3: 02 Feb 16 5.47 7.10 BUY

4: 25 Feb 16 5.42 7.10 BUY

5: 29 Feb 16 5.30 7.00 BUY

6: 01 Mar 16 5.40 7.00 BUY

7: 24 Mar 16 5.84 7.00 BUY

8: 15 Apr 16 6.28 7.00 BUY

9: 03 May 16 6.00 7.00 BUY

10: 26 May 16 6.18 7.00 BUY

11: 02 Jun 16 6.10 7.00 BUY

12: 28 Jun 16 4.84 5.30 BUY

13: 12 Jul 16 5.15 5.30 BUY

14: 14 Jul 16 5.15 5.30 BUY

Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 01 Aug 16 5.09 5.30 BUY

16: 25 Aug 16 4.98 5.50 BUY

17: 05 Sep 16 4.99 5.50 BUY

18: 31 Oct 16 4.83 5.50 BUY

19: 24 Nov 16 4.68 5.40 BUY

1

2 3

4

5

67

8

9

10

11

12 13

14

15

16

17

18

19

4.32

4.82

5.32

5.82

6.32

Dec-15 Apr-16 Aug-16 Dec-16

RMRMRMRM

Including regulatory reserves, loan loss coverage should come in at c.75%

Page 73: Malaysia Industry Focus Malaysian Banks - DBS Bank | Singapore RHB Bank (RHB), which booked high provisions in 2QCY16. Pre-provision profits grew on the back of lower expenses. Revenue

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY

BUYBUYBUYBUY Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Dec 20166 Dec 20166 Dec 20166 Dec 2016)))): : : : RM14.84 (KLCIKLCIKLCIKLCI : : : : 1,629.73) Price Target 12Price Target 12Price Target 12Price Target 12----mthmthmthmth :::: RM17.00 (15% upside) (Prev RM17.00) Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential corporate streamlining

Where we differ:Where we differ:Where we differ:Where we differ: We are more bullish on HLB’s earnings

Analyst Sue Lin LIM +65 8332 6843 [email protected] Lynette CHENG +60 32604 3907 [email protected]

What’s New • 1QFY17 earnings within expectations; strong banking contribution shielded weakness in insurance income

• Expect earnings windfall in 2QFY17 from recent surge in interest rate

• Ceased negotiations on sale of insurance unit; reverting back to business-as-usual mode

• Maintain BUY with lower TP of RM17.00

Price Relative

Forecasts and Valuation FY FY FY FY JunJunJunJun ((((RMRMRMRMmmmm) ) ) ) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Pre-prov. Profit 2,431 2,798 3,046 3,348 Net Profit 1,359 1,637 1,768 1,929 Net Pft (Pre Ex.) 1,497 1,637 1,768 1,929 Net Pft Gth (Pre-ex) (%) (5.5) 9.3 8.0 9.1 EPS (sen) 118 143 154 168 EPS Pre Ex. (sen) 131 143 154 168 EPS Gth Pre Ex (%) (13) 9 8 9 Diluted EPS (sen) 118 143 154 168 PE Pre Ex. (X) 11.4 10.4 9.6 8.8 Net DPS (sen) 38.0 49.9 39.3 42.9 Div Yield (%) 2.6 3.4 2.6 2.9 ROAE Pre Ex. (%) 10.8 10.4 10.6 10.9 ROAE (%) 9.6 10.4 10.6 10.9 ROA (%) 1.0 1.1 1.2 1.2 BV Per Share (sen) 1,337 1,406 1,494 1,591 P/Book Value (x) 1.1 1.1 1.0 0.9 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 136 145 157

Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 4 S: 0 H: 2

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Waiting for action

Corporate streamlining remains a reCorporate streamlining remains a reCorporate streamlining remains a reCorporate streamlining remains a re----rating catalyst, BUY. rating catalyst, BUY. rating catalyst, BUY. rating catalyst, BUY. We believe a corporate streamlining remains on HLFG’s agenda. This investment thesis remains our basis for our BUY rating for Hong Leong Financial Group (HLFG). We had, in the past, considered the possibility of HLFG listing HLAH to unlock value to its shareholders. Nevertheless, we believe that life insurance businesses in Malaysia may remain acquisition targets. While this negotiation has now ceased, we would not discount the possibility of other parties attempting to pursue such a transaction again. 1Q1Q1Q1QFY17 within expectations; strong contribution from banking FY17 within expectations; strong contribution from banking FY17 within expectations; strong contribution from banking FY17 within expectations; strong contribution from banking operations mitigated by insurance unitoperations mitigated by insurance unitoperations mitigated by insurance unitoperations mitigated by insurance unit.... HLB registered robust earnings growth in 1QFY17, underpinned by solid loan growth, NIM uplift (from effective funding cost management) and treasury gains. Positively, contribution from Bank of Chengdu improved due to cost discipline and decline in provisions. Liquidity continues to be a strong point for HLB, as its loan-to-deposit ratio was kept low at c.80%. NPL ratio stood stable and low at 0.8% despite the classification of one account. Insurance income was dented by lower interest rates, but is expected to recover given the surge in interest rate in 4QCY16. HL Cap’s earnings were stable. Revenues still hinge largely on HLB. Revenues still hinge largely on HLB. Revenues still hinge largely on HLB. Revenues still hinge largely on HLB. Typically, about 90% of HLFG’s revenues will come from HLB, which we remain positive on. In this current uncertain environment, balancing liquidity vs profitability will be crucial for HLB. We expect HLB to grow cautiously in the current operating environment, ensuring asset quality and liquidity preservation while delivering decent earnings growth and ROEs. Bank of Chengdu (BOCD), its 20% associate remains a wildcard, but has shown improvement in the recent quarter. Valuation: We keep our BUY rating and lower TP to RM17.00 (from RM18.00) as we reinstate the historical average holding company discount to 15% (from 10%). Our TP is based on the sum-of-parts metric using our TP for HLB, while HL Cap and HLA are valued at 1x and 1.5x BV, respectively. Key Risks to Our View: Challenging operating environment. Challenging operating environment. Challenging operating environment. Challenging operating environment. Drawing new growth levers may be challenging, given the softer operating environment. Rapid interest rate movements could result in volatile contribution from its insurance operations.

At A Glance Issued Capital (m shrs) 1,145

Mkt. Cap (RMm/US$m) 16,995 / 3,820

Major Shareholders (%)

Hong Leong Co Malaysia Bhd (%) 51.9

Guoco Group Ltd (%) 25.4

Free Float (%) 22.5

3m Avg. Daily Val (US$m) 0.95

ICB IndustryICB IndustryICB IndustryICB Industry : Financials / Banks

DBS Group Research . Equity

7 Dec 2016

Malaysia Company Guide

Hong Leong Financial Group Version 4 | Bloomberg: HLFG MK | Reuters: HLCB.KL Refer to important disclosures at the end of this report

89

109

129

149

169

189

209

11.3

12.3

13.3

14.3

15.3

16.3

17.3

18.3

19.3

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Relative IndexRM

Hong Leong Financial Group (LHS) Relative KLCI (RHS)

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Company Guide

Hong Leong Financial Group

WHAT’S NEW

Weak insurance income offset by strong banking income

HighHighHighHighllllights ights ights ights

HLB’s earnings boosted by strong topline growth. HLB’s earnings boosted by strong topline growth. HLB’s earnings boosted by strong topline growth. HLB’s earnings boosted by strong topline growth. HLB’s

1QFY17 net profit of RM543m was within expectations. Net

profit grew strongly y-o-y, on the back of robust income

growth. Net interest income was underpinned by expansion in

NIM as yields were largely stable while cost of funds fell (from

maturity of higher cost deposits). Meanwhile, non-interest

income was boosted by treasury income. Expenses were higher

due to increase in personnel and marketing costs, but its cost-

to-income ratio was kept at 45%. Income from associate, Bank

of Chengdu, has improved – thanks to cost discipline and

decline in provisions. On a q-o-q basis, earnings were lower as

provisions normalised (as opposed to write backs in previous

quarter).

Loan growth driven by mortgage and SME; liquidity remains Loan growth driven by mortgage and SME; liquidity remains Loan growth driven by mortgage and SME; liquidity remains Loan growth driven by mortgage and SME; liquidity remains

ample. ample. ample. ample. Loan growth stood at 4% y-o-y/0.3% q-o-, largely

driven by mortgage and SME, which are in line with HLB’s

targeted segments. Deposit grew at 3% y-o-y/1% q-o-q, led

by fixed deposits. Liquidity remains healthy as the loan-to-

deposit ratio was kept low at 80%.

Stable asset qualiStable asset qualiStable asset qualiStable asset quality indicators. ty indicators. ty indicators. ty indicators. Impaired loans ratio was largely

stable at 0.84%. Exposure to oil and gas (<1% of total loans)

in addition to commodities was relatively unchanged at 3% of

total loans. Loan loss coverage remains relatively high at 113%

(excluding regulatory reserve). Higher impaired loans were

noted in the working capital segment q-o-q and this was

attributed to an oil and gas account. Little provisions were

required as the account is largely secured.

Insurance income dragged by lower interest rates; HL Cap’Insurance income dragged by lower interest rates; HL Cap’Insurance income dragged by lower interest rates; HL Cap’Insurance income dragged by lower interest rates; HL Cap’s s s s

earnings were stable.earnings were stable.earnings were stable.earnings were stable. HLA recorded a decline in pre-tax profit,

primarily driven by higher actuarial reserves as interest rates

were lower y-o-y. The underlying trend remains healthy as

gross premium growth remained robust at 7% y-o-y, while

retaining a low management expense ratio of 6% during the

quarter. HL Cap’s earnings were stable. Separately, HLFG

declared an interim DPS of 13 sen.

Outlook Outlook Outlook Outlook

Expect earnings windfall from recent jump in interest ratesExpect earnings windfall from recent jump in interest ratesExpect earnings windfall from recent jump in interest ratesExpect earnings windfall from recent jump in interest rates....

Despite the weak set of results from its insurance unit, we

keep our forecast intact, as interest rate moved up sharply in

4QCY15, which should translate to an earnings windfall in the

coming quarter.

Halted negotiations on sale of insurance unitHalted negotiations on sale of insurance unitHalted negotiations on sale of insurance unitHalted negotiations on sale of insurance unit; back to business ; back to business ; back to business ; back to business

aaaas usuals usuals usuals usual.... Bank Negara Malaysia (BNM) had given the green

light to HLFG and its wholly-owned subsidiary, HLA Holdings

Sdn Bhd (HLAH) to commence negotiations with certain parties

for a possible sale of HLAH’s equity interest in Hong Leong

Assurance Berhad (HLA) and Hong Leong MSIG Takaful Berhad

(HLMT), subject to the negotiations being concluded within six

months from 23 June 2016. However, earlier this month, it

was announced that HLFG and HLA could not reach an

acceptable commercial agreement with the negotiating parties

and have mutually agreed to cease negotiations. Although the

name of the buyer was not officially announced, it was touted

that the buyer could be Canada’s Sun Life and Khazanah. The

deal was valued by sources at RM3bn or almost equivalent to

3x BV of the life insurance assets. As negotiations have ceased,

HLFG would return to a business-as-usual mode by focusing on

its banking and insurance business.

HLB keeping a cautious stance for FY17F.HLB keeping a cautious stance for FY17F.HLB keeping a cautious stance for FY17F.HLB keeping a cautious stance for FY17F. FY17F targets were

retained, and appear to skew towards a cautious mode with

loan growth expected to at least track industry levels. It is

crucial to manage loan growth to ensure NIM trends would

not be significantly compromised. Deposits would likely grow

at the same pace, keeping its loan-to-deposit ratio at c.80%.

HLB aims to keep NIM stable by managing its liability mix, as

demonstrated in 1QFY17. Non-interest income to total income

ratio is targeted at above 25%, driven by transactions and

customer flows. Cost savings from the MSS will be reinvested

to enhance digital capabilities. Digital-banking initiatives are

expected to drive transaction banking volumes higher over

time. Cost-to-income ratio is targeted to be below 46%.

Credit costs excluding recoveries are guided to normalise at

25-35bps; there are still some recoveries that could be

expected but chunky ones are largely done. Post-rights and

with slower growth expected, ROE is targeted at 10-11%.

ValuationValuationValuationValuation

Maintain BUY with lower RM17Maintain BUY with lower RM17Maintain BUY with lower RM17Maintain BUY with lower RM17.00 TP .00 TP .00 TP .00 TP (from RM18.00) as we

reinstate the historical average holding company discount to

15% (from 10%), subsequent to the cessation of negotiations

on the sale of its insurance unit. While this negotiation is now

ceased, we would not discount the possibility of other parties

attempting to pursue such a transaction again. Other than

that, a corporate streamlining exercise remains a catalyst for

the stock. Our TP for HLFG is based on sum-of-parts valuation

that uses our target price for HLB, while HL Cap and HLA are

valued at 1x BV and 1.5x BV, respectively.

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Company Guide

Hong Leong Financial Group

Quarterly / Interim Income Statement (RMm)

FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 % chg yoy % chg yoy % chg yoy % chg yoy % chg qoq% chg qoq% chg qoq% chg qoq

Net Interest Income 657 659 682 3.9 3.5

Islamic Income 115 121 130 13.2 13.2

Non-Interest Income 375 426 370 (1.6) (13.3)

Operating IncomeOperating IncomeOperating IncomeOperating Income 1,1471,1471,1471,147 1,2071,2071,2071,207 1,1811,1811,1811,181 3.03.03.03.0 (2.1)(2.1)(2.1)(2.1)

Operating Expenses (506) (552) (538) 6.4 (2.6)

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 641641641641 654654654654 643643643643 0.40.40.40.4 (1.7)(1.7)(1.7)(1.7)

Provisions (46.1) 28.0 (27.1) (41.3) (196.7)

Associates 102 107 109 6.9 2.5

Exceptionals 0.0 0.0 0.0 nm nm

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 697697697697 789789789789 726726726726 4.14.14.14.1 (8.0)(8.0)(8.0)(8.0)

Taxation (115) (188) (142) 23.3 (24.5)

Minority Interests (194) (207) (197) (1.4) (4.8)

Net ProfitNet ProfitNet ProfitNet Profit 387387387387 394394394394 386386386386 (0.3)(0.3)(0.3)(0.3) (1.9)(1.9)(1.9)(1.9)

Growth (%)

Net Interest Income Gth (0.2) 1.7 3.5

Net Profit Gth (12.2) 24.9 (1.9)

Key ratio (%)*

NIM 1.6 1.6 1.6

NPL ratio N/A N/A N/A

Loan-to deposit N/A N/A N/A

Cost-to-income 44.1 45.8 45.5

Total CAR N/A N/A N/A

*HLB’s ratios Source of all data: Company, DBS Bank HLFG: RNAV

Source of all data: Company, DBS Bank

StakeStakeStakeStake Share priceShare priceShare priceShare price No. of s haresNo. of s haresNo. of s haresNo. of s hares Va lueVa lueVa lueVa lue RNAV/s hareRNAV/s hareRNAV/s hareRNAV/s hare CommentsCommentsCommentsComments

(%)(%)(%)(%) (RM)(RM)(RM)(RM) (RMm)(RMm)(RMm)(RMm) (RM)(RM)(RM)(RM)

Hong Leong Bank 64.4% 15.00 2,167.72 20,940 18.25

Hong Leong Capital 81.3% n.a 238.97 532 0.46

Fa ir va lue of inves tment in l is ted companiesFa ir va lue of inves tment in l is ted companiesFa ir va lue of inves tment in l is ted companiesFa ir va lue of inves tment in l is ted companies (a )(a )(a )(a ) 21,47221,47221,47221,472 18.7118.7118.7118.71

HLFG's key unlis ted as s etsHLFG's key unlis ted as s etsHLFG's key unlis ted as s etsHLFG's key unlis ted as s ets As s etsAs s etsAs s etsAs s ets L iabi li tiesL iabi li tiesL iabi li tiesL iabi li ties Net As s etsNet As s etsNet As s etsNet As s ets Va lueVa lueVa lueVa lue

(RMm)(RMm)(RMm)(RMm) (RMm)(RMm)(RMm)(RMm) (RMm)(RMm)(RMm)(RMm) (RMm)(RMm)(RMm)(RMm)

Ins urance - HLA Holdings (100%)Ins urance - HLA Holdings (100%)Ins urance - HLA Holdings (100%)Ins urance - HLA Holdings (100%)

Hong Leong Assurance Berhad 70% 13,293 11,965 1,328 1,395 1.22

Hong Leong-MSIG Takaful 65% 445 357 88 86 0.07

MSIG Insurance 30% 30% stake in MSIG Insurance is equity accounted

Net as s ets of core divis ions bas ed on BVNet as s ets of core divis ions bas ed on BVNet as s ets of core divis ions bas ed on BVNet as s ets of core divis ions bas ed on BV (b)(b)(b)(b) 1,4811,4811,4811,481 1.291.291.291.29

RNAVRNAVRNAVRNAV (a )+(b)(a )+(b)(a )+(b)(a )+(b) 22,95222,95222,95222,952 20.0020.0020.0020.00

HLFG's no. of shares 1,147.52

Holding Company discount 15%

Fair Va lueFa ir Va lueFa ir Va lueFa ir Va lue 17.0017.0017.0017.00

HLA Holdings is a holding company that houses all of the

group's insurance businesses

Based on our TP for HLB (valued at 1.5x CY16 BV)

Based on 1x BV of HLCap; share price is irrelevant

HLA Holdings owns 70%; MSIG owns 30%; Assumed 1.5x BV

HLA Holdings owns 65%; MSIG owns 35%; Assumed 1.5x BV

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Page 76

Company Guide

Hong Leong Financial Group

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

HLFG’s growth prospects hinge largely on HLB.HLFG’s growth prospects hinge largely on HLB.HLFG’s growth prospects hinge largely on HLB.HLFG’s growth prospects hinge largely on HLB. HLB’s loan

growth is driven by mortgage and SME loans. We are assuming

6% loan growth in our forecasts, while deposit should track

loan growth. With a loan-to-deposit ratio still among the lowest

in the industry, HLB would have room to further leverage its

asset-liability mix to accelerate loan growth and optimise NIM.

We expect its loan-to-deposit ratio to hover around 80%.

Wealth management a crucial new driver.Wealth management a crucial new driver.Wealth management a crucial new driver.Wealth management a crucial new driver. Recurring fee income

(loan-related and credit card fees) remains HLB’s key non-

interest income driver. However, it is also building up income

from wealth management. HLB has established a regional

wealth management and private banking platform in Singapore.

Wealth management is expected to be HLB’s new growth driver

as it gradually gains prominence.

Hong Leong Assurance (HLA) an overlooked jewel.Hong Leong Assurance (HLA) an overlooked jewel.Hong Leong Assurance (HLA) an overlooked jewel.Hong Leong Assurance (HLA) an overlooked jewel. HLA, HLFG’s

insurance arm, recorded lower contribution to group PBT, at

5% in FY16 after a rough year of being hit by unfavourable

interest rate movements and provisions for equity impairment.

Going forward, there should be a pick-up in contribution as the

Group focuses on shifting its profitability levers to non-par and

investment-linked policies. In early July 2016, HLFG obtained

BNM’s approval to commence negotiations with certain parties

for the disposal of its life insurance business. However, in early

November, it was announced that HLFG and HLA could not

reach an acceptable commercial agreement with the

negotiating parties and have mutually agreed to cease

negotiations. HLA ranks 4th among Malaysian insurers with

11% market share.

HL Cap on a better footing.HL Cap on a better footing.HL Cap on a better footing.HL Cap on a better footing. Upon establishing a full-fledged

and experienced investment banking team in early 2010 and

completing the merger of Hong Leong Investment Bank (HLIB)

and MIMB Investment Bank in Sep 2012, HLIB has since

strengthened its presence in the investment banking industry.

HL Cap has seen its pretax profit increase almost four-fold since

2010, and has gradually strengthened its market share in equity

and debt issues, as well as in stockbroking. However,

contribution to HLFG remains small. We value HLCap at 1x BV

in our SOP valuation.

Margin Trends

Gross Loan & Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure

Source: Company, DBS Bank

1.3%

1.4%

1.4%

1.5%

1.5%

1.6%

1.6%

0

500

1,000

1,500

2,000

2,500

3,000

2015A 2016A 2017F 2018F 2019F

RM m

Net Interest Income Net Interest Income Margin

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2015A 2016A 2017F 2018F 2019F

RM m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2015A 2016A 2017F 2018F 2019F

RM m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

72%

74%

76%

78%

80%

82%

84%

86%

88%

101,803

121,803

141,803

161,803

181,803

201,803

2015A 2016A 2017F 2018F 2019F

RM bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

42.5%

43.0%

43.5%

44.0%

44.5%

45.0%

45.5%

46.0%

46.5%

47.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

2015A 2016A 2017F 2018F 2019F

Net Interest Income Non-interest Income

Islamic Banking Income Cost-to-income Ratio

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Company Guide

Hong Leong Financial Group

Balance Sheet:

Superior asset quality. Superior asset quality. Superior asset quality. Superior asset quality. At <1%, HLB’s NPL ratio is second only to

Public Bank (PBK). Similar to PBK, HLB also boasts a prudent

credit culture. We expect HLB to continue recording resilient

asset-quality indicators. Normalised credit cost is expected to

hover around 25bps, excluding recoveries.

Stronger capital ratios postStronger capital ratios postStronger capital ratios postStronger capital ratios post----rights. rights. rights. rights. HLFG completed its RM1.1bn

rights issue in Dec 2015 which boosted capital ratios. As a

Financial Holding Company, HLFG is expected to meet Basel III

capital requirements by 2019.

Streamlining corporate structure could enhance efficiency.Streamlining corporate structure could enhance efficiency.Streamlining corporate structure could enhance efficiency.Streamlining corporate structure could enhance efficiency. We

believe it is inefficient to have so many listed entities in the

group, especially if the counters have low trading liquidity.

Ideally, the corporate structure should be collapsed to improve

efficiency. But there are other hurdles that need to be

considered including the ultimate financial holding company for

the group and possible issues surrounding the grandfathering

rule on its ownership of HLB.

Share Price Drivers:

Corporate streamlining could reCorporate streamlining could reCorporate streamlining could reCorporate streamlining could re----rate HLFG’s share pricerate HLFG’s share pricerate HLFG’s share pricerate HLFG’s share price. Our

investment thesis is built on the potential corporate

restructuring within the group. There is also potential to unlock

value in HLA if the insurance unit is carved out for listing or

disposed of.

Key Risks:

Change in business strategy.Change in business strategy.Change in business strategy.Change in business strategy. A significant change to HLB’s

business strategy could derail HLFG’s earnings given that it

remains the key earnings driver for HLFG. Inability to

continuously scale up HLA’s business could limit earnings

upside, assuming it is not disposed of.

Company Background

Hong Leong Financial Group Berhad is the parent company of

Hong Leong Bank. Its operations extend beyond commercial

banking operations. Through its subsidiaries, HLFG underwrites

life and general insurance, and provides fund management,

corporate advisory and stockbroking services.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)

Source: Company, DBS Bank

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

2015A 2016A 2017F 2018F 2019F

NPL Ratio Provision Charge-Off Rate

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

2015A 2016A 2017F 2018F 2019F

Tier-1 CAR Total CAR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2015A 2016A 2017F 2018F 2019F

Avg: 10.4x

+1sd: 11.4x

+2sd: 12.4x

-1sd: 9.3x

-2sd: 8.3x

7.3

8.3

9.3

10.3

11.3

12.3

13.3

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

Avg: 1.34x

+1sd: 1.53x

+2sd: 1.71x

-1sd: 1.16x

-2sd: 0.98x

0.8

1.0

1.2

1.4

1.6

1.8

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

(x)

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Company Guide

Hong Leong Financial Group

Key Assumptions

FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Gross Loans Growth 8.7 6.3 6.0 6.0 8.0

Customer Deposits Growth 7.9 6.1 6.0 6.0 8.0

Yld. On Earnings Assets 3.4 3.4 3.4 3.3 3.3

Avg Cost Of Funds 2.2 2.3 2.2 2.2 2.2

Income Statement (RMm)

FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Net Interest Income 2,710 2,641 3,006 3,164 3,362

Islamic Income 420 467 514 555 600

Non-Interest Income 1,361 1,435 1,676 1,845 2,031

Operating IncomeOperating IncomeOperating IncomeOperating Income 4,4914,4914,4914,491 4,5434,5434,5434,543 5,1975,1975,1975,197 5,5645,5645,5645,564 5,9935,9935,9935,993

Operating Expenses (2,045) (2,112) (2,399) (2,519) (2,644)

PrePrePrePre----provision Profitprovision Profitprovision Profitprovision Profit 2,4462,4462,4462,446 2,4312,4312,4312,431 2,7982,7982,7982,798 3,0463,0463,0463,046 3,3483,3483,3483,348

Provisions 55.3 (96.0) (114) (158) (207)

Associates 477 402 423 468 519

Exceptionals 45.0 (172) 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 3,0233,0233,0233,023 2,5652,5652,5652,565 3,1083,1083,1083,108 3,3563,3563,3563,356 3,6613,6613,6613,661

Taxation (563) (501) (622) (671) (732)

Minority Interests (840) (705) (849) (917) (1,000)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net ProfitNet ProfitNet ProfitNet Profit 1,6211,6211,6211,621 1,3591,3591,3591,359 1,6371,6371,6371,637 1,7681,7681,7681,768 1,9291,9291,9291,929

Net Profit bef Except 1,576 1,531 1,637 1,768 1,929

Growth (%)

Net Interest Income Gth 9.5 (2.5) 13.8 5.2 6.3

Net Profit Gth (5.0) (16.2) 20.5 8.0 9.1

Margins, Costs & Efficiency (%)

Spread 1.2 1.1 1.2 1.2 1.1

Net Interest Margin 1.5 1.4 1.5 1.5 1.5

Cost-to-Income Ratio 45.5 46.5 46.2 45.3 44.1

Business Mix (%)

Net Int. Inc / Opg Inc. 60.3 58.1 57.8 56.9 56.1

Non-Int. Inc / Opg inc. 30.3 31.6 32.3 33.2 33.9

Fee Inc / Opg Income 14.9 14.7 15.1 15.5 15.8

Oth Non-Int Inc/Opg Inc 15.4 16.9 17.2 17.7 18.1

Profitability (%)

ROAE Pre Ex. 12.8 10.8 10.4 10.6 10.9

ROAE 13.2 9.6 10.4 10.6 10.9

ROA Pre Ex. 1.2 1.1 1.1 1.2 1.2

ROA 1.3 1.0 1.1 1.2 1.2

Source: Company, DBS Bank

Provisions at HLB to normalise over time

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ASIAN INSIGHTS VICKERS SECURITIES

Page 79

Company Guide

Hong Leong Financial Group

Quarterly / Interim Income Statement (RMm)

FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017

Net Interest Income 657 678 648 659 682

Islamic Income 115 118 114 121 130

Non-Interest Income 375 370 263 426 370

Operating IncomeOperating IncomeOperating IncomeOperating Income 1,1471,1471,1471,147 1,1651,1651,1651,165 1,0251,0251,0251,025 1,2071,2071,2071,207 1,1811,1811,1811,181

Operating Expenses (506) (711) (515) (552) (538)

PrePrePrePre----Provision ProfitProvision ProfitProvision ProfitProvision Profit 641641641641 454454454454 510510510510 654654654654 643643643643

Provisions (46.1) (50.8) (27.1) 28.0 (27.1)

Associates 102 84.6 109 107 109

Exceptionals 0.0 0.0 0.0 0.0 0.0

Pretax ProfitPretax ProfitPretax ProfitPretax Profit 697697697697 487487487487 592592592592 789789789789 726726726726

Taxation (115) (91.0) (107) (188) (142)

Minority Interests (194) (133) (170) (207) (197)

Net ProfitNet ProfitNet ProfitNet Profit 387387387387 263263263263 315315315315 394394394394 386386386386

Growth (%)

Net Interest Income Gth (0.2) 3.2 (4.4) 1.7 3.5

Net Profit Gth (12.2) (32.0) 19.6 24.9 (1.9)

Balance Sheet (RMm)

FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Cash/Bank Balance 8,463 9,430 11,107 9,491 7,890

Government Securities 3,532 4,329 4,582 4,851 5,226

Inter Bank Assets 4,325 3,034 3,185 3,345 3,512

Total Net Loans & Advs. 113,114 120,446 127,499 134,995 145,712

Investment 61,967 61,260 65,275 72,213 80,198

Associates 3,870 4,127 4,402 4,695 5,008

Fixed Assets 1,150 1,849 1,942 2,039 2,141

Goodwill 2,748 2,696 2,696 2,696 2,696

Other Assets 3,273 3,306 3,470 3,642 3,823

Total AssetsTotal AssetsTotal AssetsTotal Assets 202,443202,443202,443202,443 210,475210,475210,475210,475 224,157224,157224,157224,157 237,967237,967237,967237,967 256,204256,204256,204256,204

Customer Deposits 140,955 149,491 158,460 167,968 181,405

Inter Bank Deposits 8,944 8,106 8,511 8,937 9,384

Debts/Borrowings 10,199 6,672 6,770 6,871 6,975

Others 13,421 12,400 12,903 13,429 13,980

Minorities 6,353 7,836 9,441 10,194 11,121

Shareholders' Funds 13,111 15,341 16,127 17,143 18,252

Total Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s FundsTotal Liab& S/H’s Funds 202,441202,441202,441202,441 210,475210,475210,475210,475 224,157224,157224,157224,157 237,967237,967237,967237,967 256,204256,204256,204256,204

Source: Company, DBS Bank

Strong contribution from banking operations offset weak insurance contribution

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Company Guide

Hong Leong Financial Group

Financial Stability Measures (%)

FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Balance Sheet Structure

Loan-to-Deposit Ratio 80.2 80.6 80.5 80.4 80.3

Net Loans / Total Assets 55.9 57.2 56.9 56.7 56.9

Investment / Total Assets 30.6 29.1 29.1 30.3 31.3

Cust . Dep./Int. Bear. Liab. 88.0 91.0 91.2 91.4 91.7

Interbank Dep / Int. Bear. 5.6 4.9 4.9 4.9 4.7

Asset Quality

NPL / Total Gross Loans 0.8 0.8 0.8 0.8 0.7

NPL / Total Assets 0.5 0.5 0.5 0.5 0.4

Loan Loss Reserve Coverage 136.3 119.8 135.8 150.0 179.5

Provision Charge-Off Rate 0.0 0.1 0.1 0.1 0.1

Capital Strength

Total CAR 14.4 14.8 14.6 14.8 14.6

Tier-1 CAR 12.0 13.2 12.9 13.0 12.8

Source: Company, DBS Bank

Target Price & Ratings History

Source: DBS Bank

Analyst: Sue Lin LIM

Lynette CHENG

S.No.S.No.S.No.S.No.Date of Date of Date of Date of

ReportReportReportReport

Closing Closing Closing Closing

PricePricePricePrice

12-mth 12-mth 12-mth 12-mth

Target Target Target Target

PricePricePricePrice

Rat ing Rat ing Rat ing Rat ing

1: 10 Dec 15 13.72 16.80 BUY

2: 22 Jan 16 13.22 16.80 BUY

3: 02 Feb 16 13.96 16.80 BUY

4: 24 Feb 16 14.00 16.70 BUY

5: 01 Mar 16 14.10 16.70 BUY

6: 24 Mar 16 14.96 16.70 BUY

7: 03 May 16 15.10 16.70 BUY

8: 25 May 16 15.00 16.60 BUY

9: 02 Jun 16 14.70 16.60 BUY

10: 01 Jul 16 15.00 16.60 BUY

11: 12 Jul 16 15.00 16.60 BUY

12: 14 Jul 16 15.10 16.60 BUY

13: 01 Aug 16 15.08 16.60 BUY

14: 30 Aug 16 16.08 18.00 BUY

Note Note Note Note : Share price and Target price are adjusted for corporate actions. 15: 05 Sep 16 15.84 18.00 BUY

16: 23 Nov 16 15.10 17.00 BUY

12 3

4

5

6

7

8

9

10

11

12

13

14

15 16

12.08

12.58

13.08

13.58

14.08

14.58

15.08

15.58

16.08

16.58

Dec-15 Apr-16 Aug-16 Dec-16

RMRMRMRM

Low loan-to-deposit ratio at HLB

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Industry Focus

Malaysian Banks

Page 81

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUYSTRONG BUYSTRONG BUYSTRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY BUY BUY BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLDHOLDHOLDHOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUEDFULLY VALUEDFULLY VALUEDFULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL SELL SELL SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 7 Dec 2016 07:05:55 (MYT) Dissemination Date: 7 Dec 2016 08:16:51 (MYT)

GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by This report is prepared by This report is prepared by This report is prepared by DBS Bank LtdDBS Bank LtdDBS Bank LtdDBS Bank Ltd. . . . This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte 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.

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”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to

change without notice. This document 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. This

document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or

persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have

positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and

other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can

be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.

The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it

may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no

obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned

schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and

assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on

which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual

results. 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. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the

commodity referred to in this report.

DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research

department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction

in the past twelve months and does not engage in market-making.

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Industry Focus

Malaysian Banks

Page 82

ANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the

companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her

compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has

procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of

research reports. As of 7 Dec 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold

interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s)

responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and

procedures are in place to ensure that confidential information held by either the research or investment banking function is handled

appropriately.

COMPANYCOMPANYCOMPANYCOMPANY----SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary

position in the securities recommended in this report as of 31 Oct 2016.

Compensation for investment banking services: Compensation for investment banking services: Compensation for investment banking services: Compensation for investment banking services:

2. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a

manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further

information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document

should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced:Disclosure of previous investment recommendation produced:Disclosure of previous investment recommendation produced:Disclosure of previous investment recommendation produced:

3. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other

investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12

months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by

DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

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GeneralGeneralGeneralGeneral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

AustraliaAustraliaAustraliaAustralia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong KongHong KongHong KongHong Kong This report is being distributed in Hong Kong by or on behalf of, and is attributable to DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited. This report is intended for distribution in Hong Kong only to professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules promulgated thereunder.)

For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

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MalaysiaMalaysiaMalaysiaMalaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

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Page 83

SSSSingaporeingaporeingaporeingapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

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In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, 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 DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

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This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3

rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC),

Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United StatesUnited StatesUnited StatesUnited States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictionsOther jurisdictionsOther jurisdictionsOther jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank LtdDBS Bank LtdDBS Bank LtdDBS Bank Ltd

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888

e-mail: [email protected] Company Regn. No. 196800306E