Malaysia's big 8 Bank

Malaysian Business, Apr 1, 2010 by James S


Alliance Financial Group

This list is arranged according to alphabetical order THE SHARE PRICE OF ALLIANCE FINANCIAL Group (AFG) was affected in early January following news reports that it had placed several of its top management on forced leave pending completion of an informal internal investigation. Its board of directors later clarified that the bank's chief executive officer (CEO) and chief operating officer (COO) were on voluntary leave pending an investigation process.

This culminated in Datuk Bridget Lai tendering her resignation as CEO with effect from April 1. Apparently, the bank said that the resignation was a joint decision of the bank and Lai and was not in any way a reflection of the CEO's role or conduct.

Analysts are positive of a closure on the event as they say it will reduce distractions to the bank that might arise from a possible long- drawn internal investigation.

Research house AmResearch reiterates that AFG has demonstrated strong teamwork and maintained a good grip on its operations despite the recent distractions. It says the decision-making process in the bank continues to be supported by the various exco and sub- committees in the absence of the CEO and COO.

The local research house remains positive on AFG. While its share price has moved up from its recent lows, AmResearch foresee further catalysts for a rally from (i) stronger-than-expected net earnings; (ii) appointment of a new CEO; and (iii) the fact that AFG is also a prime beneficiary of the overnight policy rate (OPR) hike given its variable rate loan contribution of 85.1% of its total loan base.

The research house has a `Buy' rating on AFG with a fair value of RM3.10 per share.


AMMB Holdings

MOST ANALYSTS' CONCERNS OVER AMMB Holdings in the past centred on its high dependence on hire purchase (HP) loans (where the group was making sub-par returns) and its persistent asset quality problems. The former concern has apparently been greatly reduced with returns on its HP portfolio now enhanced by a combination of tighter approvals and risk management and better price discipline within the industry.

The general concern over the group's asset quality remains but this is now more of an industry phenomenon than one that is particularly applicable to AMMB.

Analysts are apparently happy that the various new initiatives the bank has taken with the help of its strategic foreign shareholder, Australia and New Zealand Banking Group (ANZ), which took a 19.2% stake in 2007, is now helping to strengthen AMMB's competitiveness and efficiency.

KAF Research reckons that the group's transformation is real and its structural upside now more apparent, especially if the economic and capital market cycles turn ahead as well.

It says the bank's non-consumer segments are showing strong potential especially among the larger government linked companies (GLCs) and multinational companies (MNCs). These are areas where the group's investment banking arm has always had good relationships with but has not been able to tap into their credit and other operational needs.

This is because the commercial banking balance sheet has been managed separately, not to mention the legacy problems the group had to deal with in the past.

However, KAF Research says the management now sees significant opportunity both in terms of growing its loan book and generating more fee income from providing a complete suite of products to these MNC and GLC clients.

Although spreads on corporate loans are generally thin, this strategy is one of the initiatives being used by management to increase the proportion of its variable rate loans and diversify away from its high dependence on HP. The competitive landscape in this area is said to be now better as the foreign banks have been less aggressive in this area.

Given the positive changes above, KAF Research has revised up its earnings forecasts for AMMB by 5% for FY10 and 9% each for FY11 and FY12, taking into account the better than expected operating environment.

AMMB is also one of OSK Research's favourite banking stocks, with a target price of RM5.35.


CIMB Group Holdings

CIMB GROUP HOLDINGS, THE second-largest bank by assets in Malaysia with a 15% loan market share, has been in the limelight with its intention to take advantage of new rules allowing overseas listings on Thailand's stock exchange.

The group is also proposing a one-for-one bonus issue which could boost trading interest in the stock.

According to Citibank Equity Research, CIMB has the most strategic overseas expansion plan with its established footprint in the major Asean countries of Singapore, Indonesia and Thailand. In its nine-month FY09 results, overseas operations contributed 29% of CIMB Group's pretax profits (from a mere 11% in FY08). CIMB Niaga was a key driver for the group profits vis-a-vis Malayan Banking.

The foreign research house observes that CIMB's management is efficient in tapping synergies from its operations in the key Asean countries via forex and cash management products that have boosted the group's fee-based income.

While growing commercial bank profits would alleviate investor concern over CIMB's heavy reliance on volatile investment bank earnings, a buoyant capital market could still provide an earnings surprise, given CIMB's strength in corporate advisory services, says Citibank.

All in all, it reckons that CIMB is firing on all cylinders. Coupled with the potential positive impact from the country's recent interest rate hike, OSK Research has named CIMB its top big-cap banking stock pick, with a target price of RM14.90.


EON Capital

AT THE END OF LAST YEAR, HONG Leong Bank announced that it had received Bank Negara Malaysia's approval to start talks with `certain shareholders' of EON Capital pertaining to the potential acquisition of assets and liabilities including equity interests in EON.

Hong Leong Bank went on to make an offer to buy the entire assets and liabilities of EON at RM7.10 a share to be satisfied fully in cash, representing a price-to-book value of 1.4x, based on EON's book value of RM5.03 a share as at end-September 2009.

While some analysts reckon that the offer price was fair, EON however announced that after consulting its advisers and considering all available information, its board of directors had resolved that the offer was not in the interest of EON and its shareholders.

As such, the board would not table the offer for consideration and approval by EON's shareholders and would not submit an application to the authorities for approval to accept the offer.

The tussle escalated however when two EON shareholders, Kualapura (M) Sdn Bhd (holding a 15.4% stake) and Lintang Emas Sdn Bhd (4.3%) requested for an EGM to be held to appoint new directors on top of the current ones, essentially hoping to control the board.

The outcome of the EGM favoured the two shareholders, with eight new directors being introduced. A few days later, four independent directors resigned from the board, making the board composition fall short of the requirement that no less than a third of board members must be independent directors.

At the time of writing, it was reported that Abu Dhabi Bank was ready to offer at least RM9.20 a share to certain shareholders for their stakes, adding more uncertainty to the whole tussle.

AmResearch assigns a `Hold' on EON, as the stock is being traded around the earlier offer price by Hong Leong Bank of RM7.10 a share.

Even if the market talk about Abu Dhabi's offer is true, the research house says this will not have a significant impact on EON's market price as the offer is meant for certain shareholders only and that the fundamentals of the banking group remain unchanged except for the holdings of its major shareholders.


Hong Leong Bank

MOST ANALYSTS AGREE THAT Hong Leong Bank has been travelling the conservative path after the Asian financial crisis of 1997/1998. The bank has dedicated itself to promoting retail banking in the past few years.

However, to its credit, it has slowed down its lending to the motor segment since mid-2006 due to intensified competition coupled with a diminishing asset value.

Hong Leong has delivered consistent growth over the past few years, increasing its net profit from RM382 million in FY04 to RM905 million in FY09 (a CAGR or compounded annual growth rate of 19%).

According to KAF Research, this growth came about without Hong Leong taking on too much risk. This is noted by the fact that the bank's liquidity remains extremely high, its gross non-performing loans ratio (NPL) falling from 11.2% to 2.2%, and its provisioning cover jumping from 58% to 109%.

Despite the relatively consistent track record, the market has unfortunately continued to assume limited growth for Hong Leong, as highlighted by the fact that the current consensus earnings estimates imply only an increase in net profit of 3% in FY10 and 11% in FY11 for the group, says the research house.

Going forward, the local research outfit expects Hong Leong's net profit to increase at a CAGR of 15% over the next three years. Even without taking into account the potential upside from any merger and acquisition activities, it believes that Hong Leong will rerate further over the next 12 months.

The stock remains a top pick for KAF Research, with a target price of RM10.40.


Malayan Banking

THINGS ARE DEFINITELY GETTING better for the nation's largest bank. Malayan Banking (Maybank) improved further on its strong fiscal first quarter performance by reporting a 44% rise in headline net profit and 15% higher normalised profit for the six-month period to December 2009.

Its quarterly net profit on a normalised basis has risen for three consecutive quarters from a low of RM503 million in 3QFY09 (to March) to RM936 million in 2QFY10 while return on equity (ROE) has recovered from 9.9% to 14.2%, says KAF Research.

As such, the research house has raised its net profit forecast for Maybank by a further 11%-18% over FY10-FY12 given the better than expected results and general improvement in macro conditions.

Following the earnings upgrade, the research house's target price for the bank has been raised from RM5.70 to RM7.70. This target is based on the Gordon growth version of the dividend discount model (DDM), assuming a sustainable ROE of 15.5% and long term growth of 5.5%.

However, KAF Research believes that Maybank may not be able to move to the higher end of its payout guidance due to new capital rules. As such, the research house has assumed that the dividend payout ratio for the group will remain at 40% in FY10 and rising to 50% each in FY11 and FY12, translating into dividend per share estimates of 41.5 sen and 46.1 sen respectively.


RHB Capital

GOING INTO FINANCIAL YEAR 2010, RHB Capital is now moving towards the tail end of the Phase 2 `Meet the Benchmark' (2008-2010) of its multi-year transformation programme.

Phase 1 `Get the House In Order' was completed with fully integrated structures and a universal banking platform in 2007. The key focus in Phase 2 includes setting main targets for its retail, commercial and investment, Islamic and international units, initiating cross-selling and sales and service models, continued improvement in process and service quality and meeting milestones and targets.

Phase 3 `Raise the Bar' (2010-2012) will include strategies to meet its vision to be one of the best-run banks in Malaysia and the Asean region. Main targets include maintaining its position at no less than fourth- largest bank in Malaysia, being a major Islamic player, building a long- term competitive advantage, and moving towards leadership positions (at least the top 3) in its chosen market/product segments.

According to AmResearch, the company has painted a confident picture for FY10. The banking group is maintaining its net earnings target of at least RM1.4 billion or double that of FY07's level. The bank's main targets for FY10 include:

* Gross loan growth of 15%. This is expected to be derived from consumer, corporate as well as its new focus on lending to the public sector segment.

* Net NPL ratio targeted to be reduced to below 1.9% in FY10 from 2.2% in FY09.

* To raise its international contribution to more than 10% in FY10 from 6% in FY09. This is in line with its recent proposed acquisition of an 89% stake in Bank Mestika, Indonesia.

Given such a rosy picture, AmResearch reckons that RHB Capital is the most underrated mid-cap banking stock in the industry. The research house is maintaining a `Buy' call on the counter, with a higher fair value of RM7.10 a share (RM6.60 previously).


Public Bank

THIS BANKING group continues to grow from strength to strength. AmResearch remains positive on Public Bank and is maintaining its `Buy' recommendation with an upgraded fair value of RM13 a share (from RM12.60 previously). It was reported that Public Bank has unveiled several key three-year targets:

* ROE to be raised to 30% from the 26% level in FY09.

* Core capital ratio of 8% (currently 9.9% as at end-2009).

* Net NPL ratio below 1% (currently 0.8% as at end-2009). * Loan book size of RM200 billion (up from RM135 billion as at end- 2009).

* Total asset size of RM320 billion (up from RM217 billion as at end- 2009).

According to AmResearch, Public Bank has also provided a strong reassurance on the dividend front given the possibility of more stringent capital requirements from the Basel Committee.

The group has indicated that it remains on track to meet a dividend payout ratio of 50% to 55% even if capital requirement levels were to be raised to, say, 6%-7.5% for Tier 1 (from 4% currently) with core equity levels set at 4%-5%.

Copyright 2010
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James S "Malaysia's big 8". Malaysian Business. FindArticles.com. 28 Apr, 2010. http://findarticles.com/p/articles/mi_qn6207/is_20100401/ai_n53096421/