Banking sector
Reaffirm overweight: Regional comparison reaffirms overweight on Malaysian banks. In our comparison of banks across our Asean-4 + HK/China coverage, Malaysia comes off as a mature market, albeit one that still enjoys a favourable operating environment of 10% to 11% annual loan growth and stable non-performing loans (NPL) ratios. Although Malaysian banks do not offer the superlative growth and lofty net interest margins of their counterparts in Indonesia, a few have taken stakes in Indonesian banks to get a slice of this high-growth market. We project earnings growth of 23.3% in 2010 for Malaysian banks, coming from the economic upturn, positive sentiment in the capital markets and fast-rising overseas contributions. We continue to overweight the Malaysian banking sector, with the potential re-rating catalysts being (i) strong earnings growth, (ii) higher investment banking income, (iii) brighter growth prospects for overseas operations, and (iv)
potential general provision write-backs. AMMB remains our top pick.

With a loan-to-GDP ratio of 115%, which is even higher than Singapore's 106%, Malaysia's banking system is considered a mature one. Malaysian banks have the traits of mature banks, that is moderate loan growth of 8% to 10% per annum in the next three years and net interest margin of 2.1% to 2.2%. In comparison, Indonesia's developing banking industry has a loan-to-GDP ratio of only 25.6% and offers much higher loan growth of 18% to 20% and net interest margins in excess of 6%.

For the countries in our coverage, Indonesia is the market with the most attractive growth prospects for banks. This is supported by (i) its unrivalled net interest margin of 7.4% against 2.2% to 3.5% in other countries, (ii) brisk loan growth of 18% to 20%, and (iii) low non-interest income ratio as this suggests that several segments such as treasury and investment banking are still untapped. Even now, Indonesian banks have the highest return on equity (ROE) of 25.1% and return on asset (ROA) of 2.6% among the countries under our coverage.

One of the key catalysts for Malaysian banks is their exposure to the high-growth market in Indonesia. CIMB owns 78.3% of Bank CIMB Niaga, Indonesia's fifth largest bank, Maybank controls Bank Internasional Indonesia (BII), the ninth largest bank, RHB Capital is buying 80% of Bank Mestika and Affin Holdings is purchasing a controlling stake in Bank Ina Perdana. For Maybank, loans in Indonesia are expected to increase from 6.4% of total loans in FY2009 to 8% in FY2010.

We are upgrading Maybank from neutral to outperform while raising our target price from RM8.50 to RM8.92 as we widen the premium over its discount dividend model value from 5% to 10%. Among the banks under our coverage, Maybank has the strongest presence in Indonesia, with a 97.5% stake in BII. This will help to improve the group's overall loan growth and net interest margin. We are projecting a brisk three-year CAGR of 51.7% for BII's net profit in FY2009-12, which could be exceeded if BII can match the industry's loan growth of 18% to 20% instead of our projected 16%.

Although AMMB Holdings does not have a foothold in Indonesia, it still tops our league table for Malaysian banks as we believe that its transformation programme should help it raise its ROE from 11.6% in FY2003/10 to 14.6% in FY2012. ? CIMB Research, July 16

This article appeared in The Edge Financial Daily, July 19, 2010.