Malaysian banks reach new highs. Malaysian banks' share prices have been rising steadily over the last few months. Besides positive sentiment towards the overall economy and strength of the banking industry, the focus on ROE traction implies Malaysian banks' valuations should reach new highs. The banks are in much stronger footing now than five and ten years ago. What had altered the Malaysian banking landscape are individual abilities to leverage on domestic capital markets and regional growth.

We forecast industry ROE to reach a new high of 16.3% by 2012, driven by overall revenue drivers, in particular non-interest income. Like its ASEAN counterparts, NIM is unlikely to improve due to competition. Scale and liberalization may drive next M&A wave. The Economic Transformation Plan indicates that the government aims to create regional banking champions.
The banks with clear regional footprints currently are Maybank and CIMB. But one should not ignore Hong Leong Bank and to some extent, Public Bank, which have respective exposures in China and Hong Kong. We believe that aspirations to become regional champions could precipitate the next wave of M&A within and beyond the country. We think RHB Cap would be a prime M&A candidate among the larger banks given its attractive valuations and ROE profile.

Top picks are Maybank and CIMB. Our picks remain the country's regional champions - Maybank (Buy, TP RM10.80) and CIMB (Buy, TP RM10.10), with preference for Maybank. We also like RHB Cap (Buy, TP raised to RM10.00 from RM8.30) for its attractive valuations and
ROE profile. For a small cap pick, we favour Alliance Financial Group (AFG) which has a scalable niche.

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