PP 7767/09/2010(025354)

RHB Research
Corporate Highlights

Malaysia
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Se cto r New s Updat e

13 September 2010

MARKET DATELINE
Banking Recom : Overweight
(Maintained)
Minimum Capital Ratios Set For Basel III But Not A
Problem For Local Banks

Table 1: Sector Valuations

PER (x) EPS gwth (%) P/BV (x) ROE (%) Net Div Yld (%)
Price FV Rec FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11
Maybank 8.42 9.86 OP 15.6 13.6 42.6 14.7 2.1 2.0 14.5 15.2 4.9 3.1
CIMB 7.95 8.40 OP 16.6 14.1 20.8 17.2 2.2 2.0 15.2 15.1 1.2 1.2
Public Bank - L 12.28 13.75 OP 15.0 13.4 11.8 11.8 3.4 3.0 24.1 23.6 3.7 4.0
AMMB^ 5.93 6.95 OP 14.1 12.4 20.8 14.1 1.7 1.5 12.5 13.0 2.5 2.8
HLB 9.05 10.70 OP 13.3 12.8 9.1 3.9 2.2 2.0 16.3 15.1 2.0 2.0
Affin 3.07 4.10 OP 9.5 8.9 30.1 6.4 0.9 0.8 9.8 9.6 2.1 2.1
AFG^ 3.09 3.50 OP 12.3 11.3 28.9 9.0 1.5 1.3 12.6 12.5 2.1 2.1
EON Cap 7.00 8.33 MP 11.5 10.1 23.5 14.3 1.2 1.1 11.2 11.5 1.4 1.4
RHB Cap* 7.10 NR NR 11.1 10.1 14.3 9.4 1.6 1.4 14.8 14.9 2.4 2.6
Sector Wt. Avg 14.9 13.1 24.1 13.4 2.3 2.1 16.3 16.3 2.9 2.6
*Not under coverage ^FY10-11 refers to FY11-12

♦ Minimum common equity requirement of 4.5% for Basel 3 ... The Chart 1. Industry NPL
oversight body of the Basel Committee on Banking Supervision (RMm) Gross NPL(LHS) Gross NPLratio(RHS) Net NPLratio(RHS) (%)
17
69,000
announced yesterday its package of reforms that will require banks to 64,000 15

hold minimum common equity of 4.5%. Meanwhile, the Tier 1 capital 59,000 13

requirement will increase to 6% from the current 4%. The phase in 54,000
11
arrangement kicks off from 1 Jan 2013 with full implementation by 1 Jan 49,000
9
2015. 44,000
7
39,000

♦ … with regulatory adjustments to begin from 1 Jan 2014 ... 34,000

5

Regulatory adjustments (i.e. deductions and prudential filters) will begin 29,000 3

from 1 Jan 2014 at 20% of the required deductions from common equity. 24,000
Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
1

This will rise by 20%-pts p.a. until reaching full deduction from common Chart 2. Industry LLC
equity by 1 Jan 2018. 100 (%)

95

♦ … while capital conservation buffer set at 2.5%. In addition, banks

90

85

will be required to hold a capital conservation buffer of 2.5% to withstand 80

75

future periods of stress. This buffer will be phased in from 1 Jan 2016 70

65

beginning at 0.625% of risk-weighted assets before reaching its final level 60

of 2.5% on 1 Jan 2019, bringing the total common equity requirements to

55

50

7%. A countercyclical buffer of 0-2.5% of common equity will also be 45

40

implemented but this buffer will only be in effect when there is excess 35
Jan-99

Jan-00

Jan-01

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10
Jan-03

Jan-05

Jan-07

Jan-09
credit growth.

♦ Capital instruments to be phased out over 10-year period. Finally,

capital instruments that do not meet the criteria for inclusion in common
equity Tier 1 will be excluded from computation as of 1 Jan 2013. The
recognition of instruments that are: 1) issued by a non-joint stock
company; 2) treated as equity under accounting standards; and 3)
currently recognised as Tier-1 capital, will be capped at 90% of such
instruments outstanding on 1 Jan 2013, with the cap reducing by 10%-
pts each year until fully phased out over a 10-year period. The same
applies to the recognition of capital instruments that no longer qualify as
non-common equity Tier 1 or Tier 2 capital.

♦ Forecasts. No change to our earnings forecasts.

♦ Investment case. By our calculations, the banks under our coverage

should comfortably meet the minimum common equity ratio schedule. We
believe investors would be further comforted by the phase in periods
allowed for the capital conservation buffer as well as regulatory
adjustments, all of which would allow banks time to beef up their capital
base further. In our view, yesterday’s announcement has virtually put to David Chong, CFA
rest lingering concerns investors may have with respect to capital (603) 9280 2186
requirements for Basel III. Thus, no change to our Overweight stance. david.chong@rhb.com.my

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 Table 2 : Phase-in arrangements
(All dates are of 1 Jan)
2013 2014 2015 2016 2017 2018 2019

Minimum common equity capital ratio 3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5%
Capital conservation buffer 0.625% 1.25% 1.875% 2.5%
Minimum common equity plus buffer 3.5% 4.0% 4.5% 5.125% 5.75% 6.375% 7.0%
Phase-in deductions from common equity Tier-1 ratio 20% 40% 60% 80% 100% 100%

Minimum Tier-1 capital 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0%
Minimum Tier-1 capital plus buffer 4.5% 5.5% 6.0% 6.625% 7.25% 7.875% 8.5%

Minimum total capital 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Minimum total capital plus buffer 8.0% 8.0% 8.0% 8.625% 9.125% 9.875% 10.5%
Source: BIS

Table 3 : Tier-1 and risk-weighted capital adequacy ratios (at end-Jun ’10)
Affin AFG AMMB CIMB* EON HLB Maybank Public

Tier-1 capital ratio 11.5% 11.4% 10.0% 14.4% 10.9% 15.5% 11.1% 10.5%
RWCAR 13.2% 15.7% 16.7% 15.3% 14.1% 15.5% 14.7% 14.4%
*Ratios are for CIMB Bank.
Source: Banks

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously
known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information
contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by
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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a period
of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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