HwangDBSVR: Maintain "BUY" for MAYBANK and RHB Cap

Indonesia is the next growth story for Malaysian banks

Banking sector
Maintain buy on Malayan Banking Bhd with unchanged target price of RM9.10, maintain buy with unchanged target price of RM7.30 on RHB Capital Bhd: Our recent visit to Indonesia reinforced our view of robust prospects for Indonesian banks. We expect industry loans to grow 20% in 2010 compared to 10% in 2009, supported by positive economic sentiment, benign inflation, and relatively low interest rates.

Up to April 10, total loans grew 3% and were 15% higher than the year before, while year-to-date (YTD) loan approvals surged 111%. Notably, consumer loans, which comprise 33% of total loans, grew strongly by 8% YTD April 10 or 25% year-on-year (y-o-y). Indonesia has low penetration of the banking population, and rising domestic demand points to robust growth potential especially in the consumer, SME and commercial space.

We believe that the banks are excellent proxies to the economic recovery with the DBS economist projecting 2010 gross domestic product (GDP) growth at 5.5% for Indonesia. Asset quality is in check with non-performing-loan ratio improving further to 3.2% (March: 3.3%).

The Indonesian operations of Maybank and RHB Cap (once Bank Mestika acquisition is completed) can provide a boost to growth. Indonesia banks generally deliver higher net-interest-margin, currently averaging 5% to 6% versus regional peers’ 2% to 3% and offer return-on-equity that are superior to regional peers’ (26% versus 14%).

Our high conviction picks are Maybank and RHB Cap.

We believe the market has not priced in prospects for Bank Internasional Indonesia’s (BII) 51% subsidiary of Maybank acquired in September 2008 and RHB Cap’s proposed acquisition of 89% of PT Bank Mestika Dharma expected to be completed. For Maybank, we expect a loan growth of 12% to 15% for financial year ended June 30, 2010 (FY2010) to FY2012 above industry average of 8% to 9%, supported by its domestic franchise, especially in hirepurchase and mortgages, and Indonesia prospects.

BII is focusing on branches’ performance and productivity via various improvement programs and staff initiatives. Up to March, BII expanded its network by 11 branches to 266, and added 19 automated-teller-machines (ATMs) to bring its ATM network to 806. Loans grew 2% quarter-on-quarter (q-o-q) and 8% y-o-y.

The motorcycle financing business under WOM (BII’s 50.8%-owned subsidiary) grew 25% q-o-q and reported significant improvement in asset quality, with delinquency rate (90 days) falling to 2.2% from 2.6% in December 2009 as a result of step up in its monitoring and recovery process.

We believe BII’s growth is on track after it registered net profit of Rp208 billion or RM75 million (46% gain q-o-q) in the March quarter.

RHB Cap is the cheapest stock in our Malaysia large cap universe at only eight times forward price-to-earnings-ratio (PE) and 1.2 times financial year ending Dec 31, 2011 book value versus sector average of 1.7 times, and its return on equity profile is respectable at 14% to15%.

Maybank and RHB Cap — which trade at lower multiples compared to Indonesian banks’ average forward 2.8 times book value, provide a cheaper exposure to the Indonesian growth story. — HwangDBS Vickers Research, July 12



This article appeared in The Edge Financial Daily, July 13, 2010.