Malaysia Banks - NIM outperformance in 2Q10

NIM outperformance in 2Q10

1. Expect 2Q10 earnings to grow 6% q-o-q driven by net interest income on higher NIM
2. Industry loans grew 5% YTD May 10; 2H stronger with approvals up 13% y-o-y
3. Maybank (Buy, RM9.10) offers superior growth with a twist of Indonesia earnings infusion while RHB Cap (Buy, TP RM7.30) stands out as a value play

Stronger 2Q10 driven by topline growth. We expect 2Q net profit to grow 6% q-o-q, driven by net interest income as NIM should pick up pace following the previous two OPR hikes in Mar and May 10. With another 25bps OPR hike in July, further uptick in NIM for the rest of 2010 is possible, assuming minimal competition for deposits. We think the direction of NIM hinges on the respective banks’ asset and liability management and their pricing strategies amid competition. We understand that lending spreads for key sectors such as mortgages and hire-purchase loans were maintained following price rationalization earlier this year, which would lend support in holding up loan yields.

Strong loan growth momentum continues. Up to May, industry total loans grew by 5%. On a y-o-y basis, loans grew 12% across segments, while applications and approvals grew 14% y-o-y and 13% y-o-y, respectively, indicating robust loan pipeline in 2H10. We expect the loan growth momentum to continue (FY10 forecast is 11%), supported by the improving domestic economic prospects. So far, OPR has been raised three times by 75 bps to 2.75%. Our economist is expecting another 25 bps hike by year end. The stance taken by BNM on OPR hikes imply that the Malaysian economy is on the growth trajectory. This bodes well with increasing demand for fund raising (loans and debt issuances) which is positive for banks.

Top picks - Maybank and RHB Cap. Our high conviction picks are Maybank (Buy, TP RM9.10) and RHB Cap (Buy, TP RM7.30). For Maybank, we expect loan growth of 12-15% for FY10-12F (above industry average of 12%), supported by its domestic franchise, especially in hire-purchase and mortgages, and its Indonesia prospects. RHB Cap is the cheapest stock in our Malaysia large cap universe at only 9x FY11 PE, and 1.2x FY11 BV vs sector average of 14x
FY11 PE and 1.9x FY11 BV, while its ROE profile is respectable at 14-15%.

Report from
HWANGDBS Vickers Research Sdn Bhd (128540 U)