RHB Equity 360° - 29 June 2010 (Banks, B-Toto, Hai-O, AEON, Sunway, Kencana; Technical: Time Eng)

Top Story : Banks – Valuations still decent with potential for earnings to surprise - Overweight
Sector Update
- In our view, the banking sector represents the best proxy to the economic recovery. We believe the sector can help lift the market to higher grounds, underpinned by factors such as: 1) earnings growth gaining momentum; 2) valuations remain decent relative to the market and historical levels; and 3) relatively low
foreign shareholding levels.
- Looking ahead to 2H2010, we expect the sector’s earnings growth momentum to pick up steam. We also do not discount the possibility of earnings surprises ahead and believe the areas that could surprise on the upside include: 1) interest income; 2) non-interest income; and 3) impairment allowances.
- Valuation-wise, we find that the sector is still compelling with the sector weighted average FY11 PER of 12.3x as compared to the FBM KLCI’s 2011 PER of 13.8x. More importantly, the historical trading bands of the banks suggest that there is still room for valuations to expand.
- Finally, although foreign shareholding of most banks are now off their lows, the levels are still well below peaks as well as below levels at the time of the entry of strategic partners.
- Competition, we think, will remain intense. In addition, BNM had also recently announced that five new commercial banking licences will be issued. While we believe that increasing competition would put pressure on margins and overheads (e.g. staff cost), domestic banks would still be able to hold their ground and maintain their market share at around the current level.
- We maintain our Overweight rating on the sector. Maybank remains as our top pick for the sector.

RHB Equity 360° - 29 June 2010 (Banks, B-Toto, Hai-O, AEON, Sunway, Kencana; Technical: Time Eng)