Banks - A renewed catalyst – Fee income

We foresee stronger BCHB and AMMB price performance into 2HCY09 with a renewed catalyst - fee incomes

· The banks' 1Q09 results were generally in line with or beat our forecasts, and in turn our forecasts were above consensus. 4 banks reported results which are inline with forecast (Public Bank, Maybank, AMMB and Hong Leong Bank on better diversify revenue sources), one with surprise (BCHB on treasury gains) and two disappointments (RHBC and AFG on asset quality deterioration). However, we conclude positively from the 1QCY09 reporting season that the majority of the banks were not hit by the rise of NPLs and compression in net interest margin.

· The start of an economic bottoming process is becoming move evident day by day. Aggressive policy actions have significantly reinforced prospects of eventual recovery. Our optimistic capital market view well as we emphasize the importance of looking beyond the current crisis.

· We opine that the market is at a pivotal point where bad news and earnings downgrades are being ignored. Such behaviors will continue into the new market upswing, causing prices to run ahead of earnings upgrades. Consequently, P/BV multiples should expand to what may be unjustified levels, especially when upward earnings revisions play catch-up. In the past three bear market recoveries (1998, 2001, and 2003), we saw 12-month forward consensus P/BV spiked by 0.5x-1.7x before markets had a "reality check" on earnings outlook.

· We believe investment banks, like BCHB and AMMB, will continue to be outperformers in this environment and generate decent quarterly profits from 2QCY09 onwards. Earnings will be driven by strong equity market performance, which echoes our recent upgrade of Bursa (see Bursa report dated 6 May 2009 titled “From Bear to Bull”). Going forward, equity market should be robust, which would benefit strong prime brokerage players like BCHB and AMMB.