Foreign boys not spared a 20% 1Q earnings decline. The combined net profit of the five major foreign banks in Malaysia fell 19.7% yoy to RM824.6m in 1Q09, worse than the 14% slide recorded by the local banks. Clearly, the foreign boys are not spared the impact of the economic downturn, with earnings dents coming primarily from (1) a 1.3% yoy drop in net interest income, (2) 25% slump in non- interest income, and (3) 23% jump in loan loss provisioning (LLP). • Foreign banks’ loan growth trailing local banks’. As expected, foreign banks recorded slower net loan growth of 3.1% yoy in Mar 09 compared to 12% for local banks’ domestic lending. The performance of foreign banks was pulled down by a 6.8% contraction in Citibank’s loan base, due primarily to a drop in property and business loans. Other major foreign banks registered single-digit loan growth ranging from 3.3% (for UOB) to 8.7% (for OCBC). • Higher NPL ratios and credit costs. Against the backdrop of a grim economic climate in 1Q09, all major foreign banks saw a rise in their net NPL ratios. The blended net NPL ratio of these five banks increased from 1.68% in Dec 08 to 1.81% in Mar 09, lower than the industry’s 2.2%. The hike in NPL ratios led to a 23% yoy surge in 1Q09 LLP. • Better performance by local banks. In 1Q09, local banks outperformed their foreign peers in the areas of (1) net profit – 14.2% yoy drop vs. 19.7% for foreign banks, (2) non-interest income – down 7.1% yoy vs. 25.3% for foreign banks despite their higher exposure to poor investment banking income, and (3) NPL ratios – a few local banks, i.e. Maybank, Public Bank, AMMB and Alliance managed to contain their NPL ratios while qoq rises were evident for all the major foreign banks. • Maintain NEUTRAL. Foreign banks’ poor 1Q09 financial results reflect the adverse operating environment. We take heart in the outperformance of the local banks during these difficult times as it suggests that the improvements in local banks’ operations, especially in the area of risk management, have helped them to weather the economic downturn. On this note, we are maintaining our NEUTRAL stance on Malaysian banks as local banks may trump our and market expectations in countering the slowdown in loan growth and the uptick in NPLs. Our top pick for the sector remains Public Bank.