• We maintain our BUY call on RHB Bank with an unchanged fair value of RM6.10/share (0.9x FY19 BV/share) supported by an ROE of 8.9%. Valuation continues to be compelling with the stock trading at 0.8x P/BV while its asset quality is improving with lower provisions. No change to our earnings estimate.

• The group held an analyst briefing last Friday to provide updates on its group business banking (GBB) division. Recall that the group’s 5-year (2018 to 2022) FIT22 strategy was to strengthen Malaysia and win in targeted segments; focus on niche overseas while exploring strategic partnerships and build a wining business model. For SMEs, the group will focus on growing the small business segment as well as build a connected ecosystem business to differentiate itself from its peers.

• The group aims to be the preferred SME and transaction bank in Malaysia. By 2022, it seeks to be a top 3 SME bank in Malaysia from the present ranking of No.4. Currently, SME loans contribute to circa 16.0% of the group’s total domestic loans. It has set the target to be raised to 20.0% by 2022. On its journey to 2022, GBB will grow its loans by double digits and the division aims to have 65.0% its total assets comprising assets from the small business segment. Also, it intends to derive 30% of GBB’s sales from digital channels and attain an above industry net promoter score.

• We understand that in 1HFY18, GBB’s loans grew 7.4%YoY with 56.0% of the increase supported by retail SMEs credits. This was higher than the SME industry’s loan growth of 4.3%YoY. The group has an SME market share of 9.0%. GBB registered a CAGR of 11.0% in loans growth in the past five years (FY13 to FY17) while its customer deposits grew by a CAGR of 4.2% over the same period supported by term deposits.

• Not only the group sees small businesses growing, it also sees it as a profitable segment. SMEs will remain a signification contributor to Malaysia’s GDP as well as continue to outperform the domestic economic growth rate.

• The group has a strong network distribution with 301 and 46 sales personnel for business banking and transaction banking respectively. Besides, the group also has 31 business centres, 198 branches and 22 trade windows.

• As at the end of 1HFY18, loans to wholesale, retail, restaurant & hotels were the largest segment accounting for 31.0% of the total loans. This was followed by its exposure to the construction, real estate and manufacturing sectors at 15.0%, 14.0% and 14.0% respectively of the group’s total loans. A total of 55.0% of GBB’s loans are for working capital with non-residential property loans (mainly industrial building & factories, land and shophouses) making up 41.0% of its loans. The group is selective on property financing and is cautious on loans for purchase of commercial complexes.

• To build on its competitive advantage in business banking, we gather that the group will leverage its credit partners, CGC and Syarikat Jaminan Pembiayaan Perniagaan Bhd (SJPP). Also, it will tap on BNM’s funding scheme for small businesses to expand its SME assets. Through its digital initiatives and use of analytics, the group aims to improve its productivity for SME customers.

• The group has launched the self-service online loans application for small and micro SMEs. This will allow it to extend its reach to the smaller SMEs. Moreover, it will improve its productivity by facilitating loans to be approved in 2 days and disbursed in 5 days after the application.

• The group has also employed I-Smart tools with relationship managers of business banking, utilizing tablets to improve customer service and advisory services. A more structured approach has been adopted to meet customers’ needs.

• We understand that circa 80.0% of GBB’s loans are secured with the remaining 20.0% unsecured. Nevertheless, for the latter, the risk is mitigated by credits partners’ guarantee, in particularly CGC. The security arrangement for its loans to the small business segment mirrors that of the overall GBB.

• Management hinted that post-GE14, sentiment from businesses has improved with higher investments (CAPEX).

• The average gross yield for SME loans is 5.0-6.0%.

• In view of the fact that a portion of the smaller SME loans are unsecured, the group will price in risk with the higher lending rate around the teens for loans to the smaller businesses. This provides an improvement in asset yield and at the same time mitigating the risk through guarantees by CGC or SJPP.

• GBB’s GIL ratio of 3.20% was higher than that of the group’s 2.33% in 1HFY18. This was partly contributed by the older loans which thereafter FY15, the asset quality of GBB’s loans has improved with a stringent credit underwriting.

• The group has allocated more than RM200mil for IT spend this year up until the next 3 to 4 years.

• Eventually, we understand the the group intends to have a loan mix of 55.0% retail loans, 25.0% and 20.0% business banking and corporate loans respectively.

Source: AmInvest Research - 1 Oct 2018