1Q18 results are above our estimates largely due to stronger-than-expected trading and forex income. However, a spike in opex led to a flattish CIR despite a strong revenue growth. Maintain HOLD on RHB Bank with a higher target price of RM5.55 (9.0% ROE, 0.90x FY18F P/B) post earnings revision to factor in 1Q18’s strong trading income gains. The potential normalisation in NIM and higher credit cost could see 1Q18’s strong earnings tapering off. Entry price: RM5.00.

RESULTS

• 1Q18 above expectations. RHB Bank reported 1Q18 net profit of RM590.8m (+18.1% yoy, +28.2% qoq). Annualised earnings were 10% above both consensus and our fullyear forecasts. This was driven largely by: a) strong trading and forex income growth, b) NIM expansion from recent 25bp OPR hike, and c) lower-than-expected net credit cost of 28bp vs our full-year estimates of 32bp.

• Sequential NIM and credit cost trends should reverse in subsequent quarters. Management had guided that the strong NIM expansion of 10bp qoq will taper off as deposits starts to re-price upwards following the OPR hike, while net credit cost is also expected to gradually increase closer towards the 30bp level as MFRS9 takes greater effect with a larger loans build-up post Day 1 implementation.
• High opex led to flattish CIR despite strong revenue growth. Opex expanded 13.2% yoy. As such, despite the strong revenue growth of 13.8% yoy in 1Q18, CIR was flat at 48.8%. There was a broad-based increase in cost: staff cost (+15.4% yoy), IT cost (+36.8% yoy) and marketing expense (+8.5% yoy). However, management indicated that the higher overall cost was partially front-loaded in nature as they took opportunity of 1Q18’s strong trading income gains to book in such costs. Management had alluded to more normalised run rates in the subsequent quarters as 1Q18’s strong revenue growth could taper off due to the abovementioned factors.
• Impact of MFRS9. Day 1 adoption of MFRS9 resulted in a 74% yoy increase in provisions taken through the balance sheet via retained earnings, which consequently led to a 20bp qoq decline in fully-loaded CET1 to 13.7%. LLC inclusive of regulatory reserves increased marginally from 101.6% to 106.7% post MFRS9 adoption. Apart from provision, gross impaired loans inched up 7.0% qoq on day 1 of MFRS9 adoption. This was largely driven by the adoption of MFRS9 increasing the judgmental trigger for GIL recognition for loans in transition between stage 2 to 3. However, the provision impact from this has been largely accounted for via its balance sheet on day 1 adoption while GIL ratio has improved from 2.38% on day 1 of MFRS9 adoption to 2.29% as at end-Mar 18. This led to slightly lower-than-expected net credit cost of 28bp in 1Q18. That said, management expects full-year net credit cost to gradually trend closer to 30bp level. We have conservatively maintained our 32bp FY18 net credit cost assumption for now.

EARNINGS REVISION/RISK

• Taking into account the lower net credit cost and stronger forex and trading gains in 1Q18 we raise our FY18 earnings by 4%.

VALUATION/RECOMMENDATION

• Maintain HOLD with a higher target price of RM5.55 (9.0% ROE, 0.90x FY18F P/B) post earnings revision. We note that 1Q18’s strong revenue growth was partly fuelled by potentially volatile trading and forex income gains, and hence may not be sustainable over the course of the year.

Source: UOB Kay Hian Research - 1 Jun 2018