Results

• 1Q16 net profit of RM552m (qoq: +15.9%; yoy: +74.6%) accounted for 29.5% and 26.9% of consensus and our fullyear forecasts.

• We consider the results within our expectation, as we are projecting higher provisions for the remaining quarters of 2016 (on the back of current weak economic environment).

Deviation

• Broadly in line.

Dividends

• None.

Highlights

• QoQ…1Q16 net profit increased by 15.9% to RM552m mainly on a 1.6% increase in net interest income (which in turn was driven by a 3bps expansion in NIM), lower overhead expenses and provisions, which collectively more than mitigated lower NOII.

• Gross loans declined by 1.1% qoq to RM149.6bn, and the decline was due mainly to decline in the purchase of securities segment and repayment of a large corporate repayment (amounted to RM1bn), which more than offset a RM1.8bn increase in property segment. Lower loan base, coupled with a 0.4% qoq decline in deposits (as a result of the group continues to focus on liquidity management) have resulted in LDR declining to 93.9% (from 94.6% in 4Q15).

• Asset quality improved… with absolute IL and GIL declining by 4% and 6bps qoq to RM2.73bn and 1.82% respectively. Loan loss provisions and credit cost declined to RM80.2m and 5.3bps (from RM234.5m and 15.6bps in 4Q15) mainly on lower IA (recall, the higher IA incurred in 4Q15 was due mainly to lumpy provisions for 2 customers in steel industry).

• Update on internal reorganization… Following High Court’s recent approval for the distribution of RHB Bank shares (1.3 RHB Bank shares for every RHB Cap share), RHB Bank is expected to be listed by end-Jun 2016.

Risks

• Unexpected jump in impai red loans and lower than expected loan growth as well as impact from Basel III.

Forecasts

• Maintained

Rating

BUY

Positives

• Valuations still lagging behind; OSK merger and IGNITE 2017 transformation already bearing fruits; Bank@ Work; Rights issue and reorganization will enhance tax efficiency, eliminate goodwill, enhance interest savings as well as higher ROE and capital ratios; new reframed strategy to focus on performance and profitability.

Negatives

• Low liquidity, and ROE at lower end among peers

Valuation

• Maintain BUY with unchanged TP of RM6.96 (based on Gordon Growth with ROE of 8.8% and WACC of 9.4%).

Source: Hong Leong Investment Bank Research - 26 May 2016