News

• RHB Bank will assume the listing status of RHB Capital effective 28 Jun 2016.

• Recall, the trading of RHB Capital’s shares was suspended since 31 May 2016 to facilitate the distribution and capital repayment (1.3 RHB Bank shares for every 1 RHB Cap share).

Financial impact

• We maintain our positive stance on the internal restructuring exercise, as the exercise will result in: (1) Accretive earnings and ROE arising from interest expense savings (of circa RM135m); and (2) Improved capital ratios (post exercise, CET-1 and total capital ratios will improve to 12.5% and 17.2% from 12% and 16.5% respectively at end-FY15).

Catalysts

• Gaining more traction in cost rationalization;

• Completion of internal reorganization (which will result in interest expense savings and improved capital ratios).

Risks

• Unexpected jump in impaired 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, ROE at lower end among peers and EPS dilution from rights issue.

Valuation

• Target price maintained at RM6.96 (Gordon Growth with ROE of 8.8% and WACC of 9.4%). Maintain BUY, given its inexpensive valuations, which lag peers and below book.

• While we continue to like the stock, we believe there could be near term overhang on RHB Bank shares, given the recent market volatility (we note that KL Financial Index has shed by ~ 1.4% during the suspension of RHB Cap shares).

Source: Hong Leong Investment Bank Research - 28 Jun 2016