Results

• Below expectations… 4Q16 net profit weakened to RM261m (-17.4% YoY, -48.3% QoQ), bringing FY16 net profit to RM1.6bn (+0.1% YoY). FY16 PAT was below ours and consensus respectively, accounting 87.5% and 89.3% of ours and consensus respectively.

Deviation

• Due to higher than expected loan-loss-provision of RM595m (+73.3% YoY).

Dividends

• Declared final dividend of 7 sen, lifting FY16 dividend to 12 sen (FY15: 16.3 sen), translating into 29% payout.

Highlights

• Against FY16 KPIs… RHB missed 4 KPIs namely ROE, loans growth, Gil and overseas contribution whilst CASA and CIR remained on track.
• 4Q16... 4Q16 net profit of RM261m was bogged down by NOII of RM322m (-42.6% YoY, -41.6% QoQ) and higher LLP of RM308m (+32% YoY, +111% QoQ). Lower NOII was on the back of smaller forex income of RM28m (-74% YoY, -60% QoQ). Notably, expenses were well contained in 4Q16 driven by lower personnel cost. Credit cost in 4Q16 soared by 20bps due to higher IA allowance.
• FY16. Net profit was flat RM1.6bn (-1% YoY) as contained operating cost was offset by doubling LLP to RM595m and lower NOII of RM1.6bn (-17%). NOII was derailed by fee income (-10.7% YoY) and MTM (-269% YoY). LLP soared due to IA impairment of RM475m (+102% YoY) related to O&G and steel accounts in Singapore and Malaysia.
• Loans base grew only by 2% YoY underpinned by business banking segment that rising 12% YoY but was offset by wholesale banking contribution which fell 5% YoY. Geographically, overseas contributed 6% growth whilst domestic loan growth was at 2% YoY. For domestic market, RHB still maintains its focus in the mortgage while lowering its exposure in auto finance loan.
• LDR dropped 1.1ppts to 93.1% as deposit growth outpaced loan expansion. CASA improved by 1ppt as it grew 12.1% and improved to 25.6%.
• Asset quality deteriorated severely as GIL tumbled from 2.25% to 2.43%. Loan loss coverage weakened to 74.7% vs. 83.9% in FY15.

Risks

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

Forecasts

• We lower our forecast for FY17, FY18 and FY19 by 2.4% 4.6% 11.1% respectively due to lower loan and deposit growth targets.

Rating

HOLD (↓)

• As asset quality deteriorated in 4Q16, we turn more cautious on RHB Bank’s outlook despite its swift progress in delivering its IGNITE targets. Earnings will only be lifted by recovery of impairments. Downgrade to HOLD.

Valuation

• Our TP is lowered to RM5.20 as we cut our earnings forecasts to arrive at lower ROE. Our TP is derived from 8.8x ROE and 9.6% WACC. Downgrade to HOLD.

Source: Hong Leong Investment Bank Research - 27 Feb 2017