Highlights

• Oil & gas exposure still healthy. RHB?s exposure to O&G is one of the highest in the industry at 3.6% of total loan, especially exposure to Singapore?s O&G at 15% of total loan. Despite the recuperating global oil price, we echo management?s concern on the need for further provision as half of the O&G loans have been classified under watch list in FY2016. Given this, we do not expect an early writeback to the impaired accounts given the lingering weakness of the O&G sector.
• Credit cost to stay at flat. Given the weakness in both O&G and steel sector, we do not expect a faster recovery in credit cost. The accelerated credit cost in 4Q16 to 80bps will also not likely be repeated. For FY17, we target RHB?s credit cost to touch 25bps due to the absence of impairment in steel-related loans and further impairment on bonds.
• Near-term focus: (1) Loan growth. We opine that RHB?s 5% loan growth target is achievable with SME and mortgage continuing as the key drivers. Both segments posted double- digit growth whilst corporate loan segment showed no sign of pickup. SME and mortgage now account for 16% and 28% of total loans whilst that of corporate segment declines to 19.5%.
• Near-term focus: (2) Continued discipline on cost. One of the IGNITE initiatives is to further reduce expenses through 3 areas, namely admin, IT-related and cost optimization. RHB is expected to achieve <50% CIR in FY17 and further CIR moderation is expected in FY18 and FY19.
• Near-term focus: (3) Digitization trends. RHB has embarked several digital initiatives, i.e. RHB Now Mobile Banking,App, RHB Pay Anyone, RHB Online Smart Account / Account-i, RHB,Merchant Mobile Point-of-Sale; enhanced SME e-Retail solution.
• Turning mildly positive. We are turning mildly positive on RHB as we believe the cautiousness on its asset quality issue is already priced in. We expect the bank?s NPL risk to abate on proactive management of asset quality.

Risks

• Slower loan growth and continued weakness in asset quality

Forecasts

• We lift our forecasts for FY17, FY18 and FY19 by 3.9%, 15%, and 19% respectively as we impute new loan growth target and higher NOII.

Rating

HOLD (↔)

• We believe RHB?s proactive measures in managing asset quality will limit the downside risk on its share price. RHB is targeting 5% loan growth that will translate into improvement in earnings.

Valuation

• Our TP is raised to RM5.50 (previously RM5.20) as we factor in our upward forecast revision and rejig in valuation parameters. Our TP is based on Gordon Growth (WACC of 9.9% and ROE of 9.2%. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 08 May 2017