Highlights

• 1H17 results inline… To recap, the spike in loan-loss provision by +18.5% YoY to RM165m (mainly on account of RM108m Singapore-O&G bond) was mitigated by higher NII by +3.8% YoY and declining opex by -2.5% YoY, delivering net profit of RM1bn (+11% YoY) at 50.5% and 49.7% of HLIB and consensus respectively.
• Gradual progress in asse t quality… Excluding the O&G account that had been written-off, absolute gross impaired loan continued to progress well with RM100m of reduction, lowering GIL ratio to 2.29% in 2Q17 (1Q17: 2.39%). We continue to remain watchful on RHB credit cost despite its exposure on O&G easing to 3.7% of total loans. We note that under the watchlist category has also declined to RM1.8bn as at 2Q17 (1Q17: RM2.4bn).
• Higher LLC to protect earnings… Significant effort has been made in lifting LLC to 81.4%, which should provide earnings protection during rainy days. RHB’s LLC improved by increasing its regulatory reserves via retained earnings and in preparation of MFRS9 implementation in 2018.
• Loan momentum sustainable… RHB’s 1H17 loan traction was in line with management guidance at an annualized growth of 3.2% which is ahead of 5% FY17 guidance. Our loan growth assumption stands at 5.3%, in line with management guidance, and is likely supported by mortgage and SME loans.
• Resumption in investment banking… We opine that RHB’s investment banking business may regain traction after the disruption from the aborted attempt of merger. In Jul-17, RHB completed the transfer of Treasury Business and Structured Lending Business from RHB Investment Bank to RHB Bank. Following from this, we expect its investment bank unit will resume delivering stable NOII to RHB post-the failed merger.
• Not ruling out M&A… We do not discount the possibility of M&A for RHB as existing financial institutions continue to look for opportunity to enlarge market dominance. Moreover, current valuations for Malaysian banks are below their average book value, making M&A attractive for now than ever.

Risks

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

Forecasts

• Maintained.

Rating

HOLD (↔)

• Operationally, we are turning more positive on RHB due to various progresses made to achieve IGNITE2017. That said, we remain concerned on RHB’s asset quality which had surprised with additional impairment for two quarters. Should the asset quality issue is addressed in upcoming 3Q17 results, it may represent a re-rating catalyst for RHB.

Valuation

• We maintain our TP at RM5.50. Our TP is derived from GGM model which comprises i) WACC of 9.9% ii) ROE of 9.2%. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 16 Oct 2017