RHB announced on Bursa that it is commencing negotiations with Tokio Marine to dispose the 94.7% stake of its insurance arm. This did not come as a surprise given it is a non-core asset and talks of a sale had surfaced since 2015-16. Also, we welcome this move as RHB would then be able to focus more on growing its core banking businesses. At 2.35x P/B (historical average M&A transaction involving Malaysian insurance), we estimate that RHB could potentially book in RM700-800m disposal gains. Besides, there won’t be material impact to overall earnings as the insurance arm only contributes c.2-3% to its bottom-line. For now, no change to our forecasts. We continue to like RHB for its appealing risk reward profile given strong CET1 ratio of >15%, which allows room to divvy even more. Retain BUY with GGM-TP of RM6.45, based on 0.98x 2020 P/B.

NEWSBREAK

RHB announced that it is commencing negotiations with Tokio Marine to dispose the 94.7% stake of its insurance arm.

HLIB’s VIEW

RM1.3-1.4b potential disposal gain. Not surprising as this is a non-core asset and talks of disposal had surfaced since 2015-16. Overall, we welcome the potential sale effort considering RHB would then be able to focus more on growing its core banking businesses. That said, details of the deal are limited for now. If we were to assume management is capable of fetching 2.35x P/B for its insurance unit (in line with the historical average M&A transaction involving Malaysian insurers), RHB is poised to book in disposal gains of RM700-800m (using Dec-18’s data).

Immaterial earnings impact. There won’t be any material impact to earnings as the insurance arm only contributes c.2-3% to its bottom-line. Also, we believe RHB can easily plug the hole through potential bancassurance distribution agreement with Tokio Marine, since they both already have an existing working relationship for life insurance products. Besides, the cash proceeds could also be used to (i) plowback to its commercial banking operations, (ii) reinvest in debt securities to generate returns, or even (iii) distribute as special dividends.

Forecast. Unchanged.

Retain BUY and GGM-TP of RM6.45, based on 0.98x 2020 P/B with assumptions of 9.6% ROE, 9.7% COE, and 3.0% LTG. This is largely in line to its 5-year average of 0.92x but below the sector’s 1.07x. The discount is justifiable by its weak ROE, which is 1ppt beneath industry mean. We continue to like RHB for its appealing risk-reward profile given strong CET1 ratio of 16.1% (vs sector’s 13.4%), which allows room to divvy even more; we note that RHB’s current dividend payout ratio of 36% is still below the sector average of 45% (at this level, dividend yield of c.5% would make RHB an even more attractive stock to own).

Source: Hong Leong Investment Bank Research - 31 Jul 2019