RHB announced on Bursa that it has ended talks with Tokio Marine to dispose the 94.7% stake of its insurance arm. While unfortunate that both parties were not able to come to an agreement, we are unperturbed with this outcome as: (i) RHB would not need to find ways to plug the profit gap left by its insurance unit i.e. c.2-3% of its earnings (if the deal materialized) and (ii) it was not made worse off vs its original state. Forecasts were unchanged. In our view, the stock’s risk reward profile is still skewed to the upside given: (i) its robust CET1 ratio which permits the ability to divvy even more and (ii) RHB is one of the very few local banks now with the ability to churn decent profit growth rate. Maintain BUY and GGM-TP of RM6.45, based on 0.99x 2020 P/B.

NEWSBREAK

RHB announced that it has ended talks with Tokio Marine to dispose the 94.7% stake of its insurance arm.

HLIB’s VIEW

Not worse off. It is unfortunate that both sides were unable to come to an agreement. Recall, we initially welcome the potential sale effort considering RHB can then focus more on growing its core banking businesses. Also, we estimated RHB stands to book in disposal gains of RM700-800m (using Dec-18’s data), assuming management was able to fetch 2.35x P/B for its insurance unit (in line with the historical average M&A transaction involving Malaysian insurers). Nevertheless, we are unperturbed with this negotiation outcome as: (i) RHB would not need to find ways to plug the profit gap left by its insurance unit i.e. c.2-3% of its earnings (if the deal materialized) and (ii) it was not made worse off vs its original state.

Forecast. Unchanged.

Retain BUY and GGM-TP of RM6.45, based on 0.99x 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 0.90x and the sector’s 1.00x. In our opinion, the valuation is fair, seeing RHB’s current ROE generation is similar to its 5-year mean and sector average. We continue to like the stock for its appealing risk-reward profile given strong CET1 ratio of 16.9% (vs sector’s 13.8%), which permits the ability to divvy even more; we note that RHB’s current dividend payout ratio of 40% is still below the sector average of 45%. Also, it is one of the very few domestic banks now with the ability to churn decent profit growth rate (3% vs sector: flat).

Source: Hong Leong Investment Bank Research - 13 Dec 2019