Another spike in 3Q16 provisioning

Although RHB Bank saw its 3Q16 headline net profit recover by 44% qoq in the absence of a one-off asset impairment charge (as in 2Q16), it was down 6.9% qoq on a normalized basis as operating expenses and allowances crept up sequentially (credit cost saw a 22bps spike qoq). Maintain HOLD and price target at RM5.00.

Substantial recovery in 3Q16 headline net profit yoy and qoq

RHB Bank saw its 3Q16 headline net profit recover by 120% yoy in the absence of a RM309m staff ‘career-transition-scheme’ (CTS) cost (in 3Q15). Meanwhile, on a normalized basis, 3Q16 net profit actually rose by 9.6% yoy but was down 6.9% qoq, after stripping out one-offs (RM254m corporate bond impairment in 2Q16 and CTS cost in 3Q15). The results were largely in line with our and consensus estimates. For 9M16, normalized pre-provision operating profit (PPOP) rose 16% yoy driven by: i) a +4.2% yoy growth in fund-based income; and ii) a 7% yoy expansion in non-interest income (driven by trading and investment gains and a higher insurance underwriting surplus). In line with the weakness in the industry, RHB Bank saw a marginal year-to-date loan growth (+1.0%) for 3Q16, vs. a deposit growth of 5% ytd in 3Q16. The higher growth in mortgages and SME loans was negated by corporate loan repayments.

Spike in 3Q16 credit cost due to new O&G sector impaired loans

RHB Bank saw a further uptick in the gross impaired loan (GIL) ratio from 2.06% to 2.25% mainly due to new impaired loans (from Singapore) related to the oil and gas sector as well as from the manufacturing sector. This has resulted in a spike of 22bps in the 3Q16 net credit cost to 38bps as impaired loan allowances were up by 145% qoq. Meanwhile, management guided that there may not be further negative surprises on the asset quality front in 4Q16, and that the GIL ratio may remain flat.

Maintain HOLD, Price Target unchanged at RM5.00

We maintain our HOLD rating on RHB Bank with an unchanged 12-month Price Target of RM5.00 (based on a 0.83x 2017E P/BV multiple, with an ROE assumption of 9.1% and cost of equity at 10.3%). Though we expect a relatively flat earnings outlook in 4Q16 (with improved earnings postrestructuring), we note that RHB Bank’s IGNITE 2017 initiatives are gaining traction especially in retail banking (increase in wealth management sales and mortgages), business banking (above-industry SME loan growth) and increased digitisation. Downside risks: i) weaker loan growth; and ii) higher-than-expected credit costs. Upside risks: i) better-than-expected economic recovery; and ii) further cost-savings from IGNITE 2017 moves.

Source: Affin Hwang Research - 24 Nov 2016