No Surprises; Asset-quality Concerns Ease

RHB Bank’s 1Q17 net profit of RM500m (-11% yoy, +91.5% qoq) was in line with expectations. The silver lining in 1Q17 was mainly a sequential decline in the cost-to-income ratio (49%) and a higher CASA ratio at 26.2% (+2ppts yoy). Asset quality, reflected by the GIL ratio, appears stable qoq though it has deteriorated vs. 1Q16. The additional allowances yoy were from business banking and certain O&G sector accounts. Overall, we believe the economic outlook is turning more positive and should bode well for the sector. Maintain HOLD, PT raised to RM5.35 from RM5.20 as we roll forward to CY18E.

1Q17 Net Profit Dampened by Higher Allowances Yoy, But +91.5% Qoq

RHB Bank (RHB) saw a rebound in qoq net profit by 91.5% to RM500.3m, though it was down by 11.5% yoy. The overall results were within our and market expectations. At the operating level, RHB’s 1Q17’s net income was marginally lower by 1.7% yoy though it improved by 5.2% qoq (on markedto-market gains). 1Q17 fund-based income (-1.4% yoy, -2.2% qoq) was mainly affected by weaker performance at retail banking and corporate banking, and the group NIM is holding up well, though down by 1bp qoq to 2.17% (1Q16: 2.22%). Higher impaired loan allowances in 1Q17 of RM132.4m (+64.8% yoy) were driven primarily by the business banking division and a few oil & gas sector corporate accounts which have been classified as impaired since last year. Compared to 4Q16, allowances declined sharply by 57% and the outlook appears more stable. Management has also guided that 2017’s credit cost could possibly average below the 35bps recorded in 1Q17 (1Q16: 22bps; 4Q16: 79bps). This could imply upside to our current assumption of 44bps in 2017.

Industry Outlook Turning More Positive

Overall, we are of the view that there will be more opportunities for growth as indicated by the stronger 1Q17 GDP growth of 5.6% and the recovery in Malaysia export growth. A more robust deal pipeline for loans and capital markets should bode well for the industry. Presently, our loan growth expectation for RHB remains unchanged at 5-6% p.a. (FY17-19E).

Maintain HOLD; PT Raised to RM5.35 (based on 0.87x 2018E P/BV)

We maintain our HOLD rating and raise our Gordon Growth-derived 12M price target to RM5.35 from RM5.20, now based on a 2018E 0.87x P/BV multiple (previously 0.9x). We lower our 2018 ROE assumption to 8.5% from 8.6%; our cost of equity remains 9%. We estimate that a total redemption of RM3bn in Tier-2 sub-notes and senior debt, coupled with a new Sukuk issue of RM250m (at 4.88%), would result in annual interest expense savings of RM76m, while NIM would improve to 2.12-14% in FY17-19. Hence, we increase our FY17-19E EPS by 1.4-2.5%.

Source: Affin Hwang Research - 24 May 2017