RHB Bank’s 9M17 net profit of RM1.49bn (+4.9% yoy) was in line with Affin’s and consensus estimates. Net profit in 3Q17 eased by 2.4% qoq (-3.3% yoy) as management had set aside further provisions (3Q17 credit cost rose by 33bps qoq to circa 42bps). In light of the upcoming adoption of MFRS 9 standards, RHB has increased its regulatory reserves level further – LLC stood at 93.6% as at 30 Sept17. Maintain HOLD and TP at RM5.35 (0.87x P/BV target).

9M17 Net Profit in Line With Estimates; 3Q17 Net Profit -2.4% Qoq

RHB Bank’s (RHB) 9M17 net profit came in at RM1.49bn (+4.9% yoy) driven by sharply lower impairments (in the O&G sector and other corporate accounts) vs. 9M16 (which was hit by the Swiber bonds impairment of RM250m). Results were within our and consensus estimates. Operationally, RHB’s 9M17 pre-provision operating profit declined 1.6% yoy arising from: i) a 7.3% yoy lower non-interest income; ii) weak fund-based income growth (+3.4% yoy), dampened by the cutback in higher-yielding ASB loan financing; and iii) 2% yoy growth in opex. Overall, RHB’s funding pressure eased, driven by: i) a conscious move to manage down pricey deposit growth and boost lower-cost CASA growth (+12% yoy as at Sept17); and ii) a decline in total debt-capital funding (- 20% yoy). This resulted in a steady 9M17 NIM, which averaged at circa 2.18% against 2.19% for 9M16. Meanwhile, 3Q17 net profit eased by 2.4% qoq (-3.3% yoy) due to further provisions on collective allowance.

Further Provisions Expected in 4Q17, Credit Cost Guidance at 35bps

Based on the key takeaways from the RHB conference call, management will continue its initiative to boost the group’s impaired loan cover to 100% from 93.6% as at Sept17 (June17: 81.4%) and has maintained its credit cost guidance of 35bps (optimistically, may end up below 35bps). Operationally, should loan growth continue expanding in 4Q17 (driven by the SME and non-retail sectors) and with the NIM intact, we believe that 4Q17 should fall in line with expectations.

Maintaining HOLD Call and TP of RM5.35

Reiterate HOLD. Our Gordon Growth Model-based 12-month Price Target of RM5.35 (at a 2018E P/BV of 0.87x) remains unchanged, underpinned by a 2018E ROE of 8.5% and cost of equity of 9%. Upside risks: revenue growth and cost savings from IGNITE 2017; increased retail/ SME banking penetration. Downside risk: subdued loan growth.

Source: Affin Hwang Research - 28 Nov 2017