Period  3Q13/9M13

Actual vs. Expectations The reported 9M13 net profit of RM1326.7m accounted for 77% and 72% of the consensus forecast of RM1,731m and our estimate of RMRM1,845.6.0m. As such, the results are deemed broadly in-line with expectations.

 Note that this is a much stronger quarter vis-à-vis the previous quarter as we saw much lower loan loss impairment (-79.3% QoQ) in 3Q13. Recall that there was a RM409m classification of corporate loans to become impaired loans in 2Q13.

 However, the Group has missed its ROE target again. Its annualised ROE of 11.3% is still lower than the ROE of 12% (which was revised from 13% in 2Q13).

Dividends  No interim dividend is declared, as expected, during the quarter after it paid a 6sen interim dividend in 2Q13. We expect the group to pay 17sen dividend in final financial quarter, making the full-year dividend to register at 23sen.

Key Results Highlights

9M13 vs. 9M12 Total income grew 25.0% YoY driven by strong growth in non-interest (+60.7%) and Islamic banking (+22.4%) incomes. The jump in noninterest income was due to the acquisition of OSKIB while higher Islamic Banking income was mainly due to higher net funding income on the back of 18.2% financing growth YoY.

 As for net interest income, it grew 10.2% YoY driven by 13.9% YoY growth in gross loan, which has surpassed management’s target of 12% and our full-year loan growth estimate of 11.8%. The growth was driven by household (purchase of securities +44.5% YoY, purchase of nonresidential landed properties +28.7% & personal use +22.2%) as well as commercial & corporate loans (for working capital +20.9%).

 We also notice that effective balance sheet management efforts have helped to minimise the impact of a competitive pricing environment, enabling NIM to stabilise (in fact, NIM increased by 1bps to 2.44% from 2.43 during 9M12 as per our estimate). We understand that the fall-short in deposit growth of 8.7% YoY to management’s target of 10% was not a concern as it was done by purpose to increase its loan-to-deposit (LD) ratio (to 88.9% during 9M13 from 84.8% in the period of 9M12), hence lowering cost of funding and stabilising NIM.

 Operating expenses jumped 41.3% YoY due to full-period impact of OSKIB acquisition and higher sales commission linked to stronger business volume. The cost-to-income (CTI) ratio increased to 51.5% from 45.5% in 9M12. While the management maintains their CTI target of <50%. While this could be an up-hill task, it is not entirely impossible as the CTI during the quarter was recorded at 49.7% in contrast to 52.2% in 2Q13, a sign of improvement.

 Loan loss impairment also surged >500% YoY due to classification of a large corporate account of RM409m (to impaired loans) in 2Q13. Hence, annualised credit charge ratio spiked to 38bps from 7bps in 9M12. The management is guided for a full-year credit charge-off rate of 30-35bps, which is in-line with our estimate of 33bps.

 Gross impaired loan (GIL) ratio improved to 2.92% from 3.12% during the period 9M12. Nonetheless, its loan loss coverage (LLC) ratio remains relatively low at 59.6% (vs. 66.0% in 9M12) as compared to industry average of ~100%.

 Capital adequacy of the Group remains comfortably above regulatory requirements. The Tier 1 and Total Capital ratios stood at 12.3% and 14.4%, respectively, as of end-Sep13 (vs. 12.5% and 15.7% as of end-Sep12).

 All told, the Group has missed its ROE target again. Its annualised ROE of 11.3% is still lower than the ROE of 12% (which was revised from 13% in 2Q13).

3Q13 vs. 2Q12   In a nutshell, all line items and KPI showed positive improvements.

 Net interest and Islamic banking incomes grew 3.2% QoQ and 4.7% QoQ, respectively, in-line with the growth of 3.2% in total loans.

 The 14.2% QoQ growth in non-interest income also boosted by higher forex gain and higher gain on AFS.

 As such, total income upped 7.1% QoQ.

 Operating profit, however, jumped further with 37.4% QoQ growth due mainly to significant lower in loan loss allowances. The allowances declined 79.3% QoQ, bringing the annualised credit ratio down to 10bps in contrast to 50bps in 2Q13.

 While operating expenses remained stable, the CTI ratio actually improved to 49.7% in contrast to 52.2% in 2Q13.

Outlook  Business performance is expected to improve further with the newly acquired OSKIB due to (i) enhanced geographical footprint and (ii) revenue and cost synergies post acquisition apart from the potential drawdown of loans related to ETP projects in 1H14.

 We understand that the group has seen RM95m realised revenue synergies post-completion, ahead of its original Year-1 target, arising from Investment banking and Asset Management. Funding and cost synergies totalling RM3.0m thus far.

 To recap, the estimated synergies over the next 3 years are shown in the following chart.

Change to Forecasts No change to our earnings estimates, as we had conservatively revised our numbers in previous quarter.

 Our FY13-FY14 net earnings remain unchanged at RM1,845.6m-RM2,138.0m.

Rating Maintain OUTPERFORM as the stock could potentially offer ~15% upside to our Target Price (“TP”) of RM8.75.

Valuation  Our targeted price multiples are based on the 1.2x and 10.2x FY14 PBV and PER, respectively.

 These valuations represent the trough valuation of RHBCAP for the last 3 years.

Risks  Tighter lending rules and further margin squeeze in general.

 Tougher operating environment especially in investment banking and treasury market.

 The relatively low LLC ratio against the industry could be a treat to our credit cost assumptions.

 Lower-than-expected merger synergies.

Source: Kenanga