Period  4Q13/12M13

Actual vs. Expectations The reported FY13 net profit of RM1,831.2m accounted for 99.2% of our estimate of RM1,845.6m. As such, this set of results is pretty much in line with our expectation.

 However, the Group has missed its FY13 ROE target. The FY13 ROE registered at 11.5%, which is still lower than the ROE target of 12% but broadly within our estimate of 11.7%.

Dividends  Declared a final dividend of 10.3 sen. Together with the 6 sen interim dividend declared in 2Q13, this brings the Group’s total DPS to 16.3 sen.

 However, the final and total dividend payments are lower than our estimates of 17 sen and 23 sen, respectively. In short, the payout ratio was only at 23%, which is lower than the Group’s historical performance of 30%.

 We understand that the lower dividend was due to the need of the Group to reserve more capital despite achieving Tier-1 and Total Capital Ratios of 12.4% and 14.4% as at end-Dec13.

Key Result Highlights  12M13 vs. 12M12

 Total income grew 23.2% YoY driven by a significant jump in non-interest segment (+51.2%), boosted by robust fee income and net forex gain as well as due to the merger with OSK Investment Bank. Noninterest income accounted for 35.0% of the total income. Even excluding certain one-off gains and recovery, non-interest income still registered at a relatively high level of 33.4%. Islamic Banking also grew strongly at 20.6% due to higher net funding income on the back of 15% YoY growth YoY in financing.

 As for net interest income, it grew 10.6% YoY driven by a 9.2% YoY growth in gross loan. This loans growth was below management’s target of 12% and our full-year loan growth estimate of 11.8% due to a repayment of RM2.6b in corporate loan by a single corporate client. Excluding this repayment, the total loans growth would have been 11.6%.

 Despite the below-than-expected growth, the Group still managed to achieve decent growth from some of its target sectors. For instance, household loan grew 15% (accounted for 45.3% of total loan) mainly driven by purchase of securities; +27.5%, purchase of non-residential properties; +30.0%, personal use; +24.9% and residential properties; +15.2%.

 In-line with the industry norm, NIM declined approximately 8bps from 2.41% in FY12 to 2.33% in FY13.

 While the customer deposits contracted 0.3% YoY and fell short below management’s target of 10%, CASA (the low cost deposit), however, grew 9.1% YoY and contributed 23.8% to the total customer deposits. Loan-to-deposit ratio (LDR), on the other hand, increased from 80.6% in end-2012 to 88.4% in end-2013.

 Operating expenses increased by 33% due mainly to full-period impact of the enlarged investment bank cost base apart from increase in sales-related personnel cost, higher commission linked to stronger business volume and merger integration cost. Consequently, cost-to-income ratio (CIR) surged from 47.5% in FY12 to 51.3% in FY13.

 Loan loss impairment surged >200% YoY due to further net provision of c.RM120m in 4Q13, resulting in the full-year loan loss impairment to register at c.RM450m for a large corporate account. Hence, annualised credit charge ratio spiked to 38bps from 14bps in FY12. The credit charge ratio is slightly higher than the management earlier guidance of 30-35bps and our estimate of 33bps.

 Gross impaired loan (GIL) ratio improved to 2.8% from 3.0% in end-2012. Nonetheless, its loan-loss coverage (LLC) deteriorated to 63.7% in contrast to 66.0% in end-2012. Besides, the ratio is also relatively low vis-à-vis the industry average of 107.6% as at end-Dec13.

 Capital adequacy of the Group remains comfortably above regulatory requirements. The Tier 1 and Total Capital ratios stood at 12.4% and 14.4%, respectively, as at end-Dec13 (vs. 12.4% and 15.9% in end-2012). All in all, the Group missed its FY13 ROE target. The FY13 ROE was registered at 11.5%, which is lower than the target ROE of 12% and our estimate of 11.7%.

4Q13 vs. 3Q13

 In a nutshell, all top-line items showed positive improvements with total income growing 5.4% QoQ.

 Net interest and Islamic banking incomes grew 4.3% QoQ and 7.1% QoQ, respectively, despite a marginal growth in total loans of 0.3%. To recap, the lacklustre loans growth was due mainly to a RM2.6b repayment in corporate loan. The 6.5% QoQ growth in non-interest income was driven by higher fee income, which was partially offset by lower net gains from trading and investment securities.

 However, operating expenses grew at a faster pace at 7.4% QoQ, and the CIR weakened to 50.6% from 49.7% in 3Q13. Coupled with the higher loan loss impairment (+300%) QoQ (annualised credit charge surged from 10bps in 3Q13 to 39bps in 4Q13), pretax profit and net profit declined 7.7 and 9.8% QoQ.

Outlook  Going forward, the group still aims to achieve a ROE of >12% in FY14 despite tougher operating environment.

 The management also set its loan growth target at 12% while CASA deposits growth target is pegged at >15%. These could be uphill tasks. Nonetheless, it would be able to register loan growth nearer 11% if and when more ETP projects kick start in 2014.

 NIM is expected to continue to be under pressure. We have factored in another 7bps reduction in our 2014 estimate.

 The management also aims to bring down CIR below the 50%-mark. We believe this could be achievable, but the CIR will remain sticky and may not fall far below this target. Our estimated CIR for 2014 is pegged at 49.5%.

 The management also reckon that credit charge ratio should improve by at least 1/3 to <25bps as the impaired corporate loan was secured by rich assets and cash flow. This target is also in line with the management's aim to lower the gross impaired loan ratio to <2.5%. In fact, in our forecast, we only price in a credit cost of 15bps in FY14. However, the risk of fall-short in achieving our target credit cost is somewhat high as the group’s LLC is still far below the industry average.

 Dividend wise, we expect the group to continue to pay out 30% of its net profit as dividend. Hence, our FY14 and FY15 DPS are estimated at 27sen and 30sen, respectively.

Change to Forecasts   No change in our earnings estimate. Our FY14 net profit is estimated at RM2,138.0m (vs. consensus estimate of RM2,00.6m). We also introduce our FY15 net profit forecast of RM2,374.7m (vs. consensus estimate of RM2,204.6m).

Rating  Maintain OUTPERFORM as the stock could potentially offer ~12.6% 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 three 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