Period  3Q14/9M14

Actual vs. Expectations 3Q14 net profit of RM544.6m brought 9M14 net profit to RM1,551.8m.

 This met expectations; accounting for 73% and 77% of our full-year estimate and street numbers, respectively.

Dividends  No dividend was declared since our last results note (last year: 6.0 sen), and we believe that this is partly due to the potential CIMB-RHBCAP-MBSB merger and acquisition.

 While we do not discount the possibility of the absence of dividends in respect of FY14, we have assumed dividends amounting to 27 sen on a business as usual basis (payout: 31.5%).

Key Results Highlights YoY, 9M14 net profit advanced 17.0% due in part to growth reported across all income segments. Net interest income (NII) gained (+3.0%) on loan book expansion, despite the narrowing of net interest margin (NIM) to 2.29% (-6bps). Meanwhile, net income from Islamic banking (IBI) (+23.9%), and noninterest income (NOII) (+3.5%) also advanced. As a result, total income rose 5.3% to RM4,560.4m (and made up 75% of our forecast).

 Growth at the net profit level surged mainly on the halving of impaired loan allowance to RM165.8m (-49.7%) Potential growth, however, was capped by a higher cost-to-income (CI) ratio of 53.2% (+1.7ppts).

 Gross loan-to-deposit (LD) ratio was up 3.0ppts to 91.8% (industry: 82.1%), as gross loans growth of 12.0% (industry: +9.0%) continued to outpace that of deposits’ 8.4% (industry: +5.9%). Main drivers of loans growth were the purchase of residential properties (+22.0%), working capital (+13.1%), and purchase of non-residential properties (+37.7%).

 Asset quality improved with gross impaired loans (GIL) ratio dropping to 2.29% (-63bps). Nevertheless, annualised credit cost ratio inched up to 14bps (+4bps) while loan impairment coverage (LIC) ratio was higher at 66.6% (+7.0ppts) (industry: >100%).

This could imply a more cautious outlook.

 In terms of management efficiency, annualised return on equity (ROE) gained 49bps to 11.5% in response to the commendable 9M14 net profit growth.

 Common equity tier 1 (10.74%), tier 1 (11.20%) and total capital (14.18%) ratios remained above their respective fully loaded requirements of 7.0%, 8.5%, and 10.5%.

 QoQ, 3Q14 net profit declined (-2.1%) despite total income growing by a double digit 14.0% to RM1,647.1m, with net interest income (+1.0%), net income from Islamic banking (+7.1%), and noninterest income (+41.7%) all recording gains. Other favourable QoQ changes include NIM holding steady at 2.29%, CI ratio declining to 51.1% (-4.1ppts), and effective tax rate slipping to 22.8% (-1.5ppts).

 Nevertheless, 3Q14 net profit was lower due to a relatively large increment in loan impairment provision to RM94.2m (>100%).

Outlook  All-in, RHBCAP produced a good set this 9M14.

 However, given the Group’s high LD ratio coupled with management’s expectation of another hike in the Overnight

Policy Rate next year, we are seeing very aggressive competition to lock in deposit.

 In light of this and the softness in the property market, NIM should resume its downwards trend.

 2014 targets have been maintained, with year-to-date achievement for ROE (>12% target vs. 11.5% in 9M14), loans growth (12% target vs. 12%YoY at 9M14), and GIL ratio (<2.5% target vs 2.29% at 9M14) on track to meet targets.

 Nevertheless, CASA growth (>15% target vs. 4.1% at 9M14) looks likely to miss its FY14 target, while CI ratio may fall short of its <50% target (9M14: 53.2%) given the group’s manpower expansion (+13% YoY). Our FY14 estimate implies a more conservative 52.6% CI ratio.

 On the CIMB-RHBCAP-MBSB merger, management anticipates completion to be in mid-2015. On the longer term, we believe that the merger will benefit the enlarged Group predominantly from a cost perspective, while providing scale, visibility, greater international presence and a new growth driver in the form of a mega-Islamic bank.

Change to Forecasts    No changes to our earnings estimates of RM2,138.0m (FY14E) and RM2.374.7m (FY15E).

Rating Maintain MARKET PERFORM

 …despite the 20% implied potential upside, given our expectation of a long gestation period post-merger.

Valuation  We leave our target price (TP) unchanged at RM10.00, which was derived based on a blended FY15E PER of 11x and PBV of 1.3x.

 These price multiples are within their historical ranges for the past 2 years (PER: 10.7x-11.0x & PBV: 1.2x-1.3x).

Risks to Our Call Increase in the Overnight Policy Rate.

 Tighter lending rules and further margin squeeze.

 Tougher operating environment in treasury and capital markets.

 A stickier-than-expected CI ratio.

 The relatively low LIC ratio against industry average could be a threat to our credit cost assumption.

 Lower-than-expected merger synergies.

Source: Kenanga