Period  4Q14/FY14

Actual vs. Expectations  4Q14 net profit (NP) of RM486.2m brought FY14 NP to RM2.04b.

 This met expectations; accounting for 100% of our fullyear estimate and street consensus.

Dividends  An interim single-tier dividend of 6.0 sen was declared (last year: 6.0 sen), with the entitlement and payment dates to be announced in due course.

 Based on a pay-out assumption of 28-29%, we are expecting a final pay-out of c.17 sen. Declarations of final dividends are usually in Apr/May/Jun.

Key Results Highlights  YoY, FY14 NP finished off commendably, advancing 11.3% due in part to growth reported across all income segments. Net interest income (NII) gained 0.5% on loan book expansion, despite the narrowing of net interest margin (NIM) to 2.29% (-4bpts). Meanwhile, net income from Islamic banking (IBI) (+23.9%), and non-interest income (NOII) (+6.3%) also advanced. As a result, total income rose 4.8% to RM6.23b (and made up 103% of our forecast).

 Growth at the NP level accelerated mainly on a 54.0% decline in impaired loan allowance to RM206.2m on recoveries and non-recurrence of certain corporate account impairments and one-time bad debts written-off in 2013 on refinement of the application of MFRS139. Potential growth, however, was capped by a higher costincome (CI) ratio of 54.7% (+3.4ppts) brought about by the Group’s continuing manpower expansion.

 Gross loan-deposit (LD) ratio edged up 2.3ppts to 90.7% (industry: +81.2%), as gross loans growth of 17.0% (industry: +8.7%) continued to outpace that of deposits’ 14.1% (industry: +7.6%). Main drivers of loans growth were the purchase of residential properties (+23%), working capital (+20%), and purchase of non-residential properties (+43%).

 Meanwhile, asset quality was much improved with gross impaired loans (GIL) ratio dropping to 2.03% (-78bpts) (industry: 1.66%). Credit cost ratio was also significantly lower to 15bpts (-22bpts). Nevertheless, loan loss coverage (LLC) ratio declined to 61.1% (-2.7ppts) (industry: >100%).

 QoQ, 4Q14 NP declined (-10.7%), despite a slight gain recorded in total income to RM1.68b (+1.8%) supported by growths in IBI (+2.1) and NOII (+9.1%). The retracement was due in part to a decrease in NII (-3.6%), as NIM slipped to 2.26% (-3bpts).

 The other major factor contributing to the decrease in 4Q14 NP was a higher CI ratio of 58.9% (+7.8ppts).

Outlook  All-in, good growth in NP. However, the underlying support came mostly from lower loan loss provisioning which may be unsustainable. Furthermore, cost remains a concern, and had limited the potential NP growth this FY14 given the Group’s manpower expansion.

 Looking at the scorecard for FY14, of the 6 targets set, 3 were met. They were loans growth (17% vs. target: 12%), GIL ratio (2.0% vs. target: <2.5%) and international contribution (13.1% vs. target >12%). The 3 that missed were return on equity (ROE) (11.5% vs. target: >12%), current and savings account growth (CASA) (6.4% vs. target >15%), and CI ratio (54.7% vs. <50%).

 While FY15 aspirations have been set higher than FY14 achievements (aside from loans growth, given the strong 17% achieved this FY14), they are mostly lower compared to FY14 targets as follows:- o ROE : >11.5% o GIL ratio : <1.8% o Loans growth : 10% o CASA growth : >10% o CI ratio : <51% o International contribution : >13%

 We believe that the loans growth target is achievable given RHBCAP’s strong track record in this area. However, bringing the CI ratio down to <51% could be an uphill task. Our FY15 forecast assumes a more conservative 80-90bpts reduction from its FY14 level.

 NIM should also continue on its downwards trend given RHBCAP’s lower-than-industry excess liquidity and the impending liquidity coverage ratio (LCR) requirement (60% in FY15) effective 1 June 2015. However, we understand that Bank Negara Malaysia has eased the regulations relating to the computation of LCR components (ie. high quality liquid assets and net cash outflow). Hence, we may see some easing in the competition for deposits as well as the upwards pressure on the Group’s cost of funds.

 With the CIMB-RHBCAP-MBSB merger now fading into the background, focus should revert back to the Group’s transformation programme, IGNITE 2017. 2015 leg of the programme is focused on launching differentiate and regional capabilities with most of the revenue- and cost- related target having already being met ahead of time. Hence, we should see full efforts being directed towards the final revenue related target of winning over the mass affluent segment as well as improving on ‘enablers’.

Change to Forecasts  Upon imputing FY14 numbers into our model and in view of the lower FY15 targets, we have toned down our FY15E NP by 5% to RM2.11b. FY16E numbers have also been introduced.

 Essentially, we have reduced our yield assumption by 8bpts while upping our assumed cost of funds by 30bpts, on expectation of continuing stiff competition for loans and deposits given weaker domestic demand and more cautious spending. We have also adjusted downwards our NOII growth expectation to 5.3% to account for softer capital market activities.

Rating Downgrade to MARKET PERFORM  FY14 performance was by helped by large recoveries which are unlikely to recur in FY15. Furthermore, costs have proven to be stickier-than expected. Against the backdrop of slower domestic demand and weaker capital market activities, FY15 NP is expected to grow at a more moderate rate. Our forecast assumes this to be in the range of 3-4%.

Valuation  Target price (TP) lowered to RM8.20 (from RM9.35), based on a blended FY16E Price-Earnings (PE) / Price-Book (PB) ratios of 9.5 / 1.1x.  The PE ratio applied represents RHBCAP’s two-year historical average PE ratio, while the PB ratio takes into account our expectation of a declining ROE trend (FY15E: 10.8%).

Risks to Our Call  Merger and acquisitions activities.

 Tighter lending rules and further margin squeeze.

 Tougher operating environment in treasury and capital markets.

 Stickier-than-expected CI ratio.

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

 Lower-than-expected merger synergies. 

Source: Kenanga