Period

1Q15

Actual vs. Expectations

1Q15 net profit (NP) of RM476.3m met expectations; accounting for 23% of both our and consensus’ forecasts.

Dividends

No dividend declared as expected.

Key Results Highlights

YoY, 1Q15 NP edged up 5.7% as total income increased to RM1.51b (+2.8%) supported by strong growth in Islamic banking income (IBI) (+33.4% to RM202.5m) and higher non-interest income (NOII) (+1.8% to RM506.5m). Net interest income (NII), however, fell (-2.3% to RM799.8m) on further compression in net interest margin (NIM) to 2.22% (- 11bpts).

Growth was further bolstered at the bottom-line on a reduction in the effective tax rate (ETR) this 1Q15 (-3.2ppts to 25.6%), which also mitigated the effect of a higher costincome ratio (CIR) (+63bpts to 54.3%).

Gross loan-deposit (LD) ratio edged up 2.3ppts to 90.5% (industry-Mar: +80.9%), as gross loans growth of 13.7% (industry-Mar: +9.2%) continued to outpace that of deposits’ 10.8% (industry-Mar: +9.0%). Main drivers of loans growth were from the purchase of residential properties (+23%), working capital (+21%), and purchase of non-residential properties (+43%).

Meanwhile, asset quality was much improved with gross impaired loans ratio dropping to 2.03% (-52bpts) (industry- Mar: 1.63%). However, given that credit cost was also significantly lower to 0.04% (-14bpts), loan loss coverage declined further to 60.7% (-7.7ppts) (industry-Mar: 98.8%).

QoQ, 1Q15 NP slid 2.0% hampered by sequentially lower total income (-10.0%) as NII (-0.7%, given NIM -4bpts) and NOII (-24.5%) declined. IBI, on the other hand, still managed some growth (+0.9%).

On the upside, potential NP decline was capped by an excellent improvement in the CIR (-4.5ppts), which also negated the higher ETR (+3.2ppts).

Outlook

On an annualised basis, loans growth registered at 3.0%, much lower than the 10% target set for FY15. However, it is still early days and given RHBCAP’s strong track record in this area we remain optimistic that the target is achievable, encouraged also by the strong YoY growth achieved in 1Q15 of 13.7%.

Bringing the CIR down to <51%, on the other hand, could be an uphill task as CIR actually gained 63bpts on a YoY basis. Our FY15 forecast assumes a more conservative 80- 90bpts reduction in FY15.

NIM, however, should continue on a downwards trajectory given RHBCAP’s lower-than-industry excess liquidity and the impending liquidity coverage ratio (LCR) requirement (60% in FY15) effective 1 June 2015 (computed as highquality liquid assets divided by total net cash outflows over the next 30 calendar days). However, we understand that Bank Negara Malaysia has eased up slightly on the LCR component requirements. Hence, we may see some easing in the competition for deposits as well as the pressure on the Group’s cost of funds.

With the CIMB-RHBCAP-MBSB merger now fading into the background, focus has reverted back to the Group’s transformation programme, IGNITE 2017. 2015 leg of the programme is focused on launching differentiating and regional capabilities with most of the revenue and cost related targets having already being met ahead of schedule. 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

No change in earnings estimates.

Rating

Maintain MARKET PERFORM

Valuation

Target price unchanged at RM8.20, based on a blended FY15E Price-Book (PB)/Price-Earnings (PE) ratio of 1.1/ 9.5x.

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% vs. FY14A: 11.5%).

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.

Source: Kenanga Research - 1 Jun 2015