Period

2Q15/1H15

Actual vs. Expectations

1H15 PAT of RM1000.9m (-0.6% YoY) was within our and market expectations, making up 48% and 49% of respective full-year forecasts. The flat YoY performance was due to higher operating expenses and lower NIM despite healthy loan growth of 9.2% YoY (1H14: 13.0%).

Dividends

No dividend was declared. Historically dividends were declared in the 2Q.

Key Results Highlights

1H15 vs. 1H14, YoY

RHBCap’s subdued performance and deceleration in bottom line growth of -0.6% was dragged by: (i) increase in overheads at +4.8% (1H14: +7.9%) mainly arising from increase in marketing expenses (+10.0%) and establishment expenses (+6.36%), as well as (ii) compression of NIMs by 16bpts. The deceleration in growth was mitigated by a lower loan impairment charges of RM9.5m (vs. 1H14: RM71.6m).

Better performance was seen at the income level at +2.8% YoY (1H14: -1.3%) driven by strong growth from the non interest income (NOII) and Islamic Banking at +6.8% and +24.3% (1H14: -0.6% and +20.5%), respectively. The Islamic Banking income grew on the back of gross financing growth of 8.6%. NOII was bolstered by higher fee income and investment income.

However, NIM decreased by 16bpts to 2.13% ( higher than our expectations of 2.00) dragged by higher deposit costs and competition of loan yields.

Due to the increase in overheads, cost-to-income ratio (CIR) nudged by 1.1ppts to 55.5%%, against our assumption of 53.9%.

Loans and deposits grew healthily at 9.2% YoY and 5.1% YoY, respectively, bringing its loan-to-deposit ratio (LDR) to 92% from 87%. These growth rates, however, are below management’s target and our expectations of 10% for both loans and deposits.

Loans growth was primarily driven by SMEs at +58% YoY (1H14:+9.0%). The SME’s constituted 14% (1H14: 10.0%) of the portfolio with individual loans making up the bulk of it at 46% (1H14: 45%), which grew at 11.2%.

Deposits growth came mainly from demand deposits which grew by 5.8% (1H14: +17.4%). Inline with the growth of total deposits, CASA increased by 5.5% (1H14: +14.6%) and accounted for 23.4% of total deposit base (+1bpts).

Asset quality was mixed where gross impaired loans declined by 40bps to 2.05% but annualised credit charge increased by 8 bps to 0.19%, vs our assumption of +4bps to 0.16%. Loan loss coverage was down by 11ppts to 56%, which was way below industry average of 98%.

Annualised ROE narrowed to 10.4% (-1.4ppts), coming in below management’s full-year target of more than 11.5% vs. our assumption of 10.8%.

CET1, Tier 1 and total capital ratios remained healthy at 12.0%, 12.4% and 15.9% compared to 11.7%, 12.1% and 14.5% previously.

2Q15 vs. 1Q15, QoQ

Quarterly earnings surged by 10.1% as this was due to: (i) higher writeback (2Q15: +RM48.3m vs. 1Q15: -RM44.1m), and (ii) higher Islamic Banking income at +5.7% to RM214m.

Loan and deposits growth rates were at +0.8% and -1.0% respectively

NIM decreased by 4bps with CIR up by 2ppts from the previous quarter.

LDR was up by 1.5ppts to 92%.

Asset quality degenerated slightly with gross impaired loans up by 2bpts and credit charge improving another 13bpts due to writebacks.

Outlook

Operating environment is challenging with business sentiment remaining cautious. We reckon that NIM compression is likely to continue, especially amid a challenging funding cost environment. Nonetheless, management is confident that, despite the weak outlook, asset quality remains stable with no sign of alarming deterioration despite low loan loss coverage.

Management expects to grow revenue from affluent High Net Worth individuals and the SMEs and at the same time minimising costs.

With challenges expected in the 2H15, Management has reviewed its FY15 guidance: (i) ROE to come in at more than 11.5%; (ii) Total loans growth of 10%; (iii) Total deposits growth of 10%; (iv) NIM to stay above 2.0%; v) CIR to be capped below 51% and vi) Credit charge ratio of between 25 to 30bpts.

We have made a few tweaks in our assumptions for FY15: i) ROE at 10.4% (previously 10.8%; FY16: 10.4%); ii) Loans and deposits growth at 8% and 7%, respectively, for both FY15 and FY16 (previously 10% and 15% for FY15 and 10% and 7% for FY16); iii) NIM at 2.06% for FY15 (previously 1.95%), 2.0% for FY16; iv) CIR at 54% (unchanged) for both FY15 and FY16; and v) Credit charge at 30bpts for both FY15 and FY16 (previously 16bpts for both).

Change to Forecasts

Although 1H15 results were in line, we revised our FY15E/FY16E earnings by -3.9% and -4.0% respectively to RM2,031m and RM2,176m after tweaking our assumptions.

Rating

Maintained MARKET PERFORM

Valuation

Our TP is revised to RM7.92 (from RM8.20 previously). This TP is based on a blended FY15E PB/PE ratio of 1.0x/9.6x (previously FY15 PB/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 expectations of a declining ROE trend (FY15E: 10.4% vs FY14: 11.5%).

Risks to Our Call

Steeper margin squeeze from tighter lending rules and stronger-than-expected competition.

Slower-than-expected loans and deposits growth.

Higher-than-expected rise in credit charge as result of a potential up-cycle in non-performing loan (NPL).

Further slowdown in capital market activities.

Stickier than expected CIR.

Source: Kenanga Research - 1 Sep 2015