Period

3Q15/9m15

Actual vs. Expectations

9M15 CNP of RM1,195.4m(-23.0% YoY) was below our and market estimates, making up 64% and 65% of the respective full-year forecasts attributed to higher opex which include the one-off Career Transition Scheme (CTS) of RM308.8m. Stripping of the CTS, normalised CNP would have been RM1,426.9 (-8.0% YoY) which is 76%/78% of our/market estimates.

Dividends

Surprisingly, no dividend was declared. So far no interim dividend has been declared.

Key Results Highlights

9M15 vs. 9M14, YoY

9M15 CNP was down 23.0% attributed to higher opex which includes the one-off CTS of RM308.8m which pushed opex higher by 16.7% to RM2,831.5m.

Total income fell by 1.1% attributed to fall in NII and NOII by 2.2% and 6.7%, respectively, but mitigated by improvement in Islamic Banking income by 20.2%. Islamic banking income improved as gross financing grew by 12.0%.

Fall in NOII attributed to lower trading income and investment banking related fee income but offset by higher forex gain and wealth management income.

NIMs were flattish at 1.9% as net interest spread increased by 5bps (vs our assumption of NIMs at 2.2%).

CIR was at 63.8%.

Loans/deposits grew at 10.0%7.3% (vs. our estimates of 8.0%/7.0%).

Loans were driven by loans to construction (+58.1%) and purchase of non-residential property (+26.6%). Domestic growth was driven by deposits from business enterprises and individuals at 8.8% and 7.2%, respectively.

As loans growth outpaced deposits growth, loan to deposit ratio increased by 2.3ppts to 94.1% (above the industry ratio of 85.4%) but CASA’s ratio increased by 70bps to 23.3%. Management attributed the low deposit growth to its rebalancing of its portfolio as it reduces high costs deposits.

Assets improved as GIL fell by 35bps to 1.94% as NPL, fell 6.7%.

Loan loss coverage was down 10.0ppts to 56.5% attributed to decline in provisioning of 20.8% vs NPL decline of 6.7%. Annualised credit charge ratio was at 0.10% down by 7bps (we had assumed it to be at 0.30%).

CET1 and CAR improved 110bps and 150bps to 11.8% and 15.7%, (after proposed dividend) and still above the regulatory requirements of 7% and 10.5%, respectively.

Annualised ROE was at 7.5% (vs our forecast of 9.7%). 3Q15 vs. 2Q15, QoQ

On a quarterly basis, CNP fell -59.3% attributed to the CTS.

Total income was marginally higher +1.8% as NII and Islamic Banking income improved +7.8% and +3.9%, respectively. NOII fell 8.3% due to reasons mentioned above.

Key Results Highlights (Con’t)

2Q15 vs. 1Q15, QoQ

NIMs improved by 10bpts to 2.0%.

CIR up by 17.4ppts to 77.2% due to the CTS.

Loans grew higher in 3Q by 3.4% (2Q15: +0.8%) and deposits improved 1.1% (2Q15: -1.1%). LDR continues to surge higher by 2.1ppts to 94.1%.

Asset quality improves with GIL ratio down by another 11bpts to 1.94%.

Higher loan loss provisions led credit charge ratio increasing by 9bps to 0.10%.

Outlook

The 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 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%; and v) CIR to be capped below 51%. which are unlikely to be achievable.

We made a few changes in our assumptions for FY15E/16E due to the CTS being executed fully in FY15 (previously we assumed only 2/3 will be finalised in FY15): i) ROE at 8.1%/10.0% for FY15E/FY16E (previously 9.0%/9.5%); ii) Unchanged. Loans and deposits growth at +8% and +7%, respectively, for both FY15 and FY16. iii) NIMs at 1.95% for both FY15E/FY16E; iv) CIR at 58.8%/48.6% for FY15E/FY16E (previously at 57.3%/53.1% for FY15E/FY16E); and v) Unchanged. Credit charge at 30bpts for FY15E/FY16E.

As for the Rights Issue, Management clarified: (i) if the excess 6% of Aabar’s share (in the Rights Issue) is not subscribed then RHB will issue only 486.2m shares (instead of the original proposed 517.7m shares) and the proceeds received will be RM2,343.5m (instead of RM2,495.3m), (ii) management cannot confirm whether Aabar will fully subscribed to its allowed 15% share (of the Rights Issue) but is confident that the Underwriters will take the portion if Aabar declined its 15% share.

Change to Forecasts

Due to the revisions above, our FY15E/FY16E earnings are revised by -10.5%/+4.7% to RM1,680.3m and RM2,349.2m.

Rating

Maintain OUTPERFORM

The stock is looking attractive with its low P/B but decent ROE among its domestic peers.

The stock is currently one of the cheapest, currently trading at 0.7x P/B value. At 0.7x P/B, it is nearly reaching its lowest point in its 10-year history; hence, we believe that the stock price has bottomed out. The industry is currently trading at 1.5x P/B with an average ROE of 12.8%.

Valuation

Our TP is maintained at RM7.26 (post-rights). This is based on a blended FY16E PB/PE ratio of 0.9x/9.6x. The PB ratio applied takes into account RHBCAP’s share performance when its ROE hovered around 8%-10%, while the PE ratio applied is within its 5-year’s historical range of 9x-11x.

Although the stock is in deep in value but the share overhang concerns from its rights could limit upside in short term.

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 Dec 2015