Period

4Q15/12M15

Actual vs. Expectations

12M15 CNP of RM1,287.2m (-37% YoY) was below our and market estimates, making up 77% and 72% of the respective full-year forecasts, attributed to higher impairment allowances. Excluding the one-off CTS (executed in 3Q15), CNP would have been RM1,511m.

Dividends

An interim DPS of 12.0 sen was declared in this quarter for FY15. We had expected a DPS of 17.0 sen.

Key Results Highlights

12M15 vs. 12M14, YoY

CNP was dragged by higher opex at 11% (excluding CTS) and higher impairments of RM292m).

Total income rose 3% driven by driven by a 20% rise in Islamic Banking income.

NIMs fell by 16bps to 2.14% (our assumptions was -16bps).

Excluding CTS, CIR was up by 6.5ppts to 61.3% (vs. industry’s CIR of 45.5%).

Loans/Deposits grew at 6.3%/0.6% (vs. our estimates of 8%/7% & industry averages were at +7.9%/+1.8% respectively).

Loans were driven by financing for purchase of landed property (+20.5%) while financing for purchase of transport vehicles fell 11.2%. Domestic decline was led by a fall in deposits from government & statutory bodies by 4.5% and 15.5%, respectively.

As loan outpaced deposits, LDR was up by 5ppts to 95.7% (vs. the industry ratio of 86.5% but CASA improved by 2.3ppts to 24%).

Assets improved as GIL fell by 2ppts to 1.9% and Loan loss coverage (LLC) was up 170bps to 62.8% (vs. the industry’s coverage of 96.2%). Credit charge ratio went up by 16bps to 0.31% (we assumed 0.30%).

CET1 and CAR improved 50bps and 100bps to 11.8% and 15.5%, (after proposed dividend) and still above the regulatory requirements of 7% and 10.5%, respectively.

ROE was at 6.6% (vs. our forecast of 8.0% and management’s guidance of 11%.)

4Q15 vs. 3Q15, QoQ

On a quarterly basis, CNP declined by 24%, hit by higher impairments of RM245m.

Topline growth fell by 3.2%, dragged by fall in NOII. NOII was dragged by falling fee income (-20%) and other operating income (-19%).

NIM was flat at 2.0%.

CIR improved by 10ppts to 57% (as 3Q was hit by CTS). Excluding CTS, CIR would have been 50%.

Loans growth slowed down to +1.2% (3Q15: +3.4%) and deposits declined by 0.5% (3Q15: 1.1%). LDR continued to surge higher by 1.7ppts to 95.7%.

Asset quality improves with GIL ratio down by another 6bps to 1.9%.

Higher loan loss provisions led credit charge ratio increasing by 21bps to 0.31%.

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 as the Group strives to reduce its LDR. Credit costs are likely to stay elevated due to the slowdown in the economy. Management is expected to focus on ensuring asset quality.

Management gave its guidance for FY16. (i) ROE to come in at 10%; (ii) Total loans growth of 8%; (iii) CIR to be capped below 53%.

We made a few changes in our assumptions for FY16 and introduce our estimates for FY17, where we expect them to be similar. i) ROE at 8.1%/7.6% for FY16/FY17 ( unchanged for FY16). ii) Loans/deposits to grow at 7%/8% for FY16 from our earlier expectations of 8%/7%. For FY17, we expect it to be 8%/8%. iii) NIMs at 2.15% for both FY16/FY17 (unchanged for FY16). iv) CIR at 57% for both FY16/FY17 (previously at 58% for FY16). v) We raised the Credit charge to 32bps for FY16 from 30bps previously. For FY17, we assumed it to be at 31bps.

Change to Forecasts

Due to the revisions above, our FY16E earnings are revised lower by 20%to RM1,872m.

Rating

Maintain OUTPERFORM

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

It 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 reduced to RM6.23 (from RM7.26) due to the revision of its FY16E earnings. The TP is based on a blended FY16E PB/PE ratio of 0.9x/9.6x (maintained). 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.

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 - 29 Feb 2016