1Q16 core earnings of RM552m were within our and market expectations, accounting for 29% of both estimates. No dividends declared as expected. We keep our earnings estimates unchanged and TP is maintained at RM6.51 with a MARKET PERFORM call. 1Q16 core net profit (CNP) of RM552m improved significantly by 15.9% YoY attributed to higher net interest income and Islamic Banking income.

3M16 vs 3M15, YoY

• Total income rose 6.3% (3M15: +2.8%) driven by a 20.5% (3M15: +33.4%) rise in Islamic Banking income and 10.4% (3M15:-2.3%) Net Interest Income (NII) growth.
• Annualised NIM fell by 1bps to 1.94% as cost of borrowings surged by 6bps vs. average lending yield falling by 1bps.
• Cost Income Ratio (CIR) was down by 6ppts to 48.5% (vs. industry’s CIR of 50.2%). _ Loans/Deposits performances were subdued at +4.2%/-0.8% (vs. our estimates of +7%/8+% and industry averages were at +6.4%/-0.9%).
• Loans were driven by financing for purchase of landed property (+18.2%) and construction (+14.4%) while financing for purchase of transport vehicles fell 11.5%. Deposits' decline was led by a fall in deposits from government & statutory bodies and business enterprises by 10.7% and 2.8%, respectively.
• As loan outpaced deposits, LDR was up by 5ppts to 95.0% (vs. the industry ratio of 86.9% but CASA improved by 2ppts to 24.1%).
• Assets improved as GIL fell by 20bps to 1.82% (vs. industry ratio of 1.6%) and Loan loss coverage (LLC) was up 25ppts to 85.8% (inclusive of 1.2% regulatory reserve) vs. the industry coverage of 94.3% and above the regulatory requirements of 70%. Credit charge ratio went up by 7bps to 0.22% (we had assumed an uptick of 2bps).
• CET1 and CAR improved 150bps and 200bps to 12.3% and 16.1%, (fully loaded) and still above the regulatory requirements of 7% and 10.5%, respectively. From the new holding company RHB Bank Group perspective, the CET1 and CAR were recorded at 12.2% and 16.5%, respectively.
• Annualised ROE was at 9.5% (vs. our forecast of 8.6% and management’s guidance of 10%).

1Q16 vs. 4Q15, QoQ

• On a quarterly basis, CNP improved tremendously by 74.6%, boosted by lower impairment of RM79.8m (4Q15: 245.3m).
• Topline growth fell by 4.7%, dragged by fall in NOII (-16.8%). NOII was dragged by falling fee income (-20%) and other operating income (-19%). NIM reported improved by 7bps to 2.22% attributed to higher net fund based income and low cost deposits. CIR improved by 9ppts to 48.5% as 4Q15 was affected by the onoff CTS.
• Loans growth declined by 1.2% (4Q15: +1.2%) and deposits declined by 0.4% (4Q15: -0.5%). This led to LDR falling by 7bps to 95.0%. The fall in loans growth was attributed to corporate repayment amounting RM1b.
• Asset quality improves with GIL ratio down by another 6bps to 1.82% with lower loan loss provisions led credit charge ratio falling by 1bps to 0.22%.

Outlook. We reckon that NIM compression is likely to persist, especially amid a challenging funding cost environment as the Group strives to reduce its LDR. Management is not expecting 1Q16 NIMs performance to be repeated in the coming quarters. The Rights Issue was supportive in easing its liquidity concerns and alleviated its NIMs in 1Q16. Credit costs are likely to stay elevated due to the slowdown in the economy. Asset quality is seen stable from the retail side, but concerns are still brewing from the oil & gas and construction portfolios. Its exposure to the oil & gas segment is around 2.7%. For FY16, management maintains its targets: (i) ROE to come in at 10%; (ii) Total loans growth of 8%; and (iii) CIR to be capped below 53% and ROE at 10%. We, on the other hand, maintained our assumptions for FY16E/FY17E: (i) ROE at 8.6%/10.3% for FY16E/FY17E; (ii) Loans/deposits to grow at 7.3%/7.7% for FY16E and for FY17E at 7.6%/8%; (iii) NIMs at 2.16%/2.15 for both FY16E/FY17E; (iv) CIR at 56%/51% for both FY16E/FY17E; and (v) Credit charge at 32bps/31 bps for FY16E/FY17E. Also note that, this financial quarter is the last reporting quarter for RHBCAP as the new RHB Bank Group is expected to be listed by end of June 2016.

No change in forecast earnings with TP and Market Perform rating maintained. As earnings were within expectations, we made no changes to our forecast earnings of RM1,867m/RM2,170m for FY16E/FY17E. Our TP is 6.51 based on a blended FY17E PB/PE ratio of 1.3x/10.6x. This is based on its 5-year average PB/PE Bands with +1SD above their respective 5-year mean. With a less than 10% upside potential, we maintain our Market Perform rating. The stock is still looking attractive with its low P/B but decent ROE among its domestic peers. The stock is currently one of the cheapest public listed banks, trading at 0.8x P/B value with a P/B ratio of ~8.0%. In the meantime, the industry is currently trading at 1.5x P/B with an average ROE of 11.4%. Upside risks to our call are: (i) lower than expected margin squeeze, and (ii) higher-than-expected loans and deposits growth, while downside risk is worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 26 May 2016