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
1Q16 vs. 4Q15, QoQ
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
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