RHBBANK gave a briefing yesterday to update on the progress of its Ignite 17 and strategic focus where feebased income will be the earnings driver in the long-term as the environment and loans growth is still a challenge. No change in our view either on the challenges facing the bank; thus, we maintain our earnings assumptions for now. We maintained our TP and OUTPERFORM call as we see value with the recent sharp pullback in its share prices.

Driving earnings from fee-based income. As part of its Ignite 17 strategic initiatives, the RHBBANK has set a series of targets to drive earnings forward from the traditional fund-based income growth. Among the target is for the Group’s Treasury and Global Market to achieve a 25% contribution to overall PBT by 2020 driven by larger contribution from fee based income. To support growth strategic initiatives will focus on: (i) enhancing revenue from foreign exchange, fixed income and derivatives sales, (ii) managing costs via reducing & optimizing funding costs, and (iii) optimising risk adjusted returns via rebalancing its investment securities portfolio mix by reducing its HTM (Held to Maturity) assets and raising its AFS (Available for Sale) assets in line with its peers. Currently, the bank has a 39%/55% HTM/AFS mix from 44%/53% (in 2014) compared to peers that has a mix of between 10-30%/34-77%. Via the reduction in HTM, the bank expect NOII to be enhanced via capital gains and improving its yields in investment securities that are currently giving around 3.8% whereas its notable peers are yielding 4.5% to 5%. The bank intends to increase its NII/NOII mix from the current YTD 54%/46% to 30%/70% by 2020. We feel this will be a challenge on the bank as it premises on volatile and uncertainty markets throughout. Moving forward the bank will focus on maintaining asset quality with income generation coming from fee-based income.

Renewed NIMs compression expected in 2017. In compliance with MFRS 18 by January 2018, management indicated the need to take longer term deposits. Management indicated that BNM is promoting higher intake of NIDs (Negotiable Instrument of Deposits) that will have longer duration but lower rates than FDs to reduce funding costs. We feel this not viable and unlikely to be positive for deposit taking activities. Management noted that other banks have seen a substantial rise in deposit rates indicating that deposit taking activities is on the rise despite the cut in OPR which will give further NIMs compression. Management feel that impact on the bank will be substantial as NIMs compression to gradually subside in the medium-term but not before an uptick in COF initially. The confidence stems from the success of its CASA taking activities, which have been growing slightly above 10% since 3Q15 whilst deposits growth was lukewarm under 5% for the same period. Part of the success is attributed to its focus on SMEs, corporates and mass affluent segment with better product bundling that gives better rates.

Forecasts & risks. No change to our forecasts pending its upcoming results at the end of the month as we render existing assumptions to be conservative at present. Management reiterated that external headwinds are still blowing and tactically it will still be on the defensive.

Our assumptions for FY16E/FY17E are; (i) ROE at 9.3%/9.5% for FY16E/FY17E, (ii) Loans/deposits to grow at 5.2%/4.3% for FY16E and for FY17E at 5.3%/4.3%, (iii) NIMs at 2.05 for FY16/17, (iv) CIR at 56%/52% and, (v) Credit charge at 20bps/26bps for FY16E/FY17E. Key risks are: (i) steeper margin squeeze, (ii) slower-than-expected loans and deposits growth, (iii) higher-than-expected rise in credit charge, (iv) further slowdown in capital market activities, (v) another OPR cut, and (vi) adverse currency fluctuations

TP with OUTPERFORM call maintained. As there is no change to our earnings forecast, TP is maintained at RM5.33 based on a blended FY17E PB/PE ratio of 1.0x/9.7x with a -1.5SD below their respective 5-year mean. The lower SD deviation in PB is to reflect the concerns on its asset quality with the lower PE to reflect lower loans growth going forward. As there is a potential 12% upside to our TP, we maintain OUTPERFORM.

Source: Kenanga Research - 11 Nov 2016