Despite 9M16 net profit coming within expectations, challenges remain from both loans growth and asset quality. Management are cautious going forward but sees stability in 2H17. Due to a slight revision in FY17 earnings and after applying a lower price-to-book target, we lower our TP to RM5.20 and downgrade RHB Bank to MARKET PERFORM

9M16 core net profit of RM1420m (9% YoY) was within expectations, accounting for 80%/75% of our/consensus estimates. The positive YoY growth was due to healthy pre-provision operating profit of (+36% YoY) underpinned by healthy growth from non-interest income (9% YoY) and Islamic banking income (+7% YoY). Net Interest Income was slower at 3% as loans growth were slower at 2% YoY. NIM was lower by 7bps due to falling lending yields. Loan loss provisions, however, surged 170% with credit costs at 25bps as asset quality deteriorated to 2.2% due to restructuring and reclassification of accounts in Singapore (incurred in 3Q16). On a quarterly basis, bottom line surged 44% due to the absence of major impairments as top line was slower at 2%. However, credit costs still surged to 39bps for the quarter. Loans were slower at 0.8% but deposits rebounded to 1.1% from the preceding quarter. As expected, no dividend was declared in this quarter.

9M16 vs 9M15

• Top line grew 5.0% (9M15: +5.1%) driven by a healthy growth across the board; Net Interest Income (NII), Islamic Banking Income and Non-interest Income (NOII) grew at 3.0%, 9.0% and 6.8% (9M15: -0.1%, +18.4% and +8.7%) respectively. Islamic banking income was supported by strong financing growth of +19.8%. Non-interest income (NOII) was slower due to lower fee income and forex loss.
• Annualised NIMs fell by 7bps to 1.9 mainly due to the impact of the OPR cut as loan yields fell faster than COF.
• Cost Income Ratio (CIR) fell by 11ppts to 49.9% (vs. industry’s CIR of 48.8%) as opex fell by 14.5% attributed to falling personnel costs savings by 11%. Excluding the CTS (incurred in 3Q15) normalised CIR would have shaved off 6ppts.
• Loans/Deposits growth rates were decent at +2.3%/+4.4% (vs. industry average at +4.2%/+0.85%) but lower than our estimates of +5%/+4%.
• Loans growth was driven by SME (+12.4%) and housing (+15.6%). Growth in deposits was led by business enterprises and individuals deposits at +3.6% and +11.6%, respectively.
• LDR dropped 2ppts to 92.1% (against the industry average of 88.6%) as deposits outpaced loans but aggressiveness in their lending for a given level of deposit. CASA improved by 1ppts as it grew 9.9% (vs. fixed deposits growth of 2.7%.
• Asset quality deteriorated severely by 31bps to 2.25% (vs. industry ratio of 1.65%) attributed to restructuring of a loan to a steel manufacturer and classification of several O&G accounts from Singapore in 3Q16.
• Loan loss coverage (LLC) was flattish at 56.0% but inclusive of the 1.2% regulatory reserve, LLC is at 74.7% (vs. the industry coverage of 89.4% and above the regulatory requirements of 70%). Credit cost was at 25bps vs. 10bps in the previous corresponding period. Accounting for the one-off impairment (incurred in 2Q16), credit cost would have been at 39bps.

Source: Kenanga Research - 24 Nov 2016