RHB’s FY16 performance was hit by a massive one-off impairment due to its overseas accounts. We expect better earnings for FY17 due rebound from the above mentioned impairments. However, we lower our TP to RM5.08 after applying a lower PB/PE below its 5-year average. MARKET PERFORM maintained.

Operational costs efficiency curbed earnings fall. 12M16 core net profit (CNP) of RM1681.6m improved marginally by 1.0% YoY, brought about by higher allowances for impairments but mitigated by falling opex (due to the absence of the one-off CTS (RM309m in 3Q15). Top-line improvement was marginal (+0.3% YoY) dragged by falling Non-Interest Income (-6.8% YoY) due to lower forex gains (- 29.8% YoY) and lower investment/trading income (-9.4% YoY). NIMs fell by 7bps due to higher funding costs mitigated by improved NIMs in Q3. Cost to Income ratio (CIR) improved by 9ppts to 50.0% (vs. industry average of 48.9%) as opex deceleration was faster than revenue acceleration.

Loans slower with deteriorating asset quality in FY16, slowing at +2.0% YoY brought about by a surge in Q3 (vs. industry’s +5.3% YoY). Loans were driven by the mortgage (15% YoY) and SME (+16% YoY). Deposits were stronger at 4.8% YoY (vs. industry’s +1.5% YoY) with CASA improving by 11.9% prompting higher CASA ratio by 160bps to 25.6%. As deposits outpaced loans, loan-todeposit ratio (LDR) fell by 260bbps to 93.2%. Asset quality deteriorated for the year by 55bps to 2.43% (vs. industry’s 1.64%) primarily due to certain O&G corporate accounts in Singapore prompting higher impairment allowances, which led to credit charge rising by 27bps to 0.41%. Capital remains adequate with CET1 and CAR at 13.1% and 17.2% well above the regulatory requirements of 7.0% and 10.5%, respectively. The fall in ROE (by 90bps) due to higher shareholders’ funds attributed to the 2016 Rights Issue.

Expect the worse over on impairments. 2017 should be a better year for RHB on the premise that the large-scale impairments seen in 2016 are likely over with credit costs expected to normalize. At the end of 2016, the Group’s exposure to the O&G industry is at 3.6% of its portfolio of which 15% is from Singapore (the bulk of its impairments). We are still cautious on the issue as 46% of its O&G exposures are still on the watch list (vs. 46% normal and 8% impaired). Management view that loans growth will be better at ~5% as its mortgage and SMEs loans surpassed the industry’s mortgage and SME’s growth of 9.2% for both. As for NIMs with the high LDR at 93%, downward pressure on NIMs might be cushioned going forward as liquidity is ample (with the recent rights issue) although deposittaking activities ae expected as banks chase for longer-term deposits.

Forecasts earnings toned slightly for FY17E. Our forecast earnings for FY17E are toned down by 1% to RM2,056m due to the slight revision mentioned below. TP reduced with call maintained.

Our TP is revised downwards to RM5.08 (from RM5.20 previously). This is based on a blended FY17E PB/PE ratio of 1.0x/9.0x (previously, it was a blended FY17E PB/PE ratio of 1.0x/9.4x with a - 1.5SD below their respective 5-year mean). The lower PB/PE is below its 5-year average of 1.1/11.4 and justified given its forward ROE/loans growth below its average mean. Maintained MARKET PERFORM.

Source: Kenanga Research - 27 Feb 2017