RHB Bank’s 1QFY17 performance was within expectations but fell by 11% YoY due to abysmal topline revenue and higher allowances for impairments. No dividend declared for the quarter as expected. TP reduced to RM5.60 after applying a lower PB/PE below its 5-year average. Our call revised upwards to MARKET PERFORM as potential returns looks attractive.

Dragged by topline and impairments losses. RHB’s core net profit of RM500.3m (-11.4% YoY) was in line with ours/consensus accounting for 24%/25% of estimates. Broadly the YoY decline was dragged by a drop in topline revenue (-1.7% YoY) and higher allowances for impairments (+70.2% YoY). The topline decline was mitigated by strong Islamic banking income (+10.2% YoY) as fund and fee based income fell 4.5% YoY and 2.3% YoY respectively. Islamic income was boosted by higher net fund based income as gross financing were strong at +10.4% YoY and +4.8% QoQ. The decline in fund based income was heightened by slower loans and dipped in net interest margin (NIM) by 9bps to 1.9% (vs our expectation of a 3bps compression) as fall in average lending yield outpaced fall in cost of funds (31bps vs 17bps). Opex was up by +1.9% due to personnel costs and IT-related expenses, which drove cost to income ratio by 170bps to 48.9% (vs industry’s 46.3%) as opex outpaced topline revenue. Loans growth slower than expected. For the quarter loans growth was at +3.2% YoY (vs management’s guidance/our expectations of 5%). Deposits growth was faster from the year before at +5.3% YoY forcing its loan-todeposit ratio to dipped by 180bps to 93.2%. On a positive note, CASA ratio was higher by 210bps to 26.2% outpacing deposits growth at +14.5% YoY. Asset quality deteriorated compared to a year ago at 2.4% (vs 1QFY15: 1.8%) with higher credit charge of 25bps (vs management’s guidance/ours expectation of 25-30bps/30bps) as opposed to 15bps a year ago.

No change in our views that 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. The Group’s exposure to the O&G industry is currently lower than in FY16 at 3.4% of its portfolio, of which 16% is from Singapore (the bulk of its impairments). Although loans growth was below target in 1Q, we are cautiously optimistic that its FY17 target is achievable on the back of strong business growth as its SME’s market share improved by 10bps to 8.9% QoQ and mortgages growth of +15% YoY was stronger than industry’s +8% YoY. We are still concern on its NIM as deposit-taking activities are expected to intensify as banks chase for longer-term deposits driven by the expected higher demand for loans. However downward pressure on NIM might be cushioned going forward with ample liquidity (with the rights issue issued last year) and funding costs expected to be contained with nearly RM2.9b of debt securities redeemed in May 2017.

No change in earnings. Our forecast earnings are maintained at RM2,061m for FY17. TP reduced, but call revised up. Our TP is reduced from RM5.65 to RM5.60. This is based on a blended FY18E PB/PE ratio of 0.92x/11.54x (previously, it was a blended 1.0x/10.8x FY18E PB (5 year PB mean with a 1SD below). The lower PB is reflective on concerns of lower ROE due to higher credit charge (to comply with MFRS9) whilst the 11.54x PER is its 5-year mean with a 0.5SD below to reflect moderate loans growth ahead (but likely higher than initially expected due to improved economic outlook this year). With a potential total return of 8.5%, we revised our call upwards to MARKET PERFORM.

Source: Kenanga Research - 24 May 2017