1H17 came within expectations as earnings improved by 9% YoY due to the absence of large one-off impairments. An interim DPS of 5.0 sen was declared (in line) as expected. TP and call maintained due to undemanding valuations.

Improved on lower impairment allowances. Core net profit of RM1001m (+9.4% YoY) is in line with our/consensus, accounting for 49%/50% of estimates. On hindsight, the improved earnings was due to fall in impairment allowances at -29.2% YoY (with the absence of oneoff impairments) as topline was marginally flat (+0.1% YoY). The flat topline was mitigated by strong Islamic Banking income surging ahead at +17.2% YoY as fund and fee-based income fell 0.4% and 7.9%, respectively. Islamic income was boosted by higher net fund-based income (+17.4%) despite Islamic funding rate falling by 24bps as gross financing was strong at +12.9% YoY. Compounding the fall in fundbased income was loans growing below target (+3.2%) and a dip in NIM by 3bps to 2.0% vs. our expectations of a 3bps compression) as fall in average lending yield outpaced fall in cost of funds (24bps vs 22bps). Cost-to-Income ratio rose by 90bps as the increase in opex (+1.9% YoY) outpaced topline growth due to higher personnel costs and IT-related expenses. Loans growth was slower than expected. For the period, loans growth was at +3.2% YoY against the industry growth of +5.7% YoY (vs management’s guidance/our expectations of 5%). Deposits eased from a year before by 340bps to +1.0% (vs industry’s 3.0% YoY) forcing uptick in loan-to-deposit ratio (LDR) to dip by 2ppts to 94.4%. On a positive note, CASA ratio was higher by 310bps to 27.9% outpacing deposits growth at +13.5% YoY. Asset quality was mixed with Gross Impaired loans ratio which deteriorated compared to a year ago by 23bps to 2.9% but credit costs dipped by 13bps to 0.26% (vs. management’s guidance/our expectation of 25- 30bps/30bps).

No change in our views that 2017 should be a better year for RHBBANK on the premise that the large-scale impairments seen in 2016 are likely over with credit costs expected to normalize. Management reiterated that no major stress exists in its portfolio in the last 18 months. The Group’s exposure to the O&G industry is currently lower than in FY16 at 3.5% of its portfolio, of which 25% is from Singapore (the bulk of its impairments). Although loans growth was below target in 1H17, we are cautiously optimistic that its FY17 target is achievable on the back of strong growth and recoveries from its SME, mortgages and corporate markets supported by the focus in the affluent car market. We are still concerned over 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 last year) and funding costs are 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 and call maintained. Our TP is maintained at RM5.60. This is based on a blended FY18E PB/PE ratio of 0.92x/11.54x (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 better economic outlook for 2018). With a potential total return looking attractive at ~14% we maintained our OUTPERFORM call.

Source: Kenanga Research - 30 Aug 2017