9MFY17 results came within expectations as earnings improved by 5% YoY due to the absence of large impairments. No dividend declared as expected. We cut our TP and earnings estimates due to revisions on loans growth but maintain the OUTPERFORM call due to undemanding valuations.

YoY earnings boosted by fall in impairments. Core net profit of RM1,494m (+4.9% YoY) is in line with our/consensus expectations, accounting for 72%/74% of estimates. The improved earnings were due to a fall in impairment allowances by 20.3% YoY, as top-line fell 0.9% YoY dragged by fall in fee-based income (-13.9% YoY) but mitigated by better performance from Islamic Banking (+17.6% YoY) and fund-based income (+1.4% YoY). Compounding the fall in fund-based income was loans growing below target (+3.3% vs. 5% target and system loans of +5.2% YoY). NIM improved by 1bps YoY vs. our expectations of a 3bps compression). Cost-to-Income ratio went slightly up by 40bps to 49.6% (vs. industry’s +48.0%) as top-line’s fall outpaced that of opex (-0.2% YoY).

As loans outpaced deposits, loan-to-deposit ratio (LDR) inched slightly by 170bps to 93.8%. Deposits eased at +1.5% YoY (vs. system’s +4.6% YoY) due to conscious efforts to reduce its Money Market Term Deposits (MMTD). On a positive note, CASA ratio was higher by 260bps to 27.1% outpacing deposits growth at +11.9% YoY. Asset quality was mixed with Gross Impaired loans ratio (GIL) up by 6bps whilst credit costs dipped by 8bps to 26bps. Discounting the impairments on other assets, credit costs were up by 8bps to 33bps (vs. management’s guidance/our expectation of 25-30bps/31bps).

QoQ highlights. CNP fell 2.4% as top-line growth was marginal (+0.3%) while seeing higher opex and impairment allowances at +4.0%. Top-line was driven by improved fee-based income and fund income (+4.5% and +0.7% respectively), offsetting the fall in Islamic Banking income (-6.5%). The marginal fund income growth was attributed to slower loans (+0.9%) and 2bps improvement in NIM. For the quarter, asset quality deteriorated slightly as GIL and credit costs inched slightly by 2bps and 1bps respectively.

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. We are cautious on its loans target of ~5% with drivers from mortgages and corporate loans moderating in 4QFY17. As of Sep 2017, 68% of its mortgages were below the RM1m mark. We are also concerned over its NIM as management highlighted a focus on retails deposits as opposed to corporate deposits, which put unnecessary pressure on its NIM despite stickier in nature.

Earnings revised. Our forecast earnings for FY17E/FY18E are revised slightly by +1%/-5% to RM2,087m/RM1,898m as we input in better performance from Islamic Banking by +3% YoY (from -2% YoY) for FY17E and revised downwards our loans growth for both FY17E/FY18E.

Our TP is at RM5.45 (from RM5.60). This is based on a blended FY18E PB/PE ratio of 0.92x/11.18x (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 11.18x 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 still looking attractive at ~14%, we maintain our OUTPERFORM call.

Source: Kenanga Research - 28 Nov 2017