FY17 earnings came below our expectation due to weak loans and higher impairments in the 4Q. A DPS of 15.0 sen (above expectations) was declared. Moving forward, we expect stable impairment allowances. TP is raised to RM5.70 but reiterate our MARKET PERFORM call.

Slightly below expectations. FY17 CNP of RM1.95b is below our/in line with market estimates at 94%/97% of full-year estimates. The negative deviation was due to impairment allowances on assets vs. our estimate of a write-back. With a final DPS of 10.0 sen, full-year DPS is at 15.0 sen, above our expectation of 14.0 sen.

Strong domestic loans but soft loans overall. YoY, 12M17 CNP was up by 16% attributed to improving top-line of +3% and also boosted by lower impairment allowances, which fell by 26%. Soft top-line due to both fund-based and fee-based income was weak at 2% and 1%, respectively, offset by strong Islamic banking income of 11%. Loans improved by 170bps to 4% (vs. guidance/expectation/system of 5%/4%/4%) dragged by overseas operation (-9%) but domestic growth exceeded system growth by 110bps. NIM stable at 1.9% due to higher CASA growth (19% vs. industry 9%) and redemption of higher debt notes. Credit costs lower by 11bps to 29bps (vs. our expectation of 32bps) with asset quality slightly better falling by 20bps to 2.2%. CIR continued to be stable at 50% (vs. industry/our estimate at 48%/50%) as opex growth was on par with top-line. QoQ, CNP contracted by 6% due to higher impairment allowances (at +49% due to impairments on its O&G portfolio) and higher opex (+7%). Top-line improved by 5%, underpinned by traction from fee-based income (at +25%). Fund-based income was stagnant with slower loans (+1%) and falling NIM (-3bps). Asset quality improved by 10bps to 2.2% and with higher impairments, credit costs rose by 13bps to 40bps.

Rebalancing its portfolio. RHBBANK targeted higher loans for 2018 (at +6%) to be driven by business banking mainly from SMEs and mid- corporate and rebound in overseas operations. Under its new FIT@22 strategic programme (as IGNITE 18 ends) loan portfolio will be rebalanced with Retail & SME/Corporate at 75%/25% from the current 69%/31% as it views corporates as volatile. Currently, the Group is at the 4th position in the SME space. The group intends and is working toward a notch higher in its SME market share. The group also expects a pick-up in Singapore loans due to its refocus into the SME space.

Meanwhile, management guided for a stable NIM as competitive pricing is still prevalent with low mortgages margins and to be compensated by higher personal financing. We are encouraged with the traction in its CASA (coming from non-retail) and with the added focus mid-corporate segment should translate into lower funding costs. Surprisingly, credit costs guidance is at 30bps (lower than expected) due to management’s confidence of stable energy prices and economy with low unemployment. Post MFR9, management guided for a CET1 of 11.5- 12%.

Higher earnings ahead. We revised our FY18E earnings by +6% to RM2.01b on account of lower credit costs, lower CIR and improved loans. We introduce our FY19E earnings where we expect earnings to improve by 8% on account of better loans, improved NIMs and stable credit costs. TP revised with MARKET PERFORM call maintained. As FY18E numbers are tweaked upwards, we raised our TP to RM5.70 (from RM5.45) based on a blended 0.92x FY18E P/B (unchanged) and 11.5x FY18 P/E (11.18x previously). The PB/PE multiples are based on their 5-year mean with a 0.5SD below to reflect on its asset risk (from its O&G portfolio and moderate loans). We maintained our Market Perform call as the potential total returns are only ~7% from here.

Source: Kenanga Research - 28 Feb 2018