RHBBANK announced that Bank Negara Malaysia (BNM) has no objection to its commencement of negotiations to sell its 94.7% stake in RHB Insurance to Tokio Marine. We are positive on this development which takes RHBBANK one step closer to divesting its insurance arm while impact on its forward earnings will be minimal with CIR likely reduced and CAR enhanced. Reiterate OUTPERFORM with unchanged TP of RM6.05

No BNM’s objections on divesting its Insurance Arm. RHBBANK announced yesterday on Bursa that that BNM via its letter dated 29 July 2019 stated it has ‘no objection’ for RHBBANK to commence negotiations with Tokio Marine Asia (TMA) in relation to the proposed disposal of its 94.7% interest in RHB Insurance. The approval is valid for six months from the date of BNM’s letter.

Positive on the proposal. While surprised with the news, we are positive on the development, taking RHBBANK one step closer to divesting its insurance arm. We believe this exercise is purely for costcutting measures as the insurance arm accounts for up 4% of its opex but contributes only <3% to top-line and bottom-line. Furthermore, with RHBBANK rebalancing its exposure to corporate loans, it is likely that the group sees its insurance arm as less earnings-accretive in the long run.

No significant impact. We believe impact on earnings will be minimal. Our initial assessments estimated that our FY20E EPS will be shaved by 3% to 60.0 sen/share but CIR lowered from 45% to 44%. The divestment will likely enhance its CET1 and CAR ratio by 40bps to 16.3% and 19.6%, respectively.

A special dividend payout? Assuming a sale is between 2-3x book value, we estimate a gain of RM543m to RM1,100m for RHBANK, which the bank could either used for reinvestment/working capital or potentially a special dividend. At a conservative gain of RM543m, we estimated a potential payout of about 48% or DPS of 36sen (from current payout of 36% and DPS of 21sen) translating to a dividend yield of 6.5% comparable to Maybank.

No change in forward earnings. As nothing is cast in stone yet, we maintain our FY19E/FY20E earnings of RM2.39b/RM2.48b – with these conservative assumptions unchanged:- (i) loans growth of <5%/~5.5%, (ii) CIR at 49%, (iii) 5-10bps compression, (iv) credit charge at 19bps, and (v) ROE at 10%.

Call and TP maintained. TP maintained at RM6.05 based on a target 0.92x PBV FY20E (implying a 0.5SD below mean valuation) - to reflect potential risk from uncertainties ahead. Valuations are undemanding; the recent depreciation of its share price has resulted in a decent dividend yield of 4% and coupled with a potential return of ~14% we reiterate OUTPERFORM.

Key risks to our call are: (i) steeper margin squeeze, (ii) higher-thanexpected loans & deposits growth, (iii) lower-than-expected rise in credit charge, and (iv) further slowdown in capital market activities.

Source: Kenanga Research - 1 Aug 2019