INVESTMENT HIGHLIGHTS

• Normalised net profit came in within expectations

• Net profit growth was led by lower OPEX, either on normalised or non-normalised basis. And the lower OPEX was due to lower personnel costs

• CI ratio improved to 50.0% for FY16 reflecting the benefits from cost initiatives

• Islamic Banking income grew +11.6%yoy to support topline growth

• Loans and deposit growth steady. However, CASA growth was strong

• Asset quality continued to be a concern as GIL ratio as at 4QFY16 closed higher at 2.43%

• Revising FY17 forecasts downwards by -10.8% to reflect NII weakness and asset quality concerns

• Final dividend of 7 sen per share, bringing full year dividend to 12 sen per share

• Maintain NEUTRAL with unchanged TP of RM5.15, pegging the stock to PB multiple of 0.9x on FY17 RHB Bank’s BVPS

Normalised earnings within expectations. The Group's FY16 net profit came below expectations at 87.4% and 87.6% of ours and consensus' estimates respectively. However, on a normalised basis, which excludes one-off impairment on a corporate bond of RM254m, earnings came within ours and consensus' expectations at 97.5% and 97.7% of respective full year estimates.

Net profit growth lead by optimized OPEX. FY16 net profit grew +1.0%yoy and +4.3%yoy on normalised basis, where in both cases were due to strong decrease in OPEX. For FY16, OPEX fell -14.6%yoy on lower personnel cost where it fell -23.7%yoy to RM1.77b. Normalised OPEX (excluding the Career Transition Scheme in FY15 of RM308.8m) fell -6.7%yoy, again due to lower personnel cost which fell -12.0%yoy. Resultantly, CI ratio improved by -3.8ppts yoy to 50.0%.

Islamic Banking supported topline growth. Total income for FY16 was almost flattish coming in at RM6.19b. This was supported by Islamic Banking income which grew +11.6%yoy to RM977.2m on the back of both net fund based income (+11%yoy) and non fund based income (+19%). Meanwhile, NII grew +1.3%yoy to RM3.45b

Uptick in NIM but too early to conclude whether it is a start of an uptrend. NIM increased by +3bps yoy to 2.18% for 4QFY16 on active management of funding. However, we believe that it is too early to conclude that NIM has turned to an uptrend, given that NII in 4QFY16 fell -3.4%yoy.

Steady loans growth. Gross loans grew +2.0%yoy to RM154.5b. This was contributed by the continued traction in mortgages and SME lending which grew at a faster pace. Mortgages and SME loans as at 4QFY16 grew +15.1%yoy to RM40.9b and +15.8%yoy to RM20.2b respectively. Comparatively, as at 3QFY16, loans from these two segments grew +13.9%yoy and +12.9%yoy respectively.

Robust CASA growth. Customer deposits as at 4QFY16 grew +4.8%yoy to RM165.8b. We like the fact that deposit growth was supported by robust CASA growth, which came in at +11.9%yoy to RM42.5b. This resulted in better CASA ratio of 25.6% vs. 24.5% and 24.0% registered as at 3QFY16 and 4QFY15 respectively. We view the robust CASA growth as positive as this would not only ensure ample liquidity but also provide better margins.

Asset quality continue to be a concern. We continue to be concerned about the Group’s asset quality. GIL ratio as at 4QFY16 was higher at 2.43% from 1.88% as at 4QFY15. It was also an +18bps qoq uptick. We understand that this was mainly contributed by the loan restructuring of a steel related manufacturer and impacted by certain oil and gas customer accounts. Our concern is that the situation, while under control, has yet to normalised.

FORECAST

We are revising our FY17 forecasts downward by -10.8% as we take into account the NII weakness and the potential deterioration of asset quality.

VALUATION AND RECOMMENDATION

It was a mix result for the Group. While we believe that initiatives to bring OPEX lower had bear fruit, earnings were dragged by high provisions and weakness in NII and NOII. Asset quality remains our biggest concern. However, we like the fact that the Group's CASA franchise was expanding robustly and this could provide liquidity and ease NIM pressure. Hence, all-in-all we maintain NEUTRAL on the stock with an unchanged TP of RM5.15 based on 0.9x of RHB Bank’s FY17 BVPS.

Source: MIDF Research - 27 Feb 2017