MIDF Sector Research

RHB Bank - Getting in on the Industry Trend

sectoranalyst
Publish date: Thu, 01 Aug 2019, 09:46 AM

INVESTMENT HIGHLIGHTS

  • No objection from BNM to commence negotiation to divest insurance business
  • A logical move; the Group will be able to devote more resources to strengthen core banking business
  • Potential to book in gains in FY19 but details still scarce
  • Overall positive on the development
  • No revision to FY19 and FY20 forecast
  • Maintain BUY with unchanged TP of RM6.35

Announcing no BNM objection to commence negotiations to dispose subsidiary. The Group announced yesterday that it received a letter from Bank Negara Malaysia (BNM) whereby BNM has no objection for the Group to commence negotiations with Tokio Marine Asia Pte Ltd. This is in relation to the proposed disposal of up to 94.7% of its equity interest in RHB Insurance. The approval is valid for 6-months from the date of BNM’s letter which was on 29 July 2019.

Disposal could be due to desire to exit non-core business. As this is at the earliest stage of negotiation, we are not surprised by the lack of details. We postulate that the rationale for the disposal is that the Group wants to exit from its non-core business.

A logical move; better to focus on core banking business. The propose divestment of the Group's non-core subsidiary seems to follow the trend in the banking sector. We had observed some of its peers have reduced or disposed their non-core assets. In our opinion, the propose divestment seems like a logical move as the Group could better focus on its core banking business.

RHB Insurance is not a significant earnings driver. We believe RHB Insurance is not a significant driver to the Group’s earnings. Based on RHB Insurance Bhd’s FY18 audited accounts, RHB Insurance Bhd recorded a PAT of RM62.8m which was a -39.8%yoy decline due to higher net claims (+34.9%yoy to RM302.3m) and lower other income (- 17.7%yoy to RM84.4m). Compared against the Group’s FY18 PAT of RM2.31b, RHB Insurance’s contributed only 3.0%. Also, RHB Insurance had a net asset of RM573.7m as at end FY18.

Potential gains to be booked in FY20, overall positive. We do note that details are still scarce. Nevertheless, we could expect the Group to book in gains from the disposal in FY20. Therefore, we are positive on this latest development due to the potential gains and the fact that the Group could devote more resources to strengthening its core banking business.

FORECAST

We are maintaining our FY19 and FY20 forecast for now pending further clarity on the proposal.

VALUATION AND RECOMMENDATION

We do not expect the Group’s earnings to be severely impacted by the propose divestment. We believe that the execution of its FIT22 strategy will be a key driver to earnings. We noted that there have been good traction with its initiatives that we believe had translated to continuing good performance the Group have recoded recently. We maintain our BUY call with unchanged TP of RM6.35. Our TP is based on pegging its FY20 BVPS to 0.97x which is its 5-year average PBV.

Source: MIDF Research - 1 Aug 2019

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