Review

• RHB Bank reported stronger 3Q results after registering less positive set of results in the previous quarter. 9M16 net gains climbed 9% YoY to RM1,420mn from RM1,302mn a year ago. Results came largely within expectations, with YTD net profit accounting for 73% and 74% of ours and consensus estimates.

• The encouraging set of results were driven by higher operating income and 14% reduction in operating expenses due to a Career Transition Scheme (CTS) expense of RM309mn undertaken in 3Q15. Levelling off the one-time expense, recap that RHB Bank reported lumpy impairment made on other assets of some RM250mn in the previous quarter. YTD operating income of RM4,830mn accounted for 75% of our full year forecast.

• Sequentially, net profit surged 44.3% on the back of an increase in the total income but mostly due to a net writeback on impairment of other assets. Total operating income expanded by some 3% owing to a 10% increase in other operating income.

• Net fund based income expanded by 4.0% YoY as loans climbed 2.0% YoY, coupled with a 2 bps increase in net interest margin (NIM). QoQ, the net fund based income stood little changed as NIM fell 4 bps on the back of the 25 bps reduction in OPR in July 2016 and lower loan yield.

• Loans growth was driven by the retail and SME segment, which combined, made up some 60% of RHB’s total loan portfolio. We note a reduction in the corporate loan mix and this was partly due to several lumpy repayments. By segment, the bank focused on growing the non-residential property loans (+21% YoY), residential mortgages (+14% YoY) and construction (+8% YoY) sectors. Meanwhile, total deposits climbed by 4% YoY, led by encouraging CASA increase of 10% YoY. CASA composition broadened to 24.5% from 23.3% a year ago.

• Total non fund based income improved, broadening 6% YoY and 8% QoQ amid the challenging market conditions. Gains were underpinned by a 62% increase in insurance underwriting surplus along with realised and MTM gains on securities and derivatives amounting to RM186mn vs. RM83mn a year ago. Total fee income slipped 2% YoY owing to decreases in IB related and commercial banking fees. Fee income from wealth management however, grew by an encouraging 38% YoY.

• Total operating expenses declined by 4.0% YoY but climbed at a modest pace of 2.0% QoQ as the group’s cost optimisation efforts continue to bear fruit. During the 9M, personnel expenses contracted by 11.4% YoY on the back of the CTS programme. Savings from personnel costs were partly offset by higher IT expenses as the group continued to invest in technology capabilities and infrastructure. Nevertheless, overall cost-toincome (CTI) ratio improved to 49.9% from 54.6% in 9M15.

• Whilst the group reported write back on impairment losses on other assets during the quarter, allowances for loan impairment surged to RM146mn from RM60mn in 2Q16 and RM106mn a year ago. Impairment losses on these loans reflect asset quality weakness in two corporate accounts that are, according to management, related to the oil and gas segment in Singapore. In Sept 2016, total gross impaired loans jumped to RM3.4bn from RM2.8bn in FY15, lifting the gross impaired loans (GIL) ratio to 2.25% from 1.88% in FY15. Loan loss coverage deteriorated to 74.7% vs. 83.9% in FY15. This is inclusive of 1.2% regulatory reserve.
• Lastly, the RHB Bank Group’s capital position remained healthy with a CET1 and Total Capital Ratio of 13% and 17.1%.

Impact

• No change to our earnings estimates.

Outlook

• We continue to foresee challenging topline growth due to continued volatility in the global markets. Management envisaged loan demand to remain soft, pressure on margins to continue and fee income from IB and the commercial bank to stay subdued. While we expect spillover effects from an industry-wide deterioration in asset quality to persists, we continue to believe RHB is also at risk of facing several more corporate impairments in the O&G, manufacturing and real estate sectors in Singapore and Malaysia.

Valuation

• TP is maintained at RM5.00. HOLD maintained on RHB Cap. Our TP is based on implied FY17e PBV of 1.0x. The stock is also currently trading at 0.94x, a slight discount vis-à-vis the industry’s average PBV of 1.1x.

• Key upside/downside risks to TP include: 1) pickup in contribution from overseas operations, 2) severe asset quality deterioration or lumpy recoveries from troubled corporate accounts in Singapore and Malaysia, 3) better than expected cost savings and revenue synergies from implementation of IGNITE, 4) stronger non-NII from a pickup in capital market activities and strategic tie-ups, and 5) ability to strengthen deposit mix and effectively manage funding costs.

Source: TA Research - 24 Nov 2016