Review

• RHB Bank reported weaker 4Q results. FY16 net gains was of little changed, up 1% YoY to RM1,682mn from RM1,665mn a year ago. Net profit came below expectations, accounting for 83% and 88% of ours and consensus estimates. Results also fell short of most of management’s FY16 targets.

• The weaker set of results were mostly due to the steep increase in loan allowances along with a total impairment on other assets totalling RM268mn. On a positive note, total income came within our forecast, accounting for 96% of our full year estimates.

• Sequentially, net profit contracted by 48.3% on the back of a 9.3% decline in the total income along with total loan allowances amounting to RM309mn vs. RM146mn in the previous quarter.

• From a year ago, net fund based income expanded by 3.0% YoY as loans climbed 2.0% YoY, coupled with a 4 bps increase in net interest margin (NIM) to 2.19% from 2.15%. RHB attributed the improvement in the net fund based income and NIM improvement to active management of funding and liquidity.

• Loan growth was driven by the retail and SME segments, 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 (+15% YoY), and SME businesses (16.0% YoY). Meanwhile, we note some easing in lending to commercial properties (+2% YoY) while auto finance and securities financing decreased by some 15% and 18% YoY. Total deposits climbed by 5% YoY, led by encouraging CASA increase of 12% YoY. CASA composition broadened to 25.6% from 24.0% a year ago.

• Total non-fund based income contracted, easing by 6% YoY and 25% QoQ amid the challenging market conditions. The decline was underpinned by a 9% YoY fall in fee income, which was led by IB related and commercial banking fees. Fee income from wealth management however, grew at a softer pace of 13% YoY. FX gains sank to RM271mn from RM386mn a year ago. Muting the decreases in fee income and FX were higher insurance underwriting surplus and trading/investment income. Insurance underwriting surplus climbed 46% YoY while gains and MTM on securities and derivatives ballooned to RM187mn vs. RM127mn in FY15.

• Total operating expenses declined by 7.0% YoY but climbed at a modest pace of 3.0% QoQ as the group’s cost optimisation efforts continue to bear fruit. During the year, personnel expenses contracted by 12.0% YoY on the back of the CTS exercise undertaken in 2015. Management noted that the 12% personnel cost savings was partly offset by higher communication expenses and higher IT expenses as RHB continued to invest in technology capabilities and infrastructure Nevertheless, overall cost-to-income (CTI) ratio improved to 50% from 53.8% in FY15

• Whilst the group’s retail books remained fairly intact, loan allowances was mostly driven by the non-retail loan book, which surged to RM444mn vs. RM316mn in FY15. RHB also reported a sharp RM163mn QoQ increase in loan allowances during the 4Q due to some weakness in a corporate customer in the steel related industry. In 2016, total gross impaired loans jumped to RM3.75bn from RM2.84bn in FY15, lifting the gross impaired loans (GIL) ratio to 2.43% from 1.88% a year ago. 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 13.1% and 17.2%. A final cash dividend of 7 sen has been proposed. Total DPS amounts to 12 sen (FY15: 12 sen), representing a payout of c. 29%.

Impact

• Incorporating the FY16 results, we adjust our FY17 and FY18 net profit estimates lower to RM1,963.5mn and RM2,071.7mn. We expect modest profit of 6.5% in FY19 to RM2,205.9mn.

Outlook

• We continue to foresee challenging topline growth due to continued volatility in the global markets. While we expect spillover effects from an industry-wide deterioration in asset quality to persists, we continue to believe RHB continues to be at risk of facing pockets of corporate impairments in the O&G, manufacturing and real estate sectors in Singapore and Malaysia.

• Meanwhile, management appears more upbeat about the growth prospects in 2017. Citing resilient domestic demand, recovery in exports and stable interest rate environment, loan growth is expected to accelerate at a stronger pace of 5% (FY16: +2%). Stronger contributions are also expected from it overseas operations. On the cost side, the CTI ratio is expected to be kept below 50% while proactive asset quality management should help keep a lid on the GIL ratio to less than 2.5%. RHB projects an ROE target of 9-10%.

Valuation

• We lower our TP to RM4.40 from RM5.00 on the back of the reduction to our FY17 earnings estimates. As such, we downgrade RHB from HOLD to SELL. Our TP is based on implied FY17e PBV of 0.78x. The stock is also currently trading at 0.87x, a slight discount vis-à-vis the industry’s average PBV of 1.12x.

• 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 - 27 Feb 2017