This article first appeared in The Edge Financial Daily on March 29, 2018
RHB Bank Bhd
(March 28, RM5.25)
Maintain add with a lower target price (TP) of RM6.23: Our recent meeting with RHB Bank Bhd chief financial officer Tuan Syed Ahmad Taufik Albar reaffirmed our positive stance on the bank. The positive takeaways from the meeting were the expectations of stronger loan growth in 2018 and an expected turnaround in its overseas earnings. Meanwhile, a negative takeaway was the guidance that the positive impact from the rate hike would not be as significant as we had anticipated.
RHB Bank expects stronger loan growth for the industry in 2018 compared with 4.1% in 2017 due to the lag effect of the robust gross domestic product growth in 2017. In line with the industry trend, RHB Bank is targeting higher loan momentum of 6% in 2018 versus 3.7% in 2017. This is above our projected financial year 2018 (FY18) loan growth of 5.4% for the bank. We estimate that every 1% point increase in the loan growth forecast for RHB Bank could raise our net profit forecast by 0.7%.
The bank’s overseas operations (mainly in Singapore) have incurred losses in the past two years — pre-tax losses of RM233 million in FY16 and RM249.4 million in FY17. The losses mainly arose from high provisioning for corporate accounts and chunky impairment losses for its oil and gas exposure. The bank expects a turnaround in its overseas businesses in 2018, underpinned by lower provisioning/impairment losses and an improvement in loan growth.
Based on our estimate, the rate hike in January/February 2018 could lift RHB Bank’s FY18 to FY20 forecast (F) net profit by 6% to 7% arising from a positive upward repricing gap between lending and fixed deposit (FD) rates. However, the bank stated that the impact would be minimal as it has launched a deposit campaign (which will end on June 30, 2018) that pays much higher interest rates of 4.25% for 10-month FDs and 4.38% for 15-month FDs.
As we think that the higher interest rates offered during the deposit campaign would elevate its cost of funds, we raise our assumed cost of deposits by 10 basis points (bps), leading to a reduction of 4% to 5% in our net interest income and 5% to 6% in our earnings per share (EPS) forecasts for FY18 to FY20F. This also lowers our dividend discount model-based TP from RM6.60 to RM6.23. Even after the earnings cut, we still project a strong EPS growth of 12.8% in FY18F.
Our top pick for the sector is RHB Bank. We remain an “add” and our top pick for the sector is premised on its attractive valuations with FY19F price-earnings ratio of 8.4 times and price-to-book value of 0.8 times, and the benefits from its ongoing transformation programme. Potential downside risks to our call are slower-than-expected loan growth and an increase in gross impaired loan ratio. — CGSCIMB Research, March 27