RHB Bank Bhd
(Nov 28, RM4.86)
Maintain hold with an unchanged target price (TP) of RM5.35 per share: RHB Bank Bhd’s nine months of financial year 2017 (9MFY17) net profit came in at RM1.49 billion (+4.9% year-on-year [y-o-y]) driven by sharply lower impairments (in the oil and gas sector and other corporate accounts) versus 9MFY16 (which was hit by the Swiber bonds impairment of RM250 million). Results were within our and consensus estimates. Operationally, RHB’s 9MFY17 pre-provision operating profit declined 1.6% y-o-y arising from a 7.3% y-o-y lower non-interest income, weak fund-based income growth (+3.4% y-o-y), dampened by the cutback in higher-yielding Amanah Saham Bumiputera loan financing, 2% y-o-y growth in operating expenditure. Overall, RHB’s funding pressure eased, driven by a conscious move to manage down pricey deposit growth and boost lower-cost current account, savings account growth (+12% y-o-y as at September 2017), and a decline in total debt-capital funding (-20% y-o-y). This resulted in a steady 9MFY17 net interest margin (NIM), which averaged at about 2.18% against 2.19% for 9MFY16. Meanwhile, net profit for third quarter of FY17 (3QFY17) eased by 2.4% quarter-on-quarter (-3.3% y-o-y) due to further provisions on collective allowance.
Based on the key takeaways from the RHB conference call, management will continue its initiative to boost the group’s impaired loan cover to 100% from 93.6% as at September 2017 (June 2017: 81.4%) and has maintained its credit cost guidance of 35 basis points (bps) (optimistically, may end up below 35bps). Operationally, should loan growth continue expanding in 4QFY17 (driven by the small and medium enterprises [SMEs] and non-retail sectors) and with the NIM intact, we believe that 4QFY17 should fall in line with expectations.
Our Gordon Growth Model-based 12-month TP of RM5.35 (at a 2018E [estimate] price-to-book value of 0.87 times) remains unchanged, underpinned by a 2018E return on equity of 8.5% and cost of equity of 9%. Upside risks include revenue growth and cost savings from the group’s transformation programme Ignite 2017, increased retail/SME banking penetration. Downside risk is subdued loan growth. — Affin Hwang Investment Bank Research, Nov 28