Friday 29 Mar 2024
By
main news image
This article first appeared in Corporate, The Edge Malaysia Weekly, on August 15 - 21, 2016.

 

WITH the Malaysian banking sector trading at an all-time low, certain local banks now appear attractive for bargain-hunting investors who are comfortable taking on some level of risk and do not mind holding their investments for a while. RHB Bank Bhd is seen as one of the banks that fits this investment strategy.

Indeed, the country’s fourth largest bank by asset size — also the second cheapest after Affin Bank Bhd (see Chart 1) — has been the best-performing banking stock in the past six months, rebounding by an outsized 29% from a five-year low of RM3.87 on Jan 22 to RM4.98 last Thursday. The last time the counter traded at such depressed valuations was in early 2009 when the US subprime mortgage crisis shocked global financial markets.

Bloomberg data shows that non-governmental institutional holding in RHB expanded by 0.76% to 5.4% since the beginning of the year. It is noteworthy that US-based investors own an aggregate of 3.54% in the bank, up 0.94% from 2.86% during the same period this year. For instance, mutual fund giant Vanguard Group acquired an additional 31.6 million shares, bringing its holding to 52.7 million shares or 1.31% and making it the bank’s eighth largest shareholder.

In the past year, the banking group has undertaken a series of corporate restructuring exercises to improve its profitability and balance sheet strength. In 3Q2015, it undertook a RM309 million staff rationalisation scheme, downsizing by 1,812 employees or 12% of its Malaysian workforce. In 4Q2015, it raised RM2.5 billion via a rights issue and injected the capital into the bank, making it one of the best-capitalised local banks.

Subsequently in 2Q2016, it completed its internal restructuring exercise, which entailed the removal of its holding company structure by transferring the listing status from RHB Capital Bhd to RHB Bank. The more efficient corporate structure is expected to result in some interest cost savings and the write-off of RM2.5 billion in goodwill, thereby enhancing its earnings per share and return on equity (ROE).

As a result of the kitchen-sinking exercises last year, net profit for 1Q2016 jumped 16% year on year to RM552 million, thanks to a 6.3% growth in total income to RM1.6 billion and a 5% reduction in overhead expenses. The strong growth in international banking (mostly Singapore) and treasury and money market revenue helped to offset the lower revenue from its core businesses, namely retail banking and corporate and investment banking.

The combination of income growth and better cost savings translated into a lower cost-to-income ratio of 48.5% (see Chart 2), below the industry average of 50.3% and beating the management’s 2016 target of 53%. Better-than-expected cost efficiency aside,  asset qu.ality also improved with gross impaired loans ratio declining to 1.82% from 1.88% in December last year, though higher than the industry’s 1.6%.

Moving forward, the management expects loan growth to slow to between 4% and 5% from 6% in 2015 as it shifts its priority to preserving net interest margin and asset quality instead of loan growth. Additionally, RHB intends to focus on better-margin segments such as small and medium enterprises (SME) banking, and aims to raise the contribution from SME loans from the current 16.9% to 20% by 2020.

ROE — the long-term share price driver for banking stocks — improved to 9.5% from 5.8% in the previous quarter on an annualised basis, albeit slightly lower compared with 10% in 1Q2015 due to the enlarged capital base. While management targets to achieve 10% ROE in 2016 and 13% in 2020, analysts expect RHB to achieve only 8.6% ROE this year and 8.5% in 2018, according to data compiled by Bloomberg.

Nonetheless, only eight of the 19 analysts tracking the stock have a “buy” call, compared with seven and four analysts that have “hold” and “sell” recommendations respectively. Analysts who are bullish on the stock cite appealing valuations that have priced in most of the negatives, strong capitalisation to absorb loan losses, and improving ROE arising from initiatives to further improve cost efficiency.

Under its IGNITE 2017 transformation programme, RHB plans to scale down its EASY outlets to 131, automated teller machine (ATM) network to 1,226 and domestic investment banking branches to 50. It will then leverage technology and enhance its electronic banking by introducing the new RHB Now Mobile Banking App.

While asset quality has so far been intact, analysts who are bearish on the stock say asset quality remains a key concern as RHB is the most vulnerable to higher credit costs when credit cycle turns, due to its low loan loss coverage of 66% (excluding 1.2% regulatory reserve) vis-à-vis 94% for the industry.

JP Morgan, in particular, has forecast Malaysia’s gross domestic product growth to decelerate to 3.8% this year — below the official estimates of 4% to 4.5% — and expects rising non-performing loan formation in the coming quarters. The research house says RHB is its high-conviction underweight as it thinks that the bank’s ROE would be on downward trend in the next three years.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share