RHB Capital Bhd
(March 2, RM8.03)
Maintain add rating with an unchanged target price (TP) of RM10.50: RHB Capital Bhd’s (RHB-Cap) financial year ended Dec 31, 2014 (FY14), net profit was almost spot on with our forecast (99.6%) and in line with consensus (101%), but its full-year net dividend per share (DPS) of six sen was way below our projected 23 sen. 

Even so, the company has maintained its policy of a 30% dividend payout that forms the basis for our DPS projection for FY15 to FY17. 

Our dividend discount model- based TP (cost of equity  of 11.8%; long-term growth of 4%) is intact. 

RHBCap remains an “add” and is our top pick for the sector, given its robust loan growth, continuous expansion of its investment banking  business, attractive valuation (2015 price-to-earnings ratio of 9.1 times and price-to-book value of 1 time), and benefits from its Ignite 17 transformation programme.

The group’s fourth quarter of FY14 (4QFY14) net profit fell by 3.6% year-on-year (y-o-y) to RM486.2 million, impacted by two developments that are not reflective of its underlying trends. 

Firstly, net interest income fell by 6.9% y-o-y in 4QFY14, partly dragged down by the higher interest expense from the issuance of US$300 million (RM1.09 billion) senior unsecured notes on Oct 3, 2014, which are not fully deployed. 

Secondly, 4QFY14’s staff costs shot up by 28.1% y-o-y, lifted by the provision for exceptionally high performance-based remuneration (bonuses), which would not be repeated in the coming quarters.

Loan growth picked up further from 12% y-o-y in September 2014 to a sterling 17% y-o-y in December 2014, way above the industry’s 8.7%. 

This was mainly driven by the stronger momentum for property loans (to 23% to 43% y-o-y in December 2014) and working capital loans (to 21% y-o-y) while the pace for auto loans eased to only 3% y-o-y.

The group’s gross impaired loan ratio improved further from 2.3% in September 2014 to 2% in December 2014, but its loan-loss coverage fell from 66.6% to 61.1% over the same period.

We expect the group’s overheads to normalise to a lower level in the coming quarters, while the strong loan growth would rejuvenate its net interest income growth in 2015. 

This would help it to achieve a healthy projected earnings per share growth of 9.6% in FY15. — CIMB Research, March 2

This article first appeared in The Edge Financial Daily, on March 3, 2015.