RHB sees small business as growing, profitable segment

This article first appeared in The Edge Financial Daily, on October 2, 2018.
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RHB Bank Bhd
(Oct 1, RM5.38)
Maintain buy with a fair value of RM6.10:
We maintain our buy call on RHB Bank with an unchanged fair value of RM6.10 per share (0.9 times financial year 2019 or FY19 book value per share), supported by a return on equity of 8.9%.

Valuation continues to be compelling with the stock trading at 0.8 times price-to-book value, while its asset quality is improving with lower provisions. There is no change to our earnings estimate.

The group held an analyst briefing last Friday to provide updates on its group business banking (GBB) division. Recall the group’s five-year (2018 to 2022) FIT22 strategy was to strengthen Malaysia and win in targeted segments; focus on niche overseas segment while exploring strategic partnerships and build a wining business model. For small and medium enterprises (SMEs), the group will focus on growing the small business segment as well as build a connected ecosystem business to differentiate itself from its peers.

The group aims to be the preferred SME and transaction bank in Malaysia. By 2022, it seeks to be a top three SME bank in Malaysia from the present No 4 ranking. Currently, SME loans contribute to about 16% of the group’s total domestic loans. It has set the target to be raised to 20% by 2022. On its journey to 2022, the GBB will grow its loans by double digits and the division aims to have 65% of its total assets to comprise assets from the small business segment. Also, it intends to derive 30% of GBB’s sales from digital channels and attain an above-industry net promoter score.

We understand in the first half of FY18, GBB’s loans grew 7.4% year-on-year (y-o-y) with 56% of the increase supported by retail SMEs credits. This was higher than the SME industry’s loan growth of 4.3% y-o-y. The group has an SME market share of 9%. The GBB registered a compound annual growth rate (CAGR) of 11% in loan growth in the past five years (FY13 to FY17), while its customer deposits grew a CAGR of 4.2% over the same period supported by term deposits.

Not only the group sees small businesses growing, it also sees it as a profitable segment. SMEs will remain a significant contributor to Malaysia’s gross domestic product as well as continue to outperform the domestic economic growth rate.

The group has a strong network distribution with 301 and 46 sales personnel for business banking and transaction banking respectively. The group also has 31 business centres, 198 branches and 22 trade windows.

As at the end of the first half of financial year ended June 30, 2018 (1HFY18), loans to wholesale, retail, restaurants and hotels were the largest segments accounting for 31% of total loans. This was followed by its exposure to the construction, real estate and manufacturing sectors at 15%, 14% and 14% respectively of the group’s total loans. A total of 55% of GBB’s loans are for working capital with non-residential property loans (mainly industrial buildings and factories, land and shophouses) making up 41% of its loans. The group is selective on property financing and cautious on loans for the purchase of commercial complexes.

To build on its competitive advantage in business banking, we gather the group will leverage its credit partners — Credit Guarantee Corp (CGC) and Syarikat Jaminan Pembiayaan Perniagaan Bhd (SJPP). Also, it will tap into Bank Negara Malaysia’s funding scheme for small businesses to expand its SME assets. Through its digital initiatives and use of analytics, the group aims to improve its productivity for SME customers.

The group has launched a self-service online loan application for small and micro enterprises, allowing it to extend its reach to smaller SMEs. Moreover, it will improve its productivity by facilitating loans to be approved in two days and disbursed in five days after the application.

The group has also employed I-Smart tools with relationship managers of business banking, utilising tablets to improve customer service and advisory services. A more structured approach has been adopted to meet customers’ needs.

We understand about 80% of GBB’s loans are secured with the remaining 20% unsecured. Nevertheless, for the latter, the risk is mitigated by credit partners’ guarantee, in particular CGC. The security arrangement for its loans to the small business segment mirrors that of the overall GBB.

Management has hinted that after the 14th general election, businesses’ sentiments have improved with higher investments.

The average gross yield for SME loans is 5% to 6%. In view that a portion of smaller SME loans is unsecured, the group will price-in risk with a higher lending rate around the teens for loans to smaller businesses. This provides an improvement in asset yield and at the same time mitigate the risk through guarantees by CGC or SJPP.

GBB’s gross impaired loans ratio of 3.2% was higher than that of the group’s 2.33% in 1HFY18. This was partly contributed by older loans which thereafter FY15, the asset quality of GBB’s loans has improved with a stringent credit underwriting.

The group has allocated more than RM200 million for information technology spend this year up until the next three to four years. Eventually, we understand the group intends to have a loan mix of 55% retail loans, 25% and 20% business banking and corporate loans respectively. — AmInvestment Bank, Oct 1