RHB Capital Bhd
(June 1, RM7.49)
Maintain hold with an unchanged target price (TP) of RM7.70: RHB-Cap’s results for the first quarter ended March (1QFY15) were in line with our  forecasts, but below consensus. Its 1Q pre-tax profit rose 1.2% year-on-year (y- o-y), although most operating indicators were below key performance indicators (KPIs).  The group’s corporate reorganisation exercise and rights issue (for de-gearing) is  expected to be completed by end-2015. 

RHBCap’s 1Q net profit of RM450.7 million (5.7% y-o-y) was within our  expectation but was 9% below consensus. At the pre-tax profit level, results were  relatively flat, up 1.2% y-o-y, but lower taxation (at an effective rate of 25.6% in  1QFY15 versus 28.9% in 1QFY14) helped profit after tax and minority interests  growth. 

Based on the operating results, RHBCap’s 1Q performance remains below its  2015 KPIs. Namely, annualised return on equity (ROE) was only 10% versus a 2015  KPI of less than 11.5%. The sequential loan growth was flat due to a chunky corporate  loan repayment versus a 2015 target of 10% while the gross impaired loan ratio  remained sticky at 2.03%, flat quarter-on-quarter (KPI: more than 1.8%) and the cost- to-income ratio stood at 54% (KPI: more than 51%). 

That said, management has reiterated that more initiatives and efforts are underway  to boost non-interest income contribution (via treasury and fee income) as well as to  further contain costs while improving staff productivity.

As at March 2015, the high gearing (39%) and the high double-leverage ratios (138%)  are expected to be resolved under the proposed corporate reorganisation and RM2.5  billion proposed rights issue, which is expected to be completed by 4QFY15. 

Currently, the high group debt totalling RM13 billion (33% y-o-y) has continued to  dampen net interest income generation, hence pressuring net interest margin, which  stood at 2.2% as at 1Q ( minus four basis points [bps] q-o-q and -11 bps y-o-y).

We reiterate our “hold” rating on RHBCap and our 12-month TP of RM7.70 (based on a  0.88 times price-to-book value on a 2016 estimate ROE of 9.4%). 

The near-term outlook remains challenging for RHBCap on a moderating  macroeconomic outlook. 

On a positive note, strategic initiatives under “Ignite 2017” are bearing fruit, realising  RM218 million in value with a positive pre-tax profit impact of RM86 million from  global corporate account management, treasury markets, the revitalisation of the  Singapore business, cost savings and enhancement of the group’s business banking  model. — AffinHwang Capital, June 1

This article first appeared in The Edge Financial Daily, on June 2, 2015.