KUALA LUMPUR (Aug 1): Should the divestment of RHB Bank Bhd's investment arm materialises, research houses are seeing it as a positive for the bank's capital ratios as well as dividend payout.
Yesterday, it was reported that the bank has obtained a six-month approval from Bank Negara Malaysia (BNM) to commence negotiations with Tokio Marine Asia Pte Ltd (TMA) to dispose of up to a 94.7% stake in RHB Insurance (RI).
"We believe that the disposal of the RI stake would be positive for RHB Bank's capital ratios due to the expected gain from the sale," said CGSCIMB Research's analyst Winson Ng in a report dated July 31, adding that it would also improve its capacity to pay dividends, and could increase its dividend payout above his forecast of 35% for FY20 to FY21.
However, Ng does not expect RHB Bank to pay out the entire proceeds from the sale as a special dividend, as BNM wants banks to keep high capital ratios.
Assuming the sale is completed in 2019, the deal would be positive for RHB Bank's FY19 net profit due to the expected gain from the disposal, said Ng.
While the sale of RI would present a one-off gain enhancing the bank's FY19 net profit by between 1.6% and 14.7%, the deal, however, would trim RHB Bank's net profit by circa 2.7% in FY20 to FY21 due to loss of insurance income, said Ng.
If RI is sold at a P/BV (price over book value) of between 1.1 times and 1.9 times, this would value RI at between RM631 million and RM1.1 billion, said Ng. In FY18, RI contributed about 2.8% of RHB Bank's net profit.
Ng opined that the sale of the RI stake will not fetch a P/BV of more than two times, because the growth in general insurance premium has been subdued at below 2% over the past three years, and Tokio Marine already has operations in Malaysia and hence, it will not be willing to pay a premium.
Meanwhile TA Securities in a report wrote that unlocking value from RI, the research house foresees the sale to be capital accretive, potentially raising capital ratios by around 10 basis points (bps) to 20 bps.
"Backed by healthy CET 1 capital of 15.7% as at end-March 2019 — one of the highest in the industry, we foresee the possibility of a higher dividend of up to 40% for FY19, buoyed by potential sale of the insurance unit," said TA Securities.
Same with CGSCIMB Research, TA Securities believes that RI could be valued at a P/BV of between 1.1 times and 1.5 times.
Despite TA Securities not foreseeing the group's earnings to be materially impacted, if the deals go through, the research house is positive on the proposed disposal.
"Currently accounting for circa 3% of group's revenue and PBT (profit before tax), we also do not foresee the absence of RHB's insurance unit to disrupt the group's five-year FIT22 targets," said TA Securities.
"We believe that in addition to possible upfront gains, the relationship between TMA and RHB Bank can be further strengthened.
"We believe that the sale could strengthen the collaboration between both companies, with RHB potentially signing a new agreement to distribute TM's general insurance products via its branches and alternative distribution outlets," TA Securities added.
Both research houses maintained a buy call on the stock with a target price of RM6.50.
At 11.07am, shares of RHB Bank were eight sen or 1.45% higher at RM5.58, with 2.4 million shares exchanging hands, valuing the bank at RM22.06 billion. The stock was up as high as 15 sen or 2.73% at RM5.65 earlier this morning, before paring some of its gains.