This article first appeared in The Edge Malaysia Weekly on May 30, 2022 - June 5, 2022

RCE Capital Bhd is in for a rough ride ahead given rising challenges, not least of which is the threat that upcoming digital banks pose. Analysts that The Edge spoke to expect tepid growth from the non-bank lender over the next few years.

The Main Market-listed company, which provides personal financing to civil servants through cooperatives, recently failed to secure a digital bank licence from Bank Negara Malaysia. RCE Capital was among the groups vying for the five licences on offer. It was part of a consortium led by Paramount Corp Bhd, which also included Star Media Group Bhd, Prosper Palm Oil Mill Sdn Bhd and a technology partner.

According to an analyst, losing out on the licence may not have been a huge blow for RCE Capital as its management had previously indicated that it would be taking a passive role in the venture.

“The drift we got from them was, ‘If we win, great; if we don’t, life goes on’,” says the analyst.

Still, by not being in the game, RCE Capital risks losing market share to digital banks when they enter the fray, another analyst opines.

As it stands, RCE Capital’s niche is the civil service market and its competitive advantage lies in its ability to provide a fast financing processing turnaround time of 48 hours. Additionally, its salary deduction scheme — administered by Angkatan Koperasi Kebangsaan Malaysia Bhd (Angkasa) — ensures that civil servants, a highly leveraged lot, fulfil their monthly repayments.

“I think RCE Capital would want to continue to ride on that niche. However, when digital banks come on board with products that are easy for consumers to access via apps, and offer fast approval and smaller-sized loans, there is a possibility that they could take business away from non-bank financial institutions like RCE Capital. But, at this point, it’s hard to say if it will have a material impact on the company,” RHB Research analyst Fiona Leong tells The Edge.

While the company itself is trying to keep up with the times by investing in digital initiatives, it remains to be seen if it can show results fast enough. The five digital banks are expected to make their debut in one to two years.

“Right now, RCE Capital has marketing agents that go out and meet [customers] physically, so they are trying to digitalise things. That’s the best they can do right now, I would say,” the earlier analyst says.

The analyst doubts that the company would venture beyond the civil servant market. “If they want to expand out of civil service, they would need CCRIS (Central Credit Reference Information System), which they currently don’t have access to.” CCRIS is a system that collects credit information on borrowers from participating financial institutions.

RCE’s personal financing, extended at a fixed rate, has a maximum tenure of 10 years.

In its latest annual report, RCE Capital said it will deploy technology to remain competitive and relevant. For the financial year ended March 31, 2021 (FY2021), it allocated about RM2.9 million for investments in digital transformation. “They will improve our online customer experience by enabling faster turnaround time through real-time customer verification and reduced manual financing applications,” the company said.

Given the expected rising interest rate environment in Malaysia, RCE Capital’s cost of funds is seen moving up. The bulk of its funding is sourced from Islamic bonds.

Nevertheless, RHB Research’s Leong believes the company will be able to mitigate the impact.

“Generally, in a rising interest rate environment, financial institutions with a large portion of fixed rate loans will be negatively impacted as they are unable to reprice loans to offset the rise in funding costs. [But] for RCE Capital, the negative impact will be mitigated in the near term as its loans are funded by fixed-rate sukuk raised earlier,” she says.

Going forward, the company is also expected to introduce higher profit rate products to maintain its net interest margin.

On May 11, Bank Negara increased the overnight policy rate by 25 basis points to 2% from a record low of 1.75% amid global inflationary pressures. The central bank may resume hiking the benchmark policy rate again in the third quarter, according to a Bloomberg survey.

Meanwhile, RCE Capital is due to release its full-year FY2022 results early this week.

Up until 2019, the company’s annual gross financing growth had outpaced the banking system’s loan growth. In recent years, it has strived to keep its growth within that of the banking industry. It saw growth of just 1.4% in FY2021 after 5.3% in FY2020.

“They have always told us that they can grow [financing] more aggressively, but doing that could mean higher non-performing loans, so it’s really up to them,” Maybank Investment Bank Research analyst Yin Shao Yang tells The Edge.

The group’s gross impaired financing ratio improved to 6.7% in FY2021 from 7.1% the year before as civil servants have  good job security in tough times.

Yin sees the company’s net profit coming in at about RM130 million in FY2022, implying a 4.2% growth over the previous year’s RM124.6 million. He expects low single-digit financing growth in FY2022, and tepid growth of about 2% the following year.

Given that the stock is sought mainly for dividends, investors will be keeping a close watch on its final quarter dividends this week. Its policy is to pay out 20% to 40% of its net profit.

Yin expects RCE Capital’s dividend per share to come in at 10 sen for the full year — it already declared seven sen in 2Q2022 — after seven sen in the previous year. “I am looking at a DPS of perhaps six sen or seven sen a year, going forward. They have to take a view on where their cost of funds is going. They may prefer to hold some cash to expand their loan book,” he says.

Maybank IB and KAF Research have a “hold” call on the stock, with a target price of RM1.67 and RM1.66 respectively, while RHB Research has a “buy” and a target price of RM1.90. The stock has shed 7.2% this year to close at RM1.79 last Thursday, giving the company a market value of RM1.32 billion.

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