RHB Capital Berhad Provisions likely to be higher moving forward
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- Elwin May
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1 29 Feb QFY15 Results Review RHB Capital Berhad Provisions likely to be higher moving forward INVESTMENT HIGHLIGHTS 12MFY15 normalised net profit of RM1.74b was below our expectation accounting for 94.4% of our estimate due to higher OPEX and provisions Loan growth decelerated to +6.3%yoy NIM dropped to 2.14%, a compression of 16bp higher than our expectation Except for its meeting its International Contribution target, the Group was short of its 5 other FY15 KPI targets CI ratio remained elevated at 56.3% in 12MFY15 based on normalised income, higher than our expectation of 55.0% due to lower revenue Annualised credit charge-off higher 0.22% for 12MFY15 due to higher IA and lower recoveries GIL ratio improved to 1.88% Declared a single interim dividend of 12 sen (higher payout of 24.4%), higher than our expectation of 8 sen for FY15 Revised our 16 net profit forecast lower by -9.2% to account for higher provisions Maintain NEUTRAL with a revised TP of RM5.40 pegging the stock to an unchanged PB multiple of 1.0x on FY16 BVPS. Normalised 12MFY15 net profit of RM1.74b after adjusting for CTS expenses of RM308.8m was slightly below our expectation. The Group reported a lower profit of RM316.1m (-25.8%qoq, -35.0%yoy on normalised basis) largely due to higher OPEX (+12.0%qoq) and rise in allowance for loan impairment (+143.5%qoq). After adjusting for one-off CTS expenses of RM308.8m, normalised net profit was RM1.74b (-14.5%yoy) for 12MFY15. The lower cumulative earnings were mainly due to lower IB and securities market related fee income in Malaysia and Singapore, higher provisions for loan impairment due to rise in IA and the absence of major recoveries in FY14. The Group s core 12MFY15 normalised net profit of RM1.74bb (- 8.0%yoy) was lower than our estimate of RM1.85b, accounting for 94.4% of our forecast. The variance to our expectation was mainly due to higher than expected normalised OPEX and higher provisions for loan impairment. Maintain NEUTRAL Revised Target Price (TP): RM5.40 (previously RM6.20) RETURN STATS Price (26 Feb 2016) Target Price Expected Share Price Return Expected Dividend Yield RM5.35 RM % n.m Expected Total Return +0.9% STOCK INFO KLCI 1, Bursa / Bloomberg Board / Sector Syariah Compliant 1066 / RHBC MK Main / Finance No Issued shares (mil) 3,074.7 Par Value (RM) 1.00 Market cap. (RM m) 16,449.6 Price over NA 0.7x 52-wk price Range RM5.01-RM8.01 Beta (against KLCI) mth Avg Daily Vol 3-mth Avg Daily Value Major Shareholders 1.50 m RM8.25 m EPF 41.99% Abu Dhabi Investments 17.75% OSK Equity Holdings 10.13% Some banking abbreviations used in this report: CA = Collective Impairment Allowance CI = Cost- Ratio CET1 = Common Equity Tier 1 GIL = Gross Impaired Loan LD = Loan-Deposit NII = Net Interest NOII = Non-interest income NIM = Net Interest margin CASA = Current and Savings Accounts COF = Cost of Funds OPEX = Operating Expenses LLC = Loan Loss Coverage MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures
2 NIM contracted 16bp to 2.14% for 12MFY15, more than our expectation of 6bp for the full financial year. For 12MFY15, higher cost of funds was contributed by the full year impact of the funding expense on its issuance of sukuk and sub-debts of RM1.5b and senior unsecured notes of USD300m issued in 2HFY14. Moving into FY16, NIM is expected to continue to be compressed, largely due competition for deposits impacting funding cost. For FY16 management is guiding for its NIM to be still compressed and remain above 2.00%. Loan growth decelerated to 6.3%yoy in 4QFY15. Gross loan growth decelerated to +6.3%yoy vs %yoy in the preceding quarter. Growth in loans for 12MFY15 was supported mainly by the expansion of Retail and Business loans. Retail loan growth continued to be slower at +6.0%yoy. Growth in loans for purchase of residential property slowed down to +20.0%yoy. Meanwhile, loans for purchase of non-residential property drop further to +20.8%yoy vs +26.6% in the preceding quarter and growth outstanding for credit cards was subdued at -0.8%yoy. Compared to the previous quarter, growth in loans for purchase of transport vehicles improved slightly to -11.2%yoy. Recall the Group s strategy of not to compete aggressively in this space as a result of the lower RAR on HP loans due to stiff competition on lending rates. Slower growth continued to be evidenced for loans for purchase of securities at - 7.5%yoy. Also, trending slower was growth in personal loans to +8.9%yoy vs %yoy in the previous quarter. Growth rate in working capital loans slipped to +7.0%yoy. On lending by customer types, lending to SMEs was slower in pace, registering a lower growth of %yoy while international loans slowed down to +22.0%yoy and corporate loans remained soft at -11.0%yoy largely due to the corporate repayments. Customer deposit growth was flat at +0.6%yoy with deceleration in growth in 4QFY15. Customer deposit growth decelerated to +0.6%yoy vs. +7.3%yoy in the preceding quarter. Growth in CASA remained stable at +11.0%yoy while that of the more costly NIDs was flat at +0.8%yoy and growth in FD decelerated to -2.2%yoy. The Group achieved its target to grow CASA by >10% in FY15 with a growth of +11.0%. CASA ratio improved slightly to 24.0%. Net LDR continued to rise further to 94.6%, reflecting tighter liquidity. Management hinted that the LCR for RHB Bank Group was >90.0%. GIL ratio improved to 1.88% but provisions were higher in FY15 due to higher IA, absence of major recoveries in FY14. Group GIL ratio improved to 1.88% in FY15 vs. 2.03% in FY14 but was still higher industry s 1.60%. Nevertheless, the Group recorded a higher credit charge-off of 0.22% in FY15 vs. 0.14% in FY14, which was slightly higher than our expectation of 0.22%. This was contributed by an increase in IA from additional provisions of RM150m taken for two steel companies which have already been classified impaired earlier, absence of major recoveries in FY14 coupled with a write back in CA from a refinement in model for its mortgage portfolio. For FY16, the Group is guiding for a higher credit charge-off of 0.40% (40bp). LLC ratio improved to 82.6% Including regulatory reserves of RM583m, the Group s LLC ratio was higher at 83.3%. Rights issue exercise to raise RM2.3b completed in December 2015 and the Group is now waiting for regulatory approval to complete its internal restructuring to list its Bank Holding Company by 2QFY16. The Group remains on track on complete the listing of its Bank Holding Company by 2QFY16 and is waiting for regulatory approval to proceed for its internal reorganisation. Recall, RHB Bank, the Bank Holding Company will be taking over the listing status of RHB Cap. Lower ROE target for FY16 of 10.0% vs. >11.5% in FY15. With a higher credit charge-off guidance of 0.40% and NIM to continue to be compress, the ROE target of 10.0% based on the Bank holding company s earnings as we understand will mainly be derived from cost savings and a dividend policy of 30%, a payout higher than the past. SME loan mix has been raised in FY15. SME loans as a percentage of total loans rose to 15% in FY15 vs. 12% in FY14. Retail CASA, Asset Managment AUM, SME market share and revenue from Singapore grew under its initiatives under IGNITE We gather that is Retail CASA grew +5.9%, higher than the industry while its Asset Management s AUM grew +7.1% under its is initiatives under IGNITE Meanwhile, market share for SME loans has been improved to 8.7% in Nov 15 vs. 7.19% in Dec 14 and revenue from Singapore has improved. On the 2
3 other initiatives under IGNITE 2017, the Group has secured BNM s approval to optimise its EASY outlets with RHB branches. This is expected to lead to higher cost savings ahead. FORECAST Revised our net proft forecast for FY16 lower by -9.2% to RM1.92b after factoring in a higher credit charge-off assumption from expected weakness in asset quality ahead and fine tuning our NII estimate. VALUATION AND RECOMMENDATION We continue to expect upticks in impaired loans ahead due to the slower economic growth with a rise in provisions contributed from lower recoveries. Nevertheless, cost savings from CTS and restructuring will flow through in FY16. We expect NOII to be softer in FY16 due to markets business continuing to be weak from volatile market and weaker market sentiment. We maintain NEUTRAL on the stock with a revised TP of RM5.40 after pegging the stock to a lower PB multiple of 1.0x on FY16 BVPS. Our valuation is based on RHB Bank, the new Bank holding company taking over the listing status of RHB Cap. INVESTMENT STATISTICS FYE Dec FY14 FY15 FY16F* FY17F* Net interest income (RM m) 3,291 3,300 3,658 4,036 Other operating income (RM m) 2,211 2,015 1,881 1,919 Islamic income (RM m) ,881 1,919 Total income (RM m) 6,235 6,191 6,537 7,059 Pretax profit (RM m) 2,735 2,107 2,492 2,813 Net profit (RM m) 2,038 1,511 1,924 2,128 Core Net profit (RM m) 2,038 1,743 1,924 2,128 Core EPS (sen) EPS growth (%) PER (x) n.m^ n.m^ Net dividend (sen) Net dividend yield (%) n.m^ n.m^ Book value per share (sen) PBV (x) n.m^ n.m^ ROE (%) *Forecast estimated under new Bank Holding Company, RHB Bank which will take over the listing status of RHB Cap in FY16 ^n.m as the financial statistics will be based on the new Bank Holding Company, RHB Bank s stock price which will be different from FY14 and FY15 which the measures under still based on RHB Cap s share price Source: Company, MIDFR DAILY PRICE CHART Kelvin Ong, CFA kelvin.ong@midf.com.my
4 Table 1: Quarterly results (base on reported financials) FYE Dec (RM m) Net Interest Islamic Other Operating Net/Total Quarterly results 4QFY15 3QFY15 4QFY14 Qoq % +3.3% % +6.4% % +28.1% , , % -52.4% Higher qoq on the back of an expansion in loans by 1.2%qoq and improved NIM by 2bp qoq to 2.15% Higher qoq as fee income picked up pace by +16.9%qoq largely due to unit trust fee income, underwriting and corporate advisory fee and fund management fees while total investment and trading income rose declined -22.7%qoq and its other income rose by +21.5%qoq due to higher FX gain and underwriting surplus before management expenses. OPEX (961.7) (1,169.1) (987.0) -2.6% -17.7% Core OPEX (961.7) (860.0) (987.0) -2.6% 11.8% Core OPEX excludes CTS expenses of RM309m in 3QFY15 PPOP % % Write back/(prov ision) for loan losses Pre-tax profit (234.5) (96.3) (40.5) % % % +61.5% Core PBT % -21.2% Core PBT excludes CTS expenses of RM309m in 3QFY15 Taxation (152.1) (99.8) (144.6) +5.2% +52.4% Net Profit % +62.6% Core Net Profit % -25.8% Core Net Profit excludes CTS expenses of RM309m in 3QFY15 EPS (sen) % +58.7% 4
5 Table 2: Financial Ratios Financial Ratios (%) 4Q15 3Q15 4Q14 (+/- ppts) Qoq (+/- ppts) ROEA *Represents capital ratios of RHB Bank Group CET1* Domestic CET1 as of end Dec 15: 12.8%. CCR* Domestic industry CCR as of end Dec 15: 13.3% RWCR* Domestic Industry RWCR as of end Dec 15: 15.8% GIL Domestic industry: 1.6% as of end Dec 15. Credit charge-off NIM Improved 2bp qoq Loan loss Coverage CI ratio Net LDR Domestic industry LLC ratio: 96.2% as of end Dec 15. LLC ratio excludes regulatory reserves. If include regulatory reserves of RM583m, LLC ratio will be higher at 83.3% CI ratio for 3QFY15 includes CTS expenses RM308.8m. Excluding CTS expenses, CI ratio in 3QFY15 was 56.8%, with CI ratio in 4QFY15 rising slightly by +0.4%qoq Domestic Industry LD ratio: 88.7% as of end Dec 15. Table 3: Cumulative Results and ratios Cumulative results FYE Dec 12M15 12M14 (RM m) Net Interest 3, , % Supported by expansion in gross loans of +6.3%yoy. Islamic % Supported by +22.0%yoy growth in Islamic financing portfolio. Other Operating Net/Total income 2, , % 6, , % Lower due to lower IB and securities market related trading fee income, partially offset by higher wealth management fee income. AUM for asset management business rose to RM52b. OPEX (3,793.2) (3,411.2) +11.2% Higher mainly due to one-off CTS expenses of RM308.8m Core OPEX (3,484.0) (3,411.2) +2.1% Normalised OPEX excluding CTS expenses of RM308.8m PPOP 2, , % Provision for Higher due to increase in IA, lower recoveries and lower CA due to the (340.3) (206.2) +65.0% loan losses refinement in model for its mortgage portfolio Pre-tax profit 2, , % Core PBT 2, , % Normalised PBT excluding CTS expenses of RM308.8m Taxation (582.7) (671.6) -13.2% Net Profit 1, , % Core Net Profit 1, , % Normalised Net profit excluding CTS expenses of RM308.8m EPS (sen) % 5
6 Cumulative results *excluding one-of CTS expenses of RM308.8m +/- ppt Table 4: PBT by key segments (base on reported financials) ROE Reported ROE: 7.3%. Normalised ROE: 8.4% for 12MFY15 CI ratio Reported CI ratio: 61.3%. Normalised CI ratio: 56.3% for 12MFY15 Credit charge-off NIM PBT by key business segments (RM m) Corporate and Investment 12M15 12M , % Lower contributed by higher impairment for loans with a few recoveries in 12MFY14 not repeated and lower IB and market related securities fee income in Malaysia and Singapore. Retail 1, % Contributed by CA write back from refinement of model for mortgage portfolio and lower OPEX Business % Lower contributed by higher provision for loan impairment and higher OPEX, partially offset by higher NII. Treasury % Contributed by rise in NII, higher net foreign exchange gain, and higher impairment writeback on other assets, partially offset by lower investment and trading gain. Group International Business % Contributed by stronger performance of Singapore operations. Singapore recorded a PBT growth of +9.5%yoy Support center and others (516.8) (355.6) +45.3% 6
7 MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad ( X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. Negative total return is expected, by -15% or more, over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 7
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