Market Access. Results Review 2Q16. M&A Securities. RHB Capital Berhad. Recovery in Decent Traction. Thursday, August 25, 2016 BUY (TP: RM5.

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1 M&A Securities Results Review 2Q16 PP14767/09/2012(030761) RHB Capital Berhad BUY (TP: RM5.80) Thursday, August 25, 2016 Recovery in Decent Traction Results Review Actual vs. expectations. RHB Bank Berhad (RHBB) journey post-transformation from RHB Capital continued to reap benefit despite setback at the bottomline. RHBB s 1H16 net profit touched RM907 million (-16% y-o-y), which missed our projection or equivalent to 39% of our full year forecast but in line with consensus.,. The setback in earnings was chiefly driven by the spike in impairment amounting RM252 million related to corporate bond in Singapore. Nevertheless, it was offset by leaner operating expenses of RM1.58 billion (-4% y-o-y). Dividend. The Group announced interim dividend of 5 cent in 1H16, amounting to 57% payout. Current Price (RM) RM5.00 New Fair Value (RM) RM5.80 Previous Fair Value (RM) RM6.20 Previous Recommend. HOLD Upside To Fair Value 16% Dividend Yield (FY16) 3.8% Stock Code Bloomberg RHBC MK Stock & Market Data Listing MAIN MARKET Sector Finance Shariah Compliance No Issued Shares (mn) 4,010 Market Cap (RM mn) 20,010 YTD Chg In Share Price 6.53% Beta (x) week Hi/Lo (RM) RM5.18 RM3.85 3M Average Volume (shrs) 1.721mn Estimated Free Float 30.2% Topline vs. Bottom line. RHBB s 1H16 net surged to RM3.19 billion (+5% y-o-y), aided by contribution from Islamic division of RM471 million (+16% y-o-y) and this factors lifted pre-provision earnings to RM1.6 billion in 1H16 (+15% y-o-y). Excluding the impact of impairment, RHBB s PBT and PAT surged by 16% y-o-y and 13.8% y-o-y respectively. Major Shareholders EPF 41.1% Aabar Investment 13.6% OSK Holdings 7.8% Fee-based and fund-based s were mix. The Group s net interest surged 6% y-o-y in 1H16 driven by lower interest expenses that declined 4% y-oy, mainly attributed from higher loans registered at 4.8% y-o-y. In contrast, fee-based dropped 2% y-o-y, caused by forex and sluggish market condition, however, it was mitigated by higher insurance underwriting that soared 52.7% y-oy ext. 257,229,224,249,238 1

2 Loans growth declined on q-o-q. Group loan growth was relatively slow, growing at only 0.2% YTD, supported by SME segment and mortgages with annualized growth of 12.2% that offset the declining corporate segment that belted annualized growth of -6.9% from corporate segment. We believe corporate segment performance is poised to drop further. Mortgages segment continued its upward trend with 13.2% annualized growth that offset the steady decline in hire-purchase growth of -30% annualized rate. Mortgages market share raked-in higher contribution of 8.4% (+20bps) in 1H16 whilst market share for hire-purchase declined to 5.9% vs.6.4% in December All in, The Group s domestic loan market share stood at 9.2% as at 30 June Liquidity improving. YTD, customer deposits grew healthy at pace of 3.8% with notable improvement in the fixed deposits that impacted to the lower NIM. Likewise, CASA position improved to 24.8%, which grew at annualized rate of 9.2%. Loans-to-deposits ratio stood at 92.4% from 95.7% in December NIM fell as expected. Management did guide that the surge in NIM during 1Q16 will not be sustained. This is chiefly driven by lower loan yield arising from competition and management poised to utilize its loan-to-deposit ratio. Positive JAWS continue. Cost initiatives continued to show results since 4Q15 earning. CI ratio in 1H16 improved to 49.5% vs. 54.2% in the 1H15 which is on track to meet its KPI target for the ratio to be 53.0% for FY16. Asset quality improved. RHBB s gross impaired loans ratio (GIL) weakened to 2.06% and absolute GIL spiked by 9.7% y-o-y in 1H16 largely due to impairment in non-residential and personal use that weakened by 49.2% y-o-y and 5.1% y-o-y especially in Singapore and Cambodia operations. Credit charge remained high at 0.18% vs.0.19% in 1H15 largely due the increase in CA. Outlook. RHBB got off to a good start post it its transfer of listing status from RHB Capital. Given good set of numbers for 1H16, we are positive that RHBB will meet its various kpi target especially its focus on optimising cost and productivity. Nevertheless, management s focus effort on Risk Adjusted Return loans may prove a setback to its loans growth in FY16 given 1H16 loans growth was already short of target. Change to our forecast. No change to our forecast. At this juncture, FY16 and FY17 are expected to grow by 32% y-o-y and 24% y-o-y assisted by 1) full blown result of completion of OSKIB into RHBC financials 2) robust target for Islamic and Singapore unit 3) benefiting from IGNITE implementation. Valuation & recommendation. We maintain our target price on RHB at RM5.80 pegged at P/BV of 0.95 given its steady recovery process. The stock is a BUY now. Re-rating catalysts for the stock include i) further adjustment in OPR as 75% of Group s loan are by flexible rate ii) steady NIM due to continuing lower cost of funds iii) aggressive expansion in Singapore. 2

3 Price (RM) Table 1: Peers Comparison EPS (RM) P/E (x) P/B (X) ROE (%) Div Yield (%) Company YE FY16 FY17 FY16 FY17 FY16 FY17 AFG Mac Hold AMMB Mac Hold BIMB Dec Hold CIMB Dec Hold Maybank Dec Hold RHB Bank Dec Hold Public TP (RM) Dec Buy Bank Affin Dec NR NR MBSB Dec NR NR STMB Dec NA NR NR HL Bank Jun NR NR Average Source: Bloomberg, M&A Securities Call Table 2: Results Analysis YE: March (RM million) 2Q16 1Q16 2Q15 y-o-y q-o-q 6M16 6M15 y-o-y Gross Interest 1,951 2,010 1,951 0% -3% 3,961 3,964 0% Interest expense -1,098-1,128-1,140-4% -3% -2,226-2,324-4% Net interest % -3% 1,735 1,640 6% Islamic banking % -7% % Other % 7% 986 1,005-2% Net 1,589 1,604 1,515 5% -1% 3,192 3,052 5% Operating expenses % 4% -1,585-1,653-4% Pre-provision % -5% 1,607 1,399 15% Allowance loan loss % -26% % Writeback of impairment % % % Operating profit % -37% 1,216 1,403-13% Joint Ventures & Associate % 338% % PBT % -37% 1,216 1,403-13% Taxation % -40% % PAT % -36% 907 1,074-16% EPS (sen) % -51% % Dividend - sen Dividend payment (RMm) Dividend payout (%) 57% % 0 Source: Bursa Malaysia, M&A Securities 3

4 Table 3: Financial Forecast YE: Dec (RM million) FY13 FY14 FY15 FY16F FY17F Gross Interest 6,901 7,470 7,935 8,773 9,324 Interest expense (3,626) (4,178) (4,636) (5,053) (5,337) Net interest 3,274 3,291 3,300 3,720 3,987 Islamic banking ,014 Other 2,085 2,211 2,015 2,211 2,233 Net 5,951 6,235 6,191 6,897 7,234 Operating expenses (3,052) (3,411) (3,793) (3,297) (3,171) Pre-provision 2,899 2,824 2,398 3,600 4,063 Allowance loan loss (448) (206) (340) (370) (384) Writeback of impairment Operating profit 2,470 2,735 2,106 3,309 3,729 Associate 1 (0) Joint Ventures PBT 2,471 2,735 2,107 3,310 3,730 Taxation (627) (672) (583) (794) (895) PAT 1,844 2,063 1,524 2,516 2,835 EPS Dividend (sen) Dividend Payment (RM mil) Dividend Payout 23% 7% 24% 25% 25% Retained Earnings (RM mil) 1,429 1, PER (x) Gross Yield 2% 1% 2% 2.2% 3% BV P/BV Source: Bursa Malaysia, M&A Securities 4

5 Table 4: Operational Ratio YE: March (RM million) FY13 FY14 FY15 FY16F FY17F Margin NII Margin 55% 53% 53% 50% 49% NOII Margin 35% 35% 33% 37% 38% PPOP Margin 49% 45% 39% 51% 56% PBT Margin 42% 44% 34% 44% 53% PAT Margin 31% 33% 25% 33% 40% Growth NII 11% 1% 0% 6% 6% NOII 51% 6% -9% 30% 10% Operating expenses 33% 12% 11% -10% -4% Pre-provision profit 14% -3% -15% 51% 18% Core net profit 3% 12% -26% 54% 29% Gross loans 9% 17% 6% 4% 6% Customer deposits 0% 14% 1% 14% 7% Total assets 1% 15% 5% 5% 7% Profitability Average Lending Yield 22% 21% 19% 22% 23% Average Cost of funds 2.3% 2.2% 2.4% 2.4% 2.4% NIM 3.6% 3.5% 3.8% 3.8% 3.8% Cost/ 1.8% 1.6% 1.6% 1.6% 1.6% 51% 55% 61% 49% 44% Asset Quality Net NPL 2.1% 1.7% 1.5% 1.8% 1.9% Gross NPL 2.8% 2.0% 1.9% 2.1% 2.1% Return ROA 1.0% 0.9% 0.7% 1.0% 1.2% ROE 10.9% 10.9% 6.6% 9.5% 11.4% Source: Bursa Malaysia, M&A Securities 5

6 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 RM Point Percentage Jan-15 May-15 Sep-15 Jan-16 May-16 FY13 FY14 FY15F FY16F FY17F RM Point RM million RHB Capital Share Price vs. KLCI (Jan15-YTD) Net Income and Net Profit (FY13-FY17F) ,900 1,800 1,700 8,000 6,000 5,951 6,235 6,191 6,606 6, ,600 1,500 4,000 2,000 1,844 2,063 1,524 2,019 2, ,400 - RHBC MK Equity FBM KLCI Net Income PAT Source: Bloomberg, M&A Securities Financial Index vs. KLCI (Jan15-YTD) RHB Loans Growth (1Q13-YTD) ,900 1,800 1,700 1,600 1, % 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 10.6% 10.6% 10.2% 11% 9.1% 9.5% 9.3% 9.8% 10% 9.3% 8.8% 9.2% 9.0% 4.9% 3.3% 3.6% 3.7% 4% 2.7% 1.9% 0.3% 13.7% 0.15% 6.60% 6% 5.6% 4.20% 4.80% 0.0 1,400 RHBC MK Equity FBM KLCI Industry Loan Growth RHB Loan Growth 6

7 M&A Securities STOCK RECOMMENDATIONS BUY Share price is expected to be +10% over the next 12 months. TRADING BUY Share price is expected to be +10% within 3-months due to positive newsflow. HOLD Share price is expected to be between -10% and +10% over the next 12 months. SELL Share price is expected to be -10% over the next 12 months. SECTOR RECOMMENDATIONS OVERWEIGHT The sector is expected to outperform the FBM KLCI over the next 12 months. NEUTRAL The sector is expected to perform in line with the FBM KLCI over the next 12 months. UNDERWEIGHT The sector is expected to underperform the FBM KLCI over the next 12 months. DISCLOSURES AND DISCLAIMER This report has been prepared by M&A SECURITIES SDN BHD. Readers should be fully aware that this report is for informational purposes only and no representation or warranty, expressed or implied is made as to the accuracy, completeness or reliability of the information or opinion contained herein. The recommendation and opinion are based on information obtained or derived from sources believed to be reliable. This report contains financial forecast/projection based on our assumptions which may defer from the actual financial results announced by the companies under coverage. All opinions, estimates and assumptions are subject to change without notice. Analysts will initiate, update and cease coverage solely at the discretion of M&A SECURITIES SDN BHD. Investors are to be cautioned that value of any securities invested may fluctuate from time to time. We advise investors to seek financial, legal and other advice for investing based on the recommendation of our report as we have not taken into account each investors specific investment objectives, risk tolerance and financial position. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. M&A SECURITIES SDN BHD can accept no liability for any consequential loss or damage whether direct or indirect. Investment should be made at investors own risks. M&A SECURITIES SDN BHD and INSAS GROUP of companies, their respective directors, officers, employees and connected parties may have interest in any of the securities mentioned and may benefit from the information herein. M&A SECURITIES SDN BHD and INSAS GROUP of companies and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. This report may not be reproduced, distributed or published in any form or for any purpose. M & A Securities SdnBhd (15017-H) (A wholly-owned subsidiary of INSAS BERHAD) A Participating Organisation of Bursa Malaysia Securities Berhad Principal Office: Level 1,2,3 No.45 & 47,43-6 The Boulevard, Mid Valley City, Lingkaran Syed Putra, Kuala Lumpur Tel: Fax: Website: 7