RHB Bank. Malaysia Company Guide

Transcription

1 Malaysia Company Guide Version 6 Bloomberg: RHBC MK Reuters: RHBC.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 28 Jun 2016 BUY Last Traded Price: RM4.68 (Pre-restructuring: RM6.10) (KLCI : 1,634.05) Price Target : RM5.30 (13% upside) (Pre-restructuring: RM7.00) Potential Catalyst: Cleaner corporate structure with improved ROE traction and materialisation of IGNITE initiatives Where we differ: Consensus may not have adjusted for the new share base as at 27 Jun 2016 Analyst LIM Sue Lin suelinlim@dbs.com Lynette Cheng lynettecheng@alliancedbs.com What s New Relisted as from RHB Capital, marking the completion of its corporate restructuring The cleaner corporate structure should re-rate the stock; new revenues drivers are keenly watched ROE is enhanced after imputing interest cost savings and removal of goodwill; minimal adjustments to earnings Maintain BUY, TP adjusted to RM5.30 to reflect new share base at Price Relative RM Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 RHB Capital (LHS) Relative KLCI INDEX (RHS) Relative Index Forecasts and Valuation FY Dec (RMm) 2015A 2016F 2017F 2018F Pre-prov. Profit 2,398 3,087 3,544 4,146 Net Profit 1,511 1,991 2,317 2,739 Net Pft (Pre Ex.) 1,511 1,991 2,317 2,739 Net Pft Gth (Pre-ex) (%) (25.8) EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) (30) Diluted EPS (sen) PE Pre Ex. (X) Net DPS (sen) Div Yield (%) ROAE Pre Ex. (%) ROAE (%) ROA (%) BV Per Share (sen) P/Book Value (x) Earnings Rev (%): 2 (5) (4) Consensus EPS (sen): Other Broker Recs: B: 8 S: 4 H: 7 Source of all data: Company, DBS Bank, Bloomberg Finance L.P A new lease of life A more efficient corporate structure, BUY. The completion of its corporate restructuring exercise which entailed the listing of (RHB) on Bursa in place of RHB Capital marks a new beginning for the group. The corporate restructuring exercise which was initiated in April 2015 also saw a RM2.5bn rights issue completed in Dec RHB now has a cleaner structure. With the restructuring overhang removed, RHB should see better share price performance going forward. However, to see a stronger re-rating beyond 1x BV, we would need a pick-up in business growth on a more sustainable basis. Impact of restructuring to our forecasts. The key differences to note in the financials under RHB (from RHB Capital) include interest savings and removal of goodwill coupled with an enlarged capital base. This resulted in an improved EPS, ROE and capital ratios. Cost savings from its staff rationalisation exercise, stronger loan growth and stabilization in credit cost should also pave the way for a better FY16 for RHB, as we noted in its 1Q16 results in May Stable outlook. Loan growth is expected at 8%, higher than the 6% in 2015 in the absence of lumpy repayments. NIM should stabilise from here. We expect credit cost to be at 25bps, while NPL ratio should stay below 2%. Cost-to-income ratio is targeted at c.50%, as cost savings start to kick in. ROE is targeted at 10%. However, with the weak operating environment, the 10% ROE target for FY16 may be challenging to achieve in our view. Valuation: RHB remains a BUY. The reference price post restructuring upon the listing of RHB is RM4.68 (last traded pre-completion of the restructuring was RM6.10). Our adjusted TP of RM5.30 (previously RM7.00) is derived using the Gordon Growth Model and is based on 10% ROE, 11% cost of equity and 4% growth. Key Risks to Our View: Sustained lull in capital market activities. A sustained lull in capital market may dampen non-interest income and hence earnings. At A Glance Issued Capital (m shrs) 3,075 Mkt. Cap (RMm/US$m) 18,756 / 4,583 Major Shareholders (%) EPF (%) 42.2 Aabar Investment (%) 17.8 OSK Holdings (%) 10.1 Free Float (%) m Avg. Daily Val (US$m) 1.6 ICB Industry : Financials / Banks ed: CK / sa: BC

2 WHAT S NEW Corporate restructuring completed with the listing of (RHB) Restructuring overhang removed with listing of (RHB). (RHB) will assume the listing status of RHB Capital from 28 June 2016 onwards. This marks a new beginning for the group as the corporate restructuring exercise initiated in April 2015 is now completed. To recap, the exercise entailed a rights issue of RM2.5bn and internal restructuring plans involving the collapse of the structure of RHB Capital into RHB. RHB then used the capital injected by RHB Capital to acquire the other two key subsidiaries of RHB Capital - RHB Investment Bank and RHB Insurance - and place them directly under RHB (see shareholding structure on the next page). Subsequently, RHB Capital implemented a capital reduction plan and its listed status is transferred to RHB. Ripe for a re-rating. With the removal of the holding company structure, RHB now has a cleaner structure. The key differences to be noted in the financials under RHB (from RHB Capital) include interest savings and removal of goodwill coupled with an enlarged capital base. Note that the removal of goodwill at RHB Capital (from the purchase of a 30% stake in RHB from Khazanah in 2007) and lower debt are the key developments to re-rate the group s book value in This resulted in an improved EPS, ROE and capital ratios (see table on next page). Cost savings from its staff rationalisation exercise, stronger loan growth and stabilisation in credit cost should also pave the way for a better FY16 for RHB, as we noted in its 1Q16 results in May Minimal impact to earnings post adjustment of credit cost and expenses assumptions. We made minimal adjustments to earnings (+2.4/-4.7/-4.5% across FY16-18F) as we raise credit cost for the anticipated soft environment, but lowered expenses to account for more cost savings. Cost management remains RHB s key agenda; with a targeted cost-to-income ratio of c.50%. FY16 will see ongoing cost-optimisation initiatives such as branch, ATM and EASY outlets rationalisation. Full cost savings are expected to be visible only in FY17, at around RM100m. Our credit cost and cost-to-income assumption now stands at 25bps each year and 54/52/49%, respectively. Capital levels are clearly stronger after the capital injection. On a proforma basis, CET1 ratio and Total CAR are at 12.5% and 17.2%, respectively. We highlight that our forecasts are based on the numbers of the new listed entity,. Similarly, the adjusted share base also reflects that of. Consensus numbers may not have reflected it at this time of writing this note. Maintain BUY, TP adjusted to RM5.30. Taking the earnings and restructuring impact changes into account, we arrive at a RM5.30 TP (assuming 10% ROE, 11% cost of equity and 4% growth), implying 0.9x BV. The revised TP is lower than our previous RM7.00 TP due to the larger share base in RHB. Based on the reference price (post restructuring upon the listing of RHB) of RM4.68, our TP implies a 13% upside. We maintain our BUY call as we expect share price to re-rate on the back of better earnings traction in FY16 and the removal of the restructuring overhang. However, to see a stronger re-rating beyond 1x BV, we believe there is a need for a pick-up in business growth on a more sustainable basis. Page 2

3 RHB s proforma numbers post internal restructuring and capital injection Group proforma numbers Notes Total assets (RM bn) Difference against RHBC's total assets is RM2.5bn which represents the goodwill removed post reorganization Net profit (RM bn) 1.65 Includes RM135m interest savings Share base (bn) 4.01 In accordance to management guidance where 's share base of 3.46bn shares is added with m new shares issued (at price of RM5.56 or 1.1x BV) in conjunction with the reorganisation. The remainder represents dividend paid to RHB Capital which was converted into capital. Shareholder equity (RM bn) Difference against RHBC's total shareholder equity mainly from the RM2.5bn goodwill removal EPS (sen) 0.41 Excluding interest savings, EPS would have been at 0.38 sen BVPS (RM) 5.01 shares issued at RM5.56 represents 1.1x BV ROE (%) 8.2 Excluding interest savings, ROE would have been at 7.5% (improving from RHBC's 7.2%) CET1 ratio (fully loaded) (%) 12.5 Improving from 12% pre-internal reorganisation Total capital ratio (%) 17.2 Improving from 16.5% pre-internal reorganisation Source of all data: Company, DBS Bank RHB: Corporate structure Before internal restructuring RHB Capital (listed entity) After internal restructuring (listed entity) 100% 100% RHB Investment Bank 95% RHB Insurance 100% 100% RHB Islamic Bank RHB Investment Bank 95% RHB Insurance RHB Islamic Bank Note: refers to RHB in the report Source: Company, DBS Bank, AllianceDBS Page 3

4 CRITICAL DATA POINTS TO WATCH Earnings Drivers: NIM to stabilise. NIM is expected to stabilise from here, a combination of improved funding structure and interest cost savings by virtue of a more efficient corporate structure post internal reorganisation. RHB is focused on driving CASA growth, following its strategy to rebalance its deposit mix. This is expected to mitigate NIM compression moving forward. RM m 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Margin Trends 2.3% 2.2% 2.2% 2.1% 2.1% 2.0% 2.0% 1.9% 1.9% 1.8% Net Interest Income Net Interest Income Margin Improved loan momentum. RHB s FY15 loan traction was impacted by a large repayment earlier in the year, resulting in loan growth of a mere 6%. We expect loan growth to pick up in FY16F to 8% in the absence of large repayments, and supported by business loans which are largely shorter tenure working capital loans Enlarged investment banking business has done well. RHB s investment banking business is doing well post-osk acquisition, with a strong non-interest income lift from higher brokerage income, fund management and unit trust income, and corporate advisory and underwriting fees. However, growing non-interest income will be a challenge going forward, given that the capital market outlook remains weak Cost-to-income ratio higher than industry average. RHB s costto-income ratio is above the industry average of 50%. To keep a tighter lid on its cost-to-income ratio, RHB rolled out a Career Transition Scheme (voluntary staff rationalisation exercise) in Sep The exercise was completed in Oct 2015 and resulted in a headcount cut of 12% of its total workforce. RHB expects this to bring in cost savings from FY16F onwards. Its cost-toincome ratio targeted at c.50% in FY16 International contribution. RHB s overseas operations are mainly in Singapore, where it operates seven branches. Other countries that RHB operates in include Laos, Cambodia and Thailand, whose contribution remains small to the group. RHB s international operations are expected to contribute at least 10% of pre-tax profit in FY16 Corporate restructuring completed. RHB Capital completed a rights issue of RM2.5bn and an internal restructuring plan on Dec 2015 and June 2016 respectively. To recap, the internal restructuring plan involved the collapse of the structure of RHB Capital into RHB. RHB then used the capital injected by RHBC to acquire the two key subsidiaries of RHB Capital - RHB Investment Bank and RHB Insurance - and place them directly under RHB. RHB Capital then implemented a capital reduction plan and its listed status is transferred to RHB. The key differences to be noted in the financials under RHB (from RHB Capital) include interest savings and removal of goodwill coupled with an enlarged capital base. 180, , , , ,000 80,000 60,000 40,000 20, , , , , ,000 80,000 60,000 40,000 20, , , , , , , , ,624 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 RM m Gross Loan& Growth Gross Loan (LHS) RM m Gross Loan Growth (%) (YoY) (RHS) Customer Deposit & Growth Customer Deposits (LHS) Customer Deposits Growth (%) (YoY) (RHS) Loan-to-Deposit Ratio Trend Loans Deposit Loan-to-Deposit Ratio (RHS) Cost & Income Structure Net Interest Income Islamic Banking Income Non-interest Income Cost-to-income Ratio 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 105% 100% 95% 90% 85% 80% Source: Company, DBS Bank Page 4

5 Balance Sheet: Expecting improving asset quality. RHB suffered from asset quality deterioration in early 2013 due to a specific corporate account. Since then, its gross NPL ratio has been trending down and management targets to keep it below 1.8%. With the model risk adjustment made to its regulatory reserves, its loan loss coverage should rise close to 75%, inching towards 80% over time. Stronger capital ratios post-rights. Under the new corporate structure, RHB s capital ratios are now stronger, comfortably above the minimum required CET1 of 9.5% (inclusive of conservation and countercyclical buffers) by 2019, as per Basel III requirements. While its dividend payout ratio was lower in 2014 and 2015, upon the completion of its corporate restructuring, we believe RHB should revert to its 30% minimum payout dividend policy with a dividend reinvestment plan. Share Price Drivers: Time to re-rate. RHB s share price has partially priced in the success of its corporate restructuring and is currently trading just below -1 SD of its 5-year P/BV mean. We believe market has not fully priced in the cleaner structure post its internal reorganisation. However, to see a stronger re-rating beyond 1x BV, we would need to see a pick-up in business growth on a more sustainable basis. Key Risks: Asset quality upset. This has been largely priced in, but further asset quality deterioration could pose downside risks to our recommendation, target price and earnings. 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 17.0% 16.0% 15.0% 14.0% 13.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Asset Quality NPL Ratio Provision Charge-Off Rate Capitalisation (%) Tier-1 CAR Total CAR ROE (%) Sluggish capital market. Post-acquisition of OSK, RHB is now one of the key players in the Malaysian capital market. As the outlook for capital markets remains soft, growth of noninterest income could be weaker than expected. Company Background Berhad provides commercial and merchant banking services. Through its subsidiaries, the company provides finance and leasing services and trades securities. also provides nominee, unit trust, asset management, and insurance services Forward PE Band (x) (x) Jun-12 Jun-13 Jun-14 Jun-15 PB Band (x) (x) Jun-12 Jun-13 Jun-14 Jun-15 +2sd: 14.9x +1sd: 13.2x Avg: 11.6x 1sd: 10x 2sd: 8.3x +2sd: 1.51x +1sd: 1.32x Avg: 1.12x 1sd: 0.93x 2sd: 0.73x Source: Company, DBS Bank Page 5

6 Key Assumptions FY Dec Gross Loans Growth Customer Deposits Growth Yld. On Earnings Assets Avg Cost Of Funds Income Statement (RMm) FY Dec Net Interest Income 3,291 3,300 3,532 3,943 4,488 Islamic Income ,099 1,231 Non-Interest Income 2,211 2,015 2,155 2,263 2,376 Operating Income 6,235 6,191 6,669 7,305 8,095 Operating Expenses (3,411) (3,793) (3,581) (3,760) (3,948) Pre-provision Profit 2,824 2,398 3,087 3,544 4,146 Provisions (88.9) (292) (422) (443) (480) Associates Exceptionals Pre-tax Profit 2,735 2,107 2,666 3,102 3,667 Taxation (672) (583) (666) (775) (917) Minority Interests (25.5) (12.6) (8.0) (9.3) (11.0) Preference Dividend Net Profit 2,038 1,511 1,991 2,317 2,739 Net Profit bef Except 2,038 1,511 1,991 2,317 2,739 Growth (%) Net Interest Income Gth Net Profit Gth 11.3 (25.8) Margins, Costs & Efficiency (%) Spread Net Interest Margin Cost-to-Income Ratio Business Mix (%) Net Int. Inc / Opg Inc Non-Int. Inc / Opg inc Fee Inc / Opg Income Oth Non-Int Inc/Opg Inc Profitability (%) ROAE Pre Ex ROAE ROA Pre Ex ROA earnings dragged by one-off rationalisation cost Source: Company, DBS Bank Page 6

7 Quarterly / Interim Income Statement (RMm) FY Dec 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 Net Interest Income Islamic Income Non-Interest Income Operating Income 1,509 1,487 1,514 1,682 1,604 Operating Expenses (820) (843) (1,169) (962) (777) Pre-Provision Profit Provisions (44.1) 48.4 (50.5) (245) (79.8) Associates Exceptionals Pretax Profit Taxation (165) (166) (99.8) (152) (193) Minority Interests (3.2) (2.3) (0.1) (7.0) (1.8) Net Profit Growth (%) Net Interest Income Gth (0.7) (1.9) Net Profit Gth (2.0) 10.1 (62.9) Boosted by strong net interest income as well as lower expenses and provisions Balance Sheet (RMm) FY Dec Cash/Bank Balance 16,237 12,882 22,659 35,093 55,457 Government Securities Inter Bank Assets 2,299 1, Total Net Loans & Advs. 140, , , , ,252 Investment 43,003 47,024 52,864 60,687 70,824 Associates Fixed Assets 1,031 1,042 1,053 1,065 1,076 Goodwill 5,274 5,348 2,848 2,848 2,848 Other Assets 10,306 13,251 14,268 15,378 16,590 Total Assets 219, , , , ,371 Customer Deposits 157, , , , ,225 Inter Bank Deposits 21,350 20,646 26,840 34,892 45,359 Debts/Borrowings 12,386 12,386 10,620 11,121 11,647 Others 9,590 16,426 22,476 32,348 49,896 Minorities Shareholders' Funds 18,794 23,085 25,329 27,101 29,191 Total Liab& S/H s Funds 219, , , , ,371 Source: Company, DBS Bank Page 7

8 Financial Stability Measures (%) FY Dec Balance Sheet Structure Loan-to-Deposit Ratio Net Loans / Total Assets Investment / Total Assets Cust. Dep./Int. Bear. Liab Interbank Dep / Int. Bear Asset Quality NPL / Total Gross Loans NPL / Total Assets Loan Loss Reserve Coverage Provision Charge-Off Rate Capital Strength Total CAR Tier-1 CAR Including regulatory reserves, loan loss coverage should come in at c.84% Source: Company, DBS Bank Target Price & Ratings History RM 7.25 Closing Target S.No. Date Rating Price Price 1 1: 02 Jul HOLD 2: 01 Sep HOLD : 04 Sep HOLD 4: 08 Sep HOLD : 25 Sep HOLD : 21 Oct HOLD : 17 Nov BUY : 19 Nov BUY : 01 Dec BUY : 10 Dec BUY 11: 22 Jan BUY 11 12: 02 Feb BUY : 25 Feb BUY Jun-15 Oct-15 Feb-16 14: 29 Feb BUY Note : Share price and Target price are adjusted for corporate actions. 15: 01 Mar BUY 16: 24 Mar BUY 17: 15 Apr BUY 18: 03 May BUY 19: 26 May BUY Source: DBS Bank Page 8

9 DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. 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11 Dubai United States Other jurisdictions This research report is being distributed in The Dubai International Financial Centre ( DIFC ) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box , 3 rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it. This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Bank Ltd 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore Tel equityresearch@dbs.com Company Regn. No E Page 11