Maybank IB Research PP16832/01/2012 (029059) Company Update 15 April 2011 RHB Capital Buy (unchanged) Share price: Target price: RM8.62 RM9.50 (unchanged) Desmond Ch ng, ACA desmond.chng@maybank-ib.com (603) 2297 8686 Description: Banking Information: Ticker: RHBC MK Shares Issued (m): 2,153.5 Market Cap (RM m): 18,563.0 3-mth Avg Daily Volume (m): 3.35 KLCI: 1,525.80 Major Shareholders: % EPF 44.6 Abu Dhabi Commercial Bank 25.0 Price Performance: 52-week High/Low RM8.76/RM5.55 1-mth 3-mth 6-mth 1-yr YTD 9.4 3.2 49.4 43.7 (1.1) Price Chart (RM8.62) 9.0 8.5 8.0 7.5 RHBC MK Equity Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 Robust loan growth targets Valuations still justify a BUY. RHB Capital continues to offer value in terms of valuations, with the stock trading at a prospective 2012 PER of just 10.3x or a 16% discount to the average for the other four large banks of 12.3x. On a P/BV basis, it trades at a prospective 2011 P/BV of 1.64x versus a peer average of 2.3x and 1.7x for AMMB Holdings (Hold, TP:RM6.80), despite a higher prospective ROE of 15.1% vs 13.1% for AMMB. Our RM9.50 target price is maintained. At least there is a potential succession. While there is still a void at the investment banking side, we are somewhat relieved that there is at least possible succession in place for the Managing Director position with Kellee Kam s appointment as Principal Officer of RHB Capital. The caveat here is that central bank approval is still required. Management is giving itself 3-6 months to find a new investment banking head. Loan growth target of >15% for 2011 remains in place. Wholesale lending is expected to expand 20-21% this year, while retail loan growth is expected to emanate from housing, hire-purchase and EASY financing of personal loans/asb units. We have taken a more conservative view and assumed loan growth of 13.3% and 11.5% for 2011 and 2012 respectively. Our forecasts assume a further 6 bps compression in NIM this year, before recovering by about 5 bps in 2012 on the back of another 50 bps interest rate hike expectation in 2011. Some delay in the acquisition of PT Bank Mestika. This deal, which was expected to be completed this month, has probably been delayed by another 6-7 weeks. All relevant documents have been submitted to the authorities and management is now awaiting approval. Alongside this delay, the proposed rights issue has been extended as well. Terms of the group s DRP. A Dividend Reinvestment Plan (DRP) is in place for RHB Capital s final gross DPS of 21.38sen (16.04sen net) for 2010. Shareholders may elect to have the entire final dividend reinvested in new RHB Capital shares and the issue price of the new RHB Capital shares has been fixed at RM7.56. The stock will trade exdividend on April 19 and the payment date is on May 20. Assuming full take-up, RHB Capital s share capital base will enlarge by 2.1%. RHB Cap Summary Earnings Table FYE Dec (RM m) Operating Income 2009A 3,665.0 2010A 4,050.3 2011F 4,406.9 2012F 4,902.8 2013F 5,360.7 Pre-provision Profit 2,099.2 2,410.6 2,620.8 2,946.0 3,222.2 Profit Before Tax 1,538.4 1,899.3 2,148.4 2,405.2 2,665.9 Recurring Net Profit 1,183.8 1,516.8 1,606.2 1,798.2 1,992.8 Recurring Basic EPS (sen) 55.0 70.4 74.6 83.5 92.5 EPS growth (%) 11.8 28.1 5.9 12.0 10.8 Gross DPS (Sen) 22.5 26.4 29.8 33.4 37.0 PER (x) 15.7 12.2 11.6 10.3 9.3 Gross Div Yield (%) 2.6 3.1 3.5 3.9 4.3 P/BV (x) 2.1 1.86 1.6 1.4 1.3 Book Value (RM) 4.04 4.63 5.26 5.99 6.78 ROAE (%) 14.5 15.2 15.1 14.8 14.5 ROAA (%) 1.1 1.2 1.2 1.2 1.2 Consensus Net Profit (RM m) - - 1,639.5 1,851.0 2,072.5 Source:Maybank-IB
Company Visit Highlights Some relief on the management front A succession plan in place. Recent upheavals, with the departure of key figures such as Dato Tajuddin Atan (Group Managing Director) and Chay Wai Leong (Director, Corporate & Investment Banking) has been unsettling for the group and for investors. What is a relief, nevertheless, is that Kellee Kam (Director, Group Finance) has been appointed Principal Officer of RHB Capital. In this capacity, Kellee s role is no different from that of a Managing Director; his nomination has been submitted to Bank Negara. Renzo Christopher Vegas (Director, Retail Banking), has been appointed Principal Officer of RHB Bank. About Kellee Kam. Kellee has been with the RHB Group since February 2005, which is when he first joined as its General Manager (Corporate Finance and Treasury). He was appointed Chief Financial Officer of RHB Capital in June 2007. Group to maintain its course. Kellee is of the opinion that the group s business direction remains intact and that no major change in strategy is required. Meanwhile, management acknowledges that it is imperative that the group stabilizes the investment banking division and it has given itself 3-6 months to find a replacement for Chay Wai Leong. Loan growth targets still robust Loan growth of more than 15%. This target was set early this year and remains in place. In fact, Renzo had earlier said that RHB was targeting to do RM4b worth of new loans this year, which would in fact translate to gross loan growth of closer to 17-18%. Where the growth is to come from. Areas of loan growth this year would include: Wholesale lending. As a corporate bank, RHB hopes to capitalize on entry point project financing under the Economic Transformation Programme (ETP) and targets to grow wholesale lending by 20-21% in 2011. Mortgage lending and hire purchase. Housing loans expanded 18% in 2010 and this pace is expected to be sustained in 2011. Management believes its mortgage portfolio to be sound, as most of its loans are 1 st and 2 nd home financing while it has also avoided the KLCC area for the last 24 months. Hire purchase grew 13% in 2010 and while this segment would expand as well, we would expect the rate of growth to moderate on the back of slower vehicles sales. Islamic financing. With the integration of the group s Islamic and conventional platforms, the group now has a greater reach and hopes to deliver Islamic products through its entire branch network. Personal loans & ASB financing via its EASY outlets. EASY loans totaled RM1.2b in 2010, or 1.4% of total loans. Growth here is expected to be strong in 2011. 15 April 2011 Page 2 of 8
Where growth may not be aggressive would be in: Government financing. Government loans accounted for a hefty 61% of new loans in 2010 and this is not expected to be repeat in such quantum. Currently accounting for 11% of total loans, we believe the contribution here is likely to decline as other segments grow at a faster pace. Positively, these loans have direct recourse to the government and carry no collective impairment charge or risk-weighting requirement. Averaging more than five years in tenure, the downside is that margins are slimmer for such loans. Credit cards. RHB Capital s credit card business grew by just 4% in 2010. Focus will be on higher income customers for this segment and where it would like to do more of would be debit cards, which grew at three times the pace of its previous year s growth in 2010. SME financing. SME loans account for 13% of total loans but loans to this segment contracted 3% in 2010. Todate, management has not experienced any form of derailment to growth on this front, but remains cautious in its lending to this sector, in light of uncertainties developing in the external environment. Loans composition (2010) Foreign entities 5% Domestic nonbank FI`s 0% SMEs 13% Individuals 44% Others 27% Government and stat bodies 11% Source: Company, Maybank IB We have imputed slower growth assumptions. While management s targets remain aggressive, we have taken a more conservative view and have imputed loan growth of 13.3% for 2011 and 11.5% for 2012. Our conservatism is premised on the fact that (i) government loans were a large contributor to growth last year and are unlikely to recur in such quantum, and (ii) ETP project financing is likely to flow through in a meaningful way only towards year end. 15 April 2011 Page 3 of 8
EASY financing to see strong momentum 250 outlets by year end. From 133 kiosks end-2010, management expects to take the total up to 250 by year end. 2011 will see a fullyear s contribution from all 133 kiosks as well as incremental contributions from the new ones. An area of concern amid rising household debt, but there are some mitigating issues. We voiced our concern over the expansion in the group s personal financing portfolio at a time when the central bank is taking preemptive steps to control household debt. Management points out that there are several mitigating issues: (i) 70% of EASY loans are for Amanah Saham Bumiputera (ASB) financing which are more secure than personal financing. RHB Capital now has a 16% market share in ASB financing (just 7% in 2007) and the impaired loans ratio here is 0.1%. (ii) Approval rates for personal loans are low at just 18% on average and it is thus not that simple to be approved for a loan. (iii) Credit charge-off rates for EASY loans are currently low at sub 15-20 bps versus 44 bps for the group s total loans. We however feel that this may not be entirely reflective at this time, given the infancy of the EASY portfolio. ASB loans portfolio RM` mil 4000 3500 3000 2500 2000 1500 1000 500 0 2005 2006 2007 2008 2009 2010 Source: Company, Maybank IB 15 April 2011 Page 4 of 8
Hoping to contain NIM decline NIMs declined a marginal 5 bps in 2010, but saw a larger compression on a QoQ basis during the year of 23 bps from a high of 2.82% in 1Q10 to 2.59% in 4Q10. Management had attributed this to various factors such as (i) lower yielding government loans, (ii) the lengthening of the tenure of deposits, (iii) the issuance of sub-debt and (iv) ongoing price competition. Expects some compression still in 1Q 2011, due mainly to much competition for funds. Management takes the view that interest rates will rise 50-75 bps this year and continues to actively lock in funds. As the table below shows, pricing for the bank s fixed deposits has been among the more aggressive at the longer end. Fixed deposit rates (17.3.11) Months 1 2 3 4 5 6 7 8 9 10 11 12 Public Bk 2.75 2.75 2.75 2.75 2.75 2.80 2.80 2.80 2.80 2.80 2.80 2.85 Maybank 2.75 2.75 2.75 2.75 2.75 2.80 2.80 2.80 2.80 2.80 2.80 2.85 RHB Bank 2.75 2.75 2.80 2.80 2.80 2.90 2.90 2.90 2.90 2.90 2.90 3.10 CIMB 2.75 2.75 3.00 2.75 2.75 2.80 2.80 2.80 2.80 3.10 2.80 3.00 AMMB 2.75 2.75 2.75 2.75 2.75 2.90 2.90 2.90 3.00 3.00 3.00 3.10 Source: Company websites, Maybank IB Hoping nevertheless to contain decline, particularly in view of reduced government lending this year. Management also hopes to improve CASA (26.8% of total loans in 4Q10), given its now extensive network (which is the 3 rd largest in the industry) of over 1,600 selfservice terminals throughout Malaysia today, almost 200 branches and 250 EASY kiosks by year end. Self-services terminals expansion in 2010 Units 1200 1000 800 600 ATM Cheque Deposits Machine Cash Deposits Machine 400 200 0 2006 2007 2008 2009 2010 Source: Company, Maybank IB 15 April 2011 Page 5 of 8
Trying to grow deposits through EASY. While EASY kiosks are permitted to take savings deposits, driving savings through the kiosks has not been an easy task due mainly to the profile of its EASY customers, and management will likely have to step up its marketing and product efforts to do so. We have assumed further compression this year. Our forecasts assume a further 6 bps compression in NIM this year, before recovering by about 5 bps in 2012 on the back of a 50 bps interest rate hike expectation. Demand & savings deposits as % of total 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 Maybank 36.0% 37.6% 37.6% 37.3% 37.1% 37.0% 37.3% 37.3% CIMB 28.7% 30.2% 31.7% 31.7% 32.2% 30.5% 31.8% 33.1% Public Bk 21.4% 22.0% 21.8% 24.5% 24.1% 24.5% 25.1% 26.0% RHB Cap 29.8% 30.4% 29.3% 28.6% 28.9% 28.1% 27.2% 26.8% AMMB 10.5% 11.4% 11.7% 12.3% 12.2% 12.4% 12.6% 13.5% Source: Companies, Maybank IB Other highlights Some delay in the acquisition of PT Bank Mestika. This deal, which was expected to be completed this month, has probably been delayed by 6-7 weeks. Todate, this acquisition, which was originally to have completed in May 2010, has been in the pipeline for almost a year. All relevant documents have been submitted to the authorities and management is now just waiting approval. With a CAR of 20-25%, Bank Mestika will not require further capital injection in the immediate future. Alongside this delay, RHB Capital s proposed rights issue has been extended as well. Terms of the group s DRP. A Dividend Reinvestment Plan (DRP) is in place for RHB Capital s final gross DPS of 21.38sen (16.04sen net). Shareholders may elect to have the entire final dividend reinvested in new RHB Capital shares and the issue price of the new RHB Capital shares has been fixed at RM7.56. The stock will trade ex-div on April 19 and the payment date is on May 20. Assuming full take-up, RHB Capital s share capital base will enlarge by 2.1%. 15 April 2011 Page 6 of 8
INCOME STATEMENT BALANCE SHEET Year End: 31 Dec (MYR'mln) 2010 2011E 2012E 2013E Year End: 31 Dec (MYR'mln) 2010 2011E 2012E 2013E Interest income 4,772 5,629 6,966 7,681 Cash & short-term funds 14,755 14,392 15,509 16,709 Interest expense (2,099) (2,695) (3,631) (3,990) Deposits & placements with banks 1,024 2,648 2,895 3,166 Net interest income 2,673 2,934 3,335 3,691 Securities under resale agreements 276 299 322 348 Dealing securities 772 834 901 973 Net income from Islamic banking 334 360 382 405 Investment securities 24,244 26,184 28,279 30,541 Non-interest income 1,043 1,112 1,186 1,264 Loans, advances and financing 81,228 91,946 102,434 113,231 Other assets 1,321 1,342 1,364 1,388 Total operating income 4,050 4,407 4,903 5,361 Central Bank deposits 460 503 557 613 Total operating expense (1,640) (1,786) (1,957) (2,138) Tax recoverable 129 129 129 129 Investment in associates 25 38 39 39 Operating profit 2,411 2,621 2,946 3,222 Property & equipment 1,023 1,044 1,065 1,086 Loan impairment allowance (416) (473) (542) (557) Intangible assets 3,807 3,807 3,807 3,807 Other gains/(losses) (97) - - - Deferred tax assets 261 261 261 261 Associate contributions 1 1 1 1 Total assets 129,325 143,426 157,561 172,291 Pre-tax profit 1,899 2,148 2,405 2,666 Deposits from customers 94,434 105,766 118,246 131,017 Taxation (471) (532) (596) (661) Deposits from banks & FI's 10,066 10,066 10,066 10,066 Minority interest (8) (10) (11) (12) Repo obligations - - - - Bills & acceptances payable 3,536 3,713 3,899 4,094 Net profit 1,420 1,606 1,798 1,993 Clients & brokers' balances 610 641 673 707 Recurring net profit 1,420 1,606 1,798 1,993 Recourse obligations on loans sold to 819 859 902 948 Cagamas Other liabilities 1,781 2,865 2,657 2,597 EPS (RM) 66.0 74.6 83.5 92.5 Borrowings 7,929 7,964 7,964 7,964 Gross DPS (RM) 26.4 29.8 33.4 37.0 Current tax liabs 173 195 219 242 BVPS (RM) 4.63 5.26 5.99 6.78 Deferred tax liabilities 5 5 6 6 Total liabilities 119,353 132,075 144,632 157,641 Weighted share capital (mln) 2,153 2,153 2,153 2,153 Share capital 2,153 2,153 2,153 2,153 Reserves 7,809 9,177 10,744 12,453 Minority interests 11 21 31 43 FINANCIAL RATIOS Total equity 9,973 11,351 12,929 14,650 Year End: 31 Dec 2010 2011E 2012E 2013E Profitability ratios Net int. inc./total op. inc 66.0% 66.6% 68.0% 68.9% Net Islamic banking inc/total op. inc 8.2% 8.2% 7.8% 7.6% Non-interest inc./total op. inc 25.8% 25.2% 24.2% 23.6% Total equity & liabilities 129,325 143,426 157,561 172,291 GROWTH RATES Net interest margin 2.74% 2.68% 2.73% 2.73% Year End: 31 Dec 2010 2011E 2012E 2013E Cost-to-income 40.5% 40.5% 39.9% 39.9% Total assets 12.4% 10.9% 9.9% 9.3% Liquidity ratios Shareholders' funds 14.4% 13.7% 13.8% 13.3% Net loans/customer deposits 86.0% 86.9% 86.6% 86.4% Loans, advances and financing 21.4% 13.2% 11.4% 10.5% Net loans/total deposit 77.7% 79.4% 79.8% 80.3% Deposits from customers 11.3% 12.0% 11.8% 10.8% Capital adequacy ratios Interest income 14.3% 18.0% 23.7% 10.3% Tier-1 Core Capital Ratio 11.3% 11.3% 11.5% 11.7% Interest expense 19.2% 28.4% 34.7% 9.9% Risk Weighted Capital Ratio 14.7% 14.5% 14.6% 14.6% Net interest income 10.8% 9.8% 13.7% 10.7% Net income from Islamic banking 2.3% 8.0% 6.0% 6.0% Asset quality ratios Non-interest income 12.7% 6.6% 6.6% 6.6% Net NPL ratio 3.4% 3.4% 3.4% 3.5% Operating income 10.5% 8.8% 11.3% 9.3% Loan loss coverage 67.6% 68.6% 68.2% 68.3% Operating expense 4.7% 8.9% 9.6% 9.3% Operating profit 14.8% 8.7% 12.4% 9.4% Returns ratios Pre-tax profit 23.5% 13.1% 12.0% 10.8% ROAE 15.2% 15.1% 14.8% 14.5% Net profit 18.2% 13.1% 12.0% 10.8% ROAA 1.2% 1.2% 1.2% 1.2% Recurring net profit 20.0% 13.1% 12.0% 10.8% Sources: Company, Maybank-IB 15 April 2011 Page 7 of 8
Definition of Ratings Maybank Investment Bank Research uses the following rating system: BUY Total return is expected to be above 10% in the next 12 months HOLD Total return is expected to be between -5% to 10% in the next 12 months SELL Total return is expected to be below -5% in the next 12 months Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies. Some common terms abbreviated in this report (where they appear): Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings BV = Book Value FV = Fair Value PEG = PE Ratio To Growth CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share NTA = Net Tangible Asset ROSF = Return On Shareholders Funds EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date EV = Enterprise Value PBT = Profit Before Tax Disclaimer This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each security s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. 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Published / Printed by Maybank Investment Bank Berhad (15938-H) (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, Menara Maybank, 100 Jalan Tun Perak, 50050 Kuala Lumpur Tel: (603) 2059 1888; Fax: (603) 2078 4194 Stockbroking Business: Level 8, MaybanLife Tower, Dataran Maybank, No.1, Jalan Maarof 59000 Kuala Lumpur Tel: (603) 2297 8888; Fax: (603) 2282 5136 http://www.maybank-ib.com 15 April 2011 Page 8 of 8