AmInvestment Research maintains Buy on RHB Bank

CIMB Research's top pick is RHB Bank

KUALA LUMPUR: AmInvestment Research is maintaining our Buy rating on RHB Bank with a higher fair value of RM6 a share (previously: RM5.90 a share) after rolling forward over its valuation to FY18. 

It said on Monday its fair value is based on FY18F returns on equity (ROE) of 9.1% leading to unchanged price-to-book value of (P/BV) of one time.

AmInvestment Research pointed out that RHB Bank’s 4QFY16 net profit was lower at RM261mil (-48.3% on-quarter), largely due to lower non-interest income (NOII) from a decline in investment/trading income, lower forex profit and fee income. 

Normalised 12MFY16 earnings (excluding one-off impairment of RM253mil on Swiber's bonds) was RM1.87bil (+4.3% on-year). 

“Cumulative core earnings were slightly below our expectation, accounting for 93.4% of ours but was within consensus estimates, at 99.2% of street expectation. 

“The variance to our forecast was due a lower-than-expected NOII from a drop in fee income and forex profit,” it said.

Total income growth was flat at 0.3%YoY, with a higher net interest and Islamic banking income, offset by lower NOII. 

AmInvestment Research said the JAW continued to be positive as normalised growth in operating expenditure -- Opex -- (excluding CTS expenses in FY15) declined 7.0% on-year, reflecting benefits from cost initiatives under IGNITE 2017.

According to Wikipedia said the jaws ratio is a measure used in finance to demonstrate the extent to which a trading entity's income growth rate exceeds its expenses growth rate, measured as a percentage.

Cost income ratio in 12MY16 improved to 50.0% compared to 53.8% in 12MFY15, based on normalised Opex. Cost income ratio met its KPI target of around 53.0%. 

“It was close to our assumption of 51.0% for FY16,” said the research house.

AmInvestment Research said that gross loan growth decelerated to 2.0% (on-year). Expansion in loan book was driven by higher retail and SME loans but dampened by slower corporate loans which were impacted by repayments. 

The slowdown in corporate loans was in line with the group’s portfolio rebalancing strategy to lower its corporate loans composition.

Annualised credit cost was higher in 4QFY16 at 0.80% compared to 0.38% in 3QFY16. Additional provisions of RM120mil were taken on legacy steel loans and a further
RM60mil provisions on oil & gas sector loans. 

“For 12MFY16, credit cost (excluding impairment on Swiber's bonds) was 0.39%, higher than 12MFY15 of 0.23%. However, it remained within our assumption of 0.50% for FY16.

“GIL ratio rose to 2.43% in 4QFY16 from 2.25% in 3QFY16. This was due to higher impaired loans, contributed by rise in impaired loans for working capital, construction and purchase of securities. 

“A final dividend of 7 sen/share has been proposed, bringing total dividends to 12 sen/share for FY16 (payout of 29.0%), slightly lower than our estimate of 13 sen/share. We tweaked our net profit estimate for FY17/18 by - NOII and credit cost,” said the research house.