CIMB Research retains Add for RHB Bank

Valuations remain attractive for RHB Bank

KUALA LUMPUR: CIMB Equities Research has retained its Add recommendation for RHB Bank and reduced its dividend discount model (DDM based target price from RM6.10 to RM5.96.

It said on Monday that despite the disappointing 4Q16 results, it retained its Add call on RHB Bank given the expected recovery in earnings per share (EPS) growth in FY17F, arising from normalising loan loss provisions (LLP). 

“We also believe that the tight cost control would keep the increase in overheads at bay. Valuations remain attractive, at FY17 P/E of 10 times and price-to-book value (P/BV) of 0.8 times versus the sector average of 11.9 times and 1.3 times, respectively. Downside risks are a further increase in impaired loans and loan loss provisions,” it said.

To recap, CIMB Research said RHB Bank’s FY16 net profit was 8% below its forecast due to higher-than-expected
 LLP However, FY16 net profit was in line with market expectations at 98% of Bloomberg consensus estimate. Total net DPS of 12 sen for FY16 was also below its projected 14 sen.

“FY16 LLP was pushed up by the 29.9% on-year and 110.9% on-quarter jump in 4Q16 LLP. This was partly elevated by the provisioning of RM120mil for legacy steel impaired loans and RM60mil for oil and gas impaired loans. 

“In our view, the additional provisioning for the steel impaired loans was due to the impairment of collateral value, as most of the unsecured portions of these loans would have been provided for previously,” it said.

The larger-than-expected LLP brought down FY16 return on equity to 8.5%, below its key performance index (KPI) of 10%.

Gross impaired loan (GIL) ratio rose from 2.25% in Sep 16 to 2.43% in Dec 16, missing its target of 2% or below. Loan growth was also disappointing at 2% in 2016, below its KPI of 8%.

“During the conference call on Friday, the management stated that the worst is likely over for asset quality and credit costs. It expects the GIL ratio to stabilise below 2.5% in 2017 (vs. 2.43% at end-16). 

“Management also guides for lower credit charge-off rate of 25bp-30bp, compared to 39bp in FY16. It also foresees a recovery in loan growth to 5% in 2017F from only 2% in 2016.

“We lower FY17-18F EPS by circa 2.8% as we cut projected loan growth from 6% in
FY17F and 5.5% in FY18F to only 2% for both years. This brings down our DDM-based target price from RM6.10 to RM5.96. 

“Although LLP was higher than expected in FY16, we do not increase our credit charge-off rate assumptions of 33-34bp for FY17-18F, as they are already higher than the 25-30bp guided by the management,” it said.