AmInvest Research's Buy call on RHB Bank is premised on the stock's undemanding valuation, improvement in the outlook of its non-interest income from stronger capital market activities as well as lower provisions
KUALA LUMPUR: RHB Bank shares surged to a high of RM5.10 on Wednesday, leaving in its wake AMMB or AmBank after their proposed merger plan fell apart.
Investors of RHB Bank, which saw the share price under pressure since June 1 when the merger plan was announced, were relieved after the plan did not go through. It ended the day up 19 sen to RM5.07 – the highest since July 27.
At the current price, RHB Bank is trading at a price-to-earnings of 12.52 times. Its forward PE for FY ending Dec 31, 2017 is 10.06 times.
AmBank which was seen to have gained more from the merger, hit a high of RM4.89 in early trade. However, it soon lost ground to end down 11 sen to RM4.59.
At the last traded price, AmBank is trading at a price-to-earnings of 10.42 times and a forward P/E of 9.94 times in the financial year ending March 31, 2018.
On Tuesday, both banking groups announced that they had mutually agreed to end merger discussions as they were not able to reach an agreement on mutually acceptable terms and conditions for the proposed merger.
Based on earlier discussions, the deal could be priced at one times book value, which will minimise any goodwill issues that may arise from the deal.
“We had at best viewed this proposed merger as neutral. Apart from size, it would appear that the merged entity would need to extract a lot of cost synergies. To start with, its branch network, staff and possible overlap in businesses would need to be assessed,” it said in its research note earlier on Wednesday.
Without the merger, we are back to eight anchor banking groups with RHB ranking fourth by total assets and AMMB, sixth. We believe both banks will shift their focus back on their strategic plans which have been outlined for the year/financial year.
Alliance DBS Research has a Hold, target price of RM4.90.
“A better 2017 but there are still risks in our view. Up to 1Q17, RHB has yet to deliver on loan growth (FY17 guidance: 5.0% vs 1Q17: 3.2%) while net interest margin (NIM) compression risk arising from competition persists. The bank continues to focus on cost efficiency, with aspirations to keep cost-to-income ratio at <50%.
“It appears that NPL ratio has stabilised in 1Q17 with credit cost having peaked in 4Q16. What remains uncertain is the watch list sitting in its oil and gas portfolio,” it said.
The research said credit cost was guided to be below 35bps. Taking these into account, management hopes to end the year with return on equity (ROE) of 9%-10%.
“Possible upside surprises could arise from improved investment banking (IB) fees from its strong deal pipeline in Malaysia as well as interest cost savings from the redemption of capital instruments maturing in the coming quarters.
“With ample capital, some of these capital instruments are unlikely to be refinanced. RHB is targeting to release its 2Q17 results on Aug 29,” it said.
Meanwhile, Aliance DBS Research has a Hold for AmBank with a target price of RM5.40.
“With little being shared after its FY17 results in end-May, we expect AMMB’s business-as- usual (BAU) ROE to be c9% across FY18-20F,” it said.
AMMB delivered well on its transformation plans for FY17, with successful NIM improvement and cost containment.
Its bottomline continued to ride on recoveries, albeit the lowest in the past seven years. Its loans have also finally entered into growth mode. AMMB’s capital ratios have also improved.
“Based on its previous strategic initiatives, AMMB is targeting stronger loan growth, NIM expansion (from higher-yielding SME loans and higher proportion of current account/savings account) and stronger non-interest income growth. AMMB is expected to release its 1QFY18 within this week,” it said.
Limited time offer:
Just RM5 per month.
