RHB Bank Bhd
(Aug 25, RM4.98)
Maintain buy with a higher target price (TP) of RM5.50: RHB Bank Bhd’s second quarter of financial year 2016 (FY16) and first half of FY16 net profit came in below our and consensus expectations, mainly because of higher provisions. 

The higher-than-expected provisions came from a bond impairment from a Singapore oil and gas (O&G) company. Full provisions were made for this exposure. 

Elsewhere, non-performing loans (NPL) also increased largely due to two impaired accounts: one from a company related to the construction of a steel manufacturing plant and another from a commercial property. Some provisions were made for the former, while no provisions were made for the latter account.

Positively, pre-provision profit was in line with our expectations. Continued improvements from cost-efficiencies lifted pre-provision profit year-on-year (y-o-y) despite a weak top line from soft loan growth, but higher net interest margin.

We raise our credit cost assumption to 38 basis points (bps)/31bps and lower loan growth assumption to 5%/6% across FY16 to FY17, from 8% each year. 

Year to date, FY16 loan growth has been flattish. A NPL ratio of less than 2% would also be a challenge if some of its O&G borrowers decide to restructure or reschedule loans. Its overseas contribution target of 10% will fall short due to the impairment booked from its Singapore operations. 

We expect FY16 forecast return on equity (ROE) to stay below its target of 10%, but we see RHB’s improved cost-efficiency as a bright spot for the bank. RHB continued to trade at below book value, reflecting concerns over its asset quality outlook, in our view. 

Our higher TP implies 0.9 times book value and is derived using the Gordon growth model, with ROE of 10%, cost of equity of 11% and growth of 4%.

RHB’s O&G and steel exposure comprise 2.8% and 1.3% of its total loans respectively. Further deterioration in these segments poses earnings risk. — Alliance DBS Research, Aug 25