This article first appeared in The Edge Financial Daily, on October 29, 2015.

RHB Capital Bhd
(Oct 28, RM6.23)
Maintain buy with an unchanged target price (TP) of RM7.53: RHB Capital Bhd announced that the group has completed its career transition scheme (CTS), with a total of 1,812 applications (representing 11.8% of the group’s local workforce and 13.1% of the group’s permanent workforce in the country) accepted.

Employees, whose applications are approved, will be released in batches between November 2015 and January 2016. The group will incur a one-off CTS payout of RM309 million, and it expects to achieve an annual personnel cost rationalisation of RM193 million.

While the CTS cost will hit our financial year 2015 (FY15) net profit forecast by 15.7%, this will result in a significant reduction in future personnel costs, hence enhancing its earnings forward. The expected RM193 million personnel cost rationalisation accounts for 9.1% of our FY16 net profit forecast.

The financial impact is positive, as this allows RHBCap to operate from a leaner base from FY16. Catalysts include gaining more traction in cost rationalisation, while risks include an unexpected jump in impaired loans and a lower-than-expected loan growth as well as the impact from Basel III. We maintain our forecast for now, pending results announcement by end of November.

Positives include valuations still lagging behind; the OSK Investment Bank Bhd merger and the Ignite 2017 transformation programme already bearing fruits; the Bank@ Work corporate programme; enhanced tax efficiency from its rights issue and reorganisation, higher return on equity (ROE) and capital ratios, and a new strategy to focus on performance and profitability. Negatives include low liquidity, ROE at lower end among peers, and earnings per share dilution from rights issue.

Target price maintained at RM7.53. Maintain “buy”, given its inexpensive valuations. — Hong Leong IB Research, Oct 28