RHB Bank’s first-half profits meet expectations
But asset quality issues may weigh down the banking stock
PETALING JAYA: RHB Bank Bhd’s first-half financial year 2017 (FY17) results came within analysts’ expectations and it is back rebuilding the bank after the merger deal between it and AMMB Holdings Bhd failed.
However, asset quality issues and the lack of revenue growth may weigh down on the share price performance of the banking stock, said analysts.
Recall that the country’s fourth-largest lender made additional impairment for its oil and gas (O&G) accounts in Singapore in its results for the second quarter ended June 30, 2017.
HLIB Research said that it was somewhat surprised by the additional impairment for O&G accounts in Singapore which had already turned impaired in 2016.
This came after management painted stable credit cost in FY17 during first-quarter FY17 briefing.
Impaired loans in Singapore went up 85.6% year-on-year to RM559mil for corporate bonds in Singapore operating in the O&G industry.
Alliance DBS noted that the bank delivered a consecutive quarter of sustained profitability at the RM500mil level.
But while net interest income grew 3.9% year-on-year (y-o-y) during the quarter, topline growth was offset by a 22% contraction in non-interest income on lower treasury income recorded. Pre-provision operating income in the first half of FY17 was 1.8% higher y-o-y.
“On credit cost, provisions in the second quarter of FY17 halved from a year ago, as RHB incurred substantial impairments from its Singapore oil and gas exposure in the second quarter of FY16.
“In absolute terms, provisions made for the first half of FY17 was 30% lower than a year ago, lifting net profits for the first half of FY17 higher at 9.4% y-o-y to RM1bil.”
According to the research firm, O&G watchlist still accounted for a high proportion of provisions.
As at the end of the first half of FY17, RHB’s exposure to the segment was about 3.5% or some RM5.4bil of loan book. Of this, a quarter originated from Singapore.
“Around a third of the O&G exposure remains on the bank’s watchlist, which might still pose downside risks to provision levels in the near term, in our view,” it said in its report.
The research firm said while performance for the first half of FY17 showed improvements, the bank had yet to deliver on loan growth.
Loans grew 3.2% y-o-y at end-June, below the industry’s 5% growth. Cost-to-income ratio remained within its FY17 guidance of below 50% while non-performing loan stayed below 2.5%.
“The bulk of the drag to earnings seemed to have arisen from credit cost for its Singapore operations’ O&G exposure.
“Management has guided for credit cost to be around 35 basis points (bps) this year. We retain our assumption of around 38 bps for now.”
As for return on equity, it expects the range to come between 9% and 10% for the next two financial years.
It was reported that one issue that had cropped up during the merger talks was the concern that RHB might still be saddled with some unfinished NPL linked to O&G that could take a toll on its earnings.
Following provisions in Singapore, overseas contribution in the first half of FY17 registered an 8% loss, falling short of its 10% target set.
RHB’s overseas operations are mainly in Singapore, where it operates seven branches. It also operates in Laos, Cambodia and Thailand but contribution from these markets remain small.
The stock, majority controlled by the Employees Provident Fund, is currently trading at 0.9 times book value.
“To see a stronger re-rating beyond one times book value, Alliance DBS opined that the market would need to see a pick-up in business growth on a more sustainable basis and for asset-quality concerns to taper off.”
Shares of RHB had been trend- ing down when the merger was announced in early June, but have gained some of its losses since the merger was scrapped two weeks ago.
The stock was last traded at
RM5.05 for a market cap of RM20.24bil.
Of the 18 analysts covering the bank based on Bloomberg data, half called for a “hold” on the stock, while there were two “sell” calls and the rest prescribed a “buy” on it.
As for the outlook for the second half of FY17 management expects a rebound in the capital market activities and the return of investors’ interest to contribute to an improved outlook for non-funding income.
It is also reaching the final stages of its IGNITE strategy to enhance its presence in the affluent retail as well as small and medium enterprise (SME) segments. Management also stated its preference to reduce corporate loan exposure to below 30% from 33% in the the second quarter of FY17.
Kenanga Research is of the opinion that 2017 should be a better year for the bank on the premise that the large-scale impairments seen in 2016 are likely over with credit costs expected to normalise.
Kenanga Research said although loans growth was below target in the first half of FY17, it is cautiously optimistic that the bank’s FY17 target is achievable on the back of strong growth and recoveries from its SME, mortgages and corporate markets, supported by the focus in the affluent car market.
“But we are still concerned over its net interest margin (NIM) as deposit-taking activities are expected to intensify as banks chase for longer-term deposits driven by the expected higher demand for loans.
“However, downward pressure on NIM might be cushioned, going forward, with ample liquidity from the rights issue last year,” it said.
CIMB Research expects net profit to be at a similar level to the first half of FY17, as expected higher provisioning in the second half would be offset by lower impairment losses.