Analysts cautious on RHB asset quality

However, CIMB Research says the worst may be over for the banking group

PETALING JAYA: RHB Bank Bhd’s results could still surprise on the downside in the coming quarter to be reported, according to Affin Hwang Capital Research.

The research house said in its report that it was turning more cautious over RHB’s asset quality outlook, given no improvement seen in the outstanding impaired loans (+32% year-on-year) while recoveries appeared to be slim.

“We are of the view that RHB may have to set aside more allowances in order to beef up its impaired loan cover to 100% from 74.7% (including regulatory reserves), or it could be done via a one-off kitchen-sinking exercise,” Affin Hwang Capital said.

“Hence, our net profit forecasts for financial year 2017 (FY17-FY18 estimate) are being reduced by 13%-15% as we raise our credit cost assumption from 24 basis points (bps) to 40-47 bps while lowering our loan growth target to 4%-5%,” Affin Hwang Capital added.

The research house noted that in the latest reported fourth quarter of FY16, RHB’s asset quality deteriorated, as implied by an uptick of 55 bps year-on-year (y-o-y) and 18 bps quarter-on-quarter (q-o-q) in the gross impaired loan (GIL) ratio to 2.43%.

Credit charge for 2016 rose to 39 bps versus 31 bps, with the height of provision seen in the fourth quarter of 2016 (credit costs crept up by +42 bps to 80 bps q-o-q).

To recap, RHB saw its fourth quarter of FY16 headline net profit plunging by 48% q-o-q due to a pre-emptive provisioning on a steel-related company, hence undermining 2016 results, which saw a net profit of RM1.68bil (+1% y-o-y).

“The 2016 results were below our and consensus estimates by 9%-10%,” Affin Hwang Capital said.

For CIMB Research, RHB’s FY16’s net profit was 8% below its forecasts. Commenting on RHB’s results, CIMB Research said FY16 loan loss provisioning was pushed up by the 29.9% y-o-y and 110.9% q-o-q jump in fourth-quarter loan loss provisioning.

“This was partly elevated by the provisioning of RM120mil for legacy steel impaired loans (ILs) and RM60mil for oil and gas ILs. In our view, the additional provisioning for the steel IL was due to the impairment of collateral value, as most of the unsecured portions of these loans would have been provided for previously,” CIMB Research said.

CIMB Research further noted that RHB’s management had said in its conference call that the worst is likely over for asset quality and credit costs.

“It expects the gross IL ratio to stabilise below 2.5% in 2017 (vervus 2.43% at end-2016). Management also guides for lower credit chargeoff rate of 25-30 bps, compared to 39 bps in FY16. It also foresees a recovery in loan growth to 5% in 2017 from only 2% in 2016,” it said.