RHB Capital (RHBC MK, BUY, FV: RM9.90, Close: RM7.80)

The group’s FY11 results were largely in line with consensus and our full-year estimates. However, its 4Q11 sequential earnings were hit by lumpy exceptional provisions for its CLOs, thus raising q-o-q impairment losses on securities by 212%. Sequential pre-provision operating profit growth was commendable at 15.6% q-o-q, driven by stronger trading income and Islamic banking income. The stabilization in NIMs and absence of one-off lumpy CLO provisions in FY12 provide a more promising profit growth outlook for FY12. Maintain FV of RM9.90 based on 1.76x FY12 P/BV, 14.1% ROE. Maintain BUY. 

In line. The group’s FY11 earnings were largely in line with our full-year forecast, with FY11 earnings representing 95.1% of consensus and 96.1% of our full-year forecast. The slight shortfall (-4% deviation from our earnings) was due to a lumpy spike in q-o-q impairment of its CLOs with an existing carrying value of RM87m secured against certain collaterals. FY11 earnings rose at a rather subdued 5.7% y-o-y, while preprovision operating profit posted a marginal contraction of 0.2% y-o-y.

Funding and staff cost  were key drags on FY11 performance. Key earnings dampeners included: (i) funding cost pressure from very aggressive and expensive fixed deposit growth (+28% y-o-y) which pressured net interest margins (NIMs), and this resulted in a rather lacklustre 4.2% net interest income growth despite the robust 16.8% loan growth,  (ii) 23.5% increase in staff cost due to  the undertaking of  various staff retention and optimization measures, and  (iii) RM65.8m marked-to-market losses on interest rate derivative instruments to hedge its fixed rate loans. Among the key earnings drivers were:  (i) promising growth traction on Islamic banking operations (+31.5% y-o-y and +20.1% y-o-y), and (ii) 21.1% decline in loan loss provision which brought the fullyear credit cost down to 34bps vs 50bps in FY10.

Positive  flip sides.  The aggressive deposit gathering strategy in FY11 resulted in  a 17bps compression of NIMs. On the flip side, this has helped lower the group’s loan-todeposit ratio  (LDR)  from 88.6% to a relatively comfortable 84.0% and thus, easing pressures on funding cost in FY12. With the group’s optimal LDR set at just under 90%, the current 84% LDR provides a fair degree of headroom to slowdown its deposit growth relative to loans growth and thus, enabling it to sustain its  current  NIMs in FY12 compared to the steep NIM compression in FY11.    

Source: OSK188