KUCHING: Despite a 18.5 per cent spike year on year (y-o-y_ in RHB Bank Bhd’s loan loss provisions, the bank has still managed to deliver a net profit RM1 billion for the first half of 2017 (1H17) – meeting consensus expectations at 49.7 per cent.
According to the research arm of Hong Leong Investment Bank Bhd (HLIB Research), this spike in loan loss provisions was on the account of a RM108 million Singapore oil and gas (O&G) bond that was written off.
However, higher net interest income of 3.8 per cent y-o-y and declining operational expenditure of -2.5 per cent y-o-y has helped to mitigate this provision.
And when excluding the Singapore O&G bond write off, HLIB Research noted the bank’s asset quality has seen gradual and steady progress.
“Absolute gross impaired loans (GIL) continued to progress well with RM100 million of reduction, lowering GIL ratio to 2.29 per cent in 2Q17,” said the research arm.
Loans growth was also optimistic with a growth of 3.2 per cent for 1H17 – ahead of the research arm’s 5 per cent guidance for FY17.
The bank’s exposure on the uneasy O&G sector has also eased backed to 3.7 per cent, but HLIB Research guides that they continue to be watchful of the situation as credit costs remain a major wildcard on earnings.
“We note that under the watch list category has also declined to RM1.8 billion as at 2Q17,” added the research arm.
In addition to improving asset quality, RHB has also placed significant effort in lifting in loan loss coverage to 81.4 per cent through increases in its regulatory reserves via retained earnings and in preparation of MFRS9 implementation in 2018.
“(This) should provide earnings protection during rainy days.”
And in investment banking, RHB is anticipated to dive back in soon as they have completed in July, 2017 the transfer of treasury business and structured lending business from RHB Investment Bank Bhd to RHB Bank Bhd.
To recap, RHB’s investment banking businesses saw some disruption from the failed RHB-AmBank Bhd merger attempt.
“Following from this, we expect its investment bank unit will resume delivery stable net operating income to RHB post-the failed merger.”
While this was RHB’s second failed merger attempt, HLIB Research did not discount the possibility of another merger and acquisition (M&A) attempt for RHB as existing financial institutions will continue to look for opportunities to enlarge their market dominance.
“Moreover, current valuations for Malaysian banks are below their average book value, making M&A activities now more attractive than ever,” asserted the research arm.
Overall, HLIB Research is turning more positive on RHB due to their increases in operational performances.
But at this juncture, the bank’s asset quality is still an area of concern as it has seen additional impairments for the last two quarters.
“Should the asset quality issue be addressed in upcoming 3Q17 results, it may represent a re-rating catalust for RHB,” asserted the bank.
For now, HLIB Research maintained its ‘hold’ call on RHB with an unchanged target price.