On the financial impact of this divestment, MIDF Research believed RHB Insurance is not a significant driver to the group’s earnings. — Reuters photo
KUCHING: RHB Bank Bhd’s (RHB Bank) move to divest the group’s insurance arm RHB Insurance Bhd (RHB Insurance) has been met with positive views from analysts.
In a filing on Bursa Malaysia, RHB Bank announced that Bank Negara Malaysia (BNM) had, via its letter dated July 29, 2019, stated that it has no objection for the company to commence negotiations with Tokio Marine Asia Pte Ltd in relation to the proposed disposal of up to 94.7 per cent of its equity interest in RHB Insurance. The approval is valid for six-months from the date of BNM’s letter.
“While surprised with the news, we are positive on the development, taking RHB Bank one step closer to divesting its insurance arm,” the research arm of Kenanga Investment Bank Bhd (Kenanga Research) said.
“We believe this exercise is purely for cost-cutting measures as the insurance arm accounts for up to four per cent of its operating expenditure (opex) but contributes only less than three per cent to top-line and bottom-line.
“Furthermore, with RHB Bank rebalancing its exposure to corporate loans, it is likely that the group sees its insurance arm as less earnings-accretive in the long run.”
Meanwhile, given that this is at the earliest stage of negotiation, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) was not surprised by the lack of details.
“We postulate that the rationale for the disposal is that the group wants to exit from its non-core business,” MIDF Research said.
“The proposed divestment of the group’s non-core subsidiary seems to follow the trend in the banking sector. We had observed some of its peers have reduced or disposed their non-core assets.
“In our opinion, the propose divestment seems like a logical move as the group could better focus on its core banking business.”
On the financial impact of this divestment, MIDF Research believed RHB Insurance is not a significant driver to the group’s earnings.
According to MIDF Research, based on RHB Insurance’s financial year 2018 (FY18) audited accounts, RHB Insurance recorded a profit after tax (PAT) of RM62.8 million which was a 39.8 per cent year on year (y-o-y) decline due to higher net claims (up 34.9 per cent y-o-y to RM302.3 million) and lower other income (down 17.7 per cent y-o-y to RM84.4 million).
“Compared against the group’s FY18 PAT of RM2.31 billion, RHB Insurance’s contributed only three per cent. Also, RHB Insurance had a net asset of RM573.7 million as at end FY18.”
Similarly, Kenanga Research believed that impact on earnings will be minimal. The research arm’s initial assessments estimated that its FY20E earnings per share (EPS) will be shaved by three per cent to 60 sen per share but cost-to-income ratio (CIR) lowered from 45 per cent to 44 per cent.
“The divestment will likely enhance its common equity tier 1 (CET1) and CAR ratio by 40 basis points (bps) to 16.3 per cent and 19.6 per cent, respectively,” the research arm said.
Assuming a sale is between two to three-fold book value, Kenanga Research estimated a gain of RM543 million to RM1.1 billion for RHB Bank, which the bank could either used for reinvestment or working capital or potentially a special dividend.
At a conservative gain of RM543 million, the research arm estimated a potential payout of about 48 per cent or dividend per share (DPS) of 36sen (from current payout of 36 per cent and DPS of 21sen) translating to a dividend yield of 6.5 per cent comparable to Malayan Banking Bhd (Maybank).