Company Name: RHB CAPITAL BHD
Research House: OSK
RHB Capital Bhd
(Dec 23, RM8.55)
Maintain buy at RM8.60 with target price of RM9.56: Its 'Easy' banking outlets have been a roaring success, contributing close to 6% of new loans drawn down over the past nine months. The group started with just two Easy banking outlets at the beginning of 2010. Given its relatively low start-up cost structure and pent-up demand as the group was able to create a new market segment, it has expanded the number of outlets to 100 as at 3QFY10 while bringing down its cost to income ratio from 42% to 40%. Most of the loans from RHB's Easy outlets are small, individual ASB-linked consumer loans that are secured against liquid government-linked ASB funds, which lower its risk profile. The success of its Easy outlets is reflected in the group's enlarged 14.4% market share of the ASB market vs 9.4% as at end 2009.
The group's ability to innovate and develop a relatively higher yielding and under-penetrated banking segment via a low-cost distribution channel has certainly paid off, as its 9MFY10 return on equity (ROE) of 15.1% has already beaten consensus' FY11 expectations. Given its aggressive rollout plans (in expanding the number of Easy outlets to 400 by 2012 from the current 120) and its ability to expand the distribution of higher ROE fee income banking products via its enhanced distribution network is likely to lift the group's ROEs in the longer term.
The group plans to replicate the high service standards of the Easy outlets at its traditional branches while the streamlining of the highly efficient processes throughout the group's mainstream branches is likely to benefit the entire organisation in terms of lower cost and increased competitive advantage.
To recap, the group's recent annualised 9MFY10 loans growth of 20% year-on-year (y-o-y) far exceeded industry's 11%, with its 3QFY10 sequential growth of 6.6% quarter-on-quarter being by far the strongest among the banks under our coverage. Government-linked loans were the strongest engine of overall growth at +70% y-o-y. Although the margins of such loans are lower than those from average corporate loans, a zero-credit risk allocation implies that net ROEs generated from such loans are typically higher than traditional loans, which are themselves currently experiencing yield compression as a result of competition. Smooth execution of the Economic Transformation Plans will provide further upside in the sustainability of the group's robust government linked loan growth.
RHB Capital remains our top mid-cap banking pick which boasts of ROE generation at the upper end of the industry average, while its current FY11 PBV of 1.72 times is at a discount to the industry's 1.86 times. EPF's commitment to further reduce its stake by another 9% will improve the stock's liquidity, which has been cited as the key reason for its below industry valuations despite its promising ROE growth. Maintain buy with a Gordon Growth-derived target price price of RM9.56 (1.92 times PBV, ROE: 14.8%, COE: 9.5% and growth rate of 4%). The stock is cheap as it is trading at an implied FY11 PER of only 11.7 times, despite having outperformed the broader market by 44.8% year-to-date. ' OSK Investment Research, Dec 23
This article appeared in The Edge Financial Daily, December 24, 2010.