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Rizal Commercial Banking (RCB PM) Summary

Core Content and Key Information

Rizal Commercial Banking Corp (RCB) is a mid-sized bank in the Philippines with a current share price of PHP43.00 and a target price of PHP60.00, representing a 40% upside. The bank has a market capitalization of USD1.2 billion and an average daily trading volume of USD0.6 million. RCB is viewed as an attractive acquisition target due to its capital-raising activities and strong performance in core lending and fee-based income.

Main Points and Views

• Valuation and Growth Potential:
  RCB is currently trading at 1.1x 2014F PBV and 9.8x PER, with a target price of PHP60.00 (1.5x 2014F PBV), offering a 40% upside. The bank's reported earnings are expected to grow 14% in 2014 to PHP6 billion, with a net dividend yield of 2.3%.

• Loan Growth and Asset Quality:
  RCB experienced a 25% YoY loan growth in 2013, which exceeded expectations and the industry's 16.4% growth. Non-performing loans fell 40% to PHP6.1 billion, with the gross NPL ratio projected to drop to 3.9% in 2014. The NPL cover ratio is expected to remain stable around 127%, which supports the bank's loan growth strategy.

• Capital Adequacy and M&A Potential:
  RCB improved its Basel II Tier 1 capital ratio to 15.95% in 2013 from 13.19% in 2012 through capital-raising exercises. However, under Basel III, the CET1 ratio is expected to be 12.8% in 2014, which is above the minimum requirement but may not suffice for further expansion. This may create M&A opportunities, especially given the bank's status as a systemically important financial institution.

• Operational Efficiency and Customer Growth:
  The bank's customer base has grown at a 5-year CAGR of 28%, reaching 5.9 million. Its new core banking system, launched in 2012, has enhanced operational efficiency and enabled the expansion of digital banking services. Operating costs are expected to decline to 3.5% of assets in 2014.

• Net Interest Margin (NIM) and Income Growth:
  RCB's NIM is projected to be one of the highest in the sector at 3.7%, which should boost net interest income by 11%. The bank also reported strong growth in fee-based and miscellaneous income, up 50% to PHP6.6 billion in FY13, driven by the sale of non-core assets and expansion in ATM and credit card business.

• Sector Position and Strategic Importance:
  RCB is considered a prime acquisition target as it can enhance the position of other banks, such as BPI, which is the third largest by asset size. A merger between BPI and RCB would create the second-largest bank in the country, increasing their competitiveness.

• Valuation Protection and Downside Risk:
  The bank's low PBV multiple (1.1x 2014F PBV) provides downside protection. The 2013 decline in reported earnings of 14.6% has already been reflected in the share price, which dropped 33% YoY.

Key Financial Metrics

Valuation and Performance

• Share Price Performance:
  RCB's share price has seen a 33.8% increase over the past 12 months. It has underperformed relative to the market in the short term but is expected to benefit from potential M&A activity.

• Interim Results:
  RCB reported unaudited net income of PHP5.3 billion in FY13, down 14.6% YoY due to lower trading gains. The 4Q13 net profit fell 57% to PHP605 million, primarily due to a drop in treasury gains.

Strategic and Market Outlook

• M&A Theme:
  The M&A theme is expected to be a key driver in the banking sector this year. RCB is a prime target due to its size and performance, with potential synergies for banks like BPI.

• Capital Requirements:
  RCB may need to raise more capital in the future to meet regulatory requirements and support further expansion, which could lead to potential acquisitions or partnerships.

• Market Position:
  RCB's asset size, loans, and deposits are significant but not the largest in the sector. A merger with BPI would help RCB compete with the top banks.

Conclusion

RCB is a well-positioned mid-sized bank with strong fundamentals, including improved asset quality, growth in core income and fee-based earnings, and a robust capital base. Its low valuation and potential for M&A make it an attractive investment, and the bank's strategic position in the market suggests it could benefit from consolidation efforts. The BUY rating is maintained with a target price of PHP60.00, reflecting confidence in its future performance and potential for re-rating.