Investment Highlights

• We maintain our BUY call on RHB Bank with an unchanged fair value of RM6.50/share. Our FV is pegged to FY20 P/BV of 1.0x, supported by an ROE of 9.9%. No change to our earnings estimates.

• We met the management for updates yesterday. 4Q19 results are scheduled to be released on 27 February. Earnings for 4Q19 is likely to be stronger than 3Q19’s. This is premised on an improved loan growth, better NIM, stronger NOII, coupled with stable credit cost for the quarter.

• We gather that loan growth in 4Q19 has picked up pace QoQ contributed by drawdowns of corporate loans. Loans for property development, the plantation sector and conglomerates were drawn down in 4Q19. There were still corporate repayments. Nevertheless, repayments were lower than drawdowns of corporate loans in the quarter.

• Loan growth for the full FY19 is likely to slightly better than the group’s target of 5.0%. Expansion of loan book for FY19 will be supported by growth in corporates, mortgages and loans in Singapore. With the recent lower returns of ASB, growth of loans for purchase of securities is expected to taper going forward.

• 4Q19 NIM is likely to improve on a QoQ basis, recovering from the OPR reduction of 25bps in May 2019. Improved funding cost is expected on the back of repricing of matured deposits from the earlier campaigns to lower rates. Meanwhile, asset yield was stable in 4Q19. FY19 NIM is likely to be 2.12%–2.13% in line with guidance. Recall that for 9M19, the group registered a NIM of 2.11%.

• We gather that CASA growth has improved in 4Q19 compared to 3Q19. Corporate CASA has gained traction contributed by deposit campaigns in Singapore in 3Q19. The group’s LCR is still standing at circa 130%.

• 3Q19 credit cost was 0.16%. Credit cost in 4Q19 is likely to be stable as write-backs in provisions from yje regularisation of certain R&R loans (1 large construction loan and 1 to 2 smaller business loans) were offset by some loan write-offs. 12M19 credit cost is expected to be in the high teens within our estimate of 20bps for FY19.

• The resolution of the aforementioned R&R loans will improve the group’s GIL ratio. The ratio in 4Q19 should trend lower from 2.16% in 3Q19 moving closer to its target of <2.0% for FY19.
• On the impaired manufacturing loan in Malaysia and the R&R loan in Singapore related to the utility sector, we understand that allowances for loan losses have been sufficiently provided for. In Singapore, after the provisioning was taken in 2Q19, provisions turned stable in 4Q19.
• Unrealised marked-to-market gains from FVOCI securities were substantial in FY19, benefitting from the decline in yields. This has resulted in the balance of FVOCI reserves for the 9M19 jumping to RM1.43bil. We believe that in a sustained low interest rate environment in FY20, the group will be able to monetize a portion of the gains by disposing of some FVOCI securities. This could see an uplift in the group’s ROE in FY20 which will in turn be supportive of the share price.

• On NOII, treasury income will continue to key contributor for FY19. We understand that in 4Q19, NOII has improved compared to 3Q19 with higher fees from certain materialized capital market deals and fees from loans.

• The group will be relieved of losses of RM2-3mil a month from the closure of its equity business in Hong Kong. Potential capital accretion to the group’s CET1 ratio from the cessation of the business is expected to be minimal.

• On the RHB Insurance, talks have ended with Tokio Marine to dispose of the insurance business to the latter. With that, the group will focus on organic growth for the insurance business. Meanwhile, on the non-extension of the banca partnership with Syarikat Takaful Malaysia Keluarga, the group is open to explore partnerships with other insurers that could add better value for its insurance business.

• Group and bank entity CET1 ratios continued be higher than its peers at 16.5% and 14.4% respectively as at the end of 3Q19. Capital ratios should further improve after the capital floors imposed by the regulatory authority on RHB Islamic Bank’s ratios have been slowly lifted.

Source: AmInvest Research - 22 Jan 2020