• We maintain our BUY call on RHB Bank with an unchanged fair value of RM5.80/share, pegging the stock to an FY20 P/BV of 0.9x. No changes to our estimates for now.

• The group hosted a conference call yesterday to provide updates on the measures announced by Bank Negara to assist borrowers impacted by the Covid-19 outbreak.

• Retail, SME and corporate loans comprised 55%, 16% and 29% respectively of the group’s total domestic loans of RM156.9bil as at end Dec 2019. The group is assuming all domestic retail and SME borrowers will opt for the automatic moratorium to defer their repayments, principal and interest on loans for a period of 6 months from 1 April 2020. Meanwhile, corporate borrowers will need to apply to the bank for the moratorium. 30% of the total domestic corporate loans have been projected to be requiring the moratorium. This will lead to circa 80–81% of the group’s total domestic loans to be granted moratorium. We gather that during the moratorium, interest will be accrued for 6 months without being compounded.

• Within this 6-month period, the group will actively approach its borrowers to restructure and reschedule their loans. This will prevent loans from falling over to stage 3 once payment resumes at the end of the moratorium.

• On the group’s overseas loans, the group is closely monitoring its exposure to the oil & gas, hotel and tourism sectors in Singapore.

• The group does not foresee liquidity issues arising from the implementation of the relief measures announced by BNM. Recall that the group’s LCR was 152.7% in 4Q19. Under the stress test which the group had conducted, we understand that the LCR was still above 100%. The group is likely to lower its LCR but not lower than 100% that is temporary allowed by BNM for banks to operate. The minimum NSFR for 1 July 2020 has been reduced by BNM to 80% from 100%. However, the group will maintain an NSFR of slightly above 100%.

• No negative impact to capital ratios seen from implementing the relief measures. Regulatory reserves at the group and bank entity levels stand at RM839mil and RM353mil respectively. Should the group release its regulatory reserves held against expected losses to 0% temporarily as permitted by BNM, we estimate a slight lift in the group’s and bank entity CET1 ratios by 0.7% and 0.4% respectively to 17.6% and 15.5% respectively (Dec 19: 16.9% and 15.1%).

• The European Central Bank (ECB) has recently requested banks to defer paying out dividends until at least Oct 2020. Management does not see such restriction being implemented by BNM on local banks.

• The duration as to how long the Covid-19 outbreak will last is still uncertain with no indication from management as to the extent of the expected credit losses. We see the moratorium assisting to contain impaired loans from rising substantially over at least for the next 6 months. During this period, provisions are unlikely to be significantly increased. Nevertheless, we still see some upticks in provisions in FY20 compared to FY19 arising from rise in general provisioning (macro overlay) and potentially higher provisions from corporate loans moving into stage 2. The group is hopeful for the pandemic to subside soon to maintain a GIL ratio of below 2.0%. Should the outbreak prolong, expected credit losses and provisions are likely to surge. As of now, we maintain our credit cost projection of 30bps for FY20 which we had earlier increased by 10bps.

• Approximately 8–9% of the group’s total loans of RM176bil are to non-retail borrowers in the vulnerable sectors (airlines, hotels and etc.). Meanwhile, on its retail loans, financing to employees of the vulnerable sectors makes up 2% of the group’s total loans.

• On the group’s oil & gas loans, its exposure stands at 2.4% of the total gross loans at group level. In terms of oil & gas loans by country, Malaysia and Singapore accounted for 79% and 21% respectively of the total credit exposure. GIL ratio for oil & gas sector loans was 25.0%. Approximately 1/3 of the group’s oil & gas loans are under watch list. On a comforting note, the group has a loan loss coverage for the oil & gas loans of 122%. Hence, it has already conservatively provided for the impaired and watch listed loans under this sector.

• Management hinted that the group’s NII will be impacted by the 2 (two) OPR cuts this year with another OPR cut likely to occur in the near term. In our NII estimate, we already have factored in another 25bps rate cut in May 2020 resulting in a total 75bps benchmark rate reduction for this year.

• For NOII, we understand that the YTD brokerage income was better compared to the corresponding period last year. Meanwhile, on capital markets, a slowdown has been seen for the equity and debt capital markets businesses YTD. The group has a substantial FVTOCI reserves of RM1.3bil as at the end of 4Q19. With interest rates continuing to be low moving forward, the group is hoping to harness some of the gains from disposal of fixed income securities which values have increased from marked-to-market gains. This could mitigate some of the NIM pressure from OPR cuts.

• Loan and deposit growth is unlikely to be aggressive for FY20. We maintain our ROE projection of 8.8% for FY20 as we see the group’s ROE target of 10.3–10.5% as challenging with NIM compression from OPR cuts and potentially higher credit cost.

Source: AmInvest Research - 31 Mar 2020