Investment Highlights

• We maintain our BUY recommendation on RHB Bank with an unchanged fair value RM6.90/share. We peg the stock to FY22 P/BV of 0.9x, supported by an ROE of 10.3%. We lower our FY21 net profit by 5.3% after increasing our credit cost assumption to 40bps from 30bps.

• From our virtual meeting with management yesterday, we understand that the total repayment assistance (RA) (group retail banking, group business banking and group wholesale banking) has tapered to RM14.3bil as of mid-May 2021, constituting 8.5% of the total domestic loans. This compared to 10.4% as of end-March 2021.

• Outstanding RA for retail loans declined slightly to RM8.2bil (8.5% of total domestic retail loans) as at mid-May 2021 vs. RM8.3bil as at end-Mar 2021, 9.0% of total domestic retail loans.

• Meanwhile, the outstanding RA for business banking (BB) and wholesale banking (WB) loans stood at RM6.3bil and RM2.4bil respectively representing 12.3% and 3.9% of the group’s total domestic BB and WB loans respectively.

• With the continued lockdown and stricter measures in selected areas, particularly Selangor and KL, we expect upticks in the group’s total RAs. Total RAs are likely to rise from 8.5% of total domestic loans as at mid-May 2021.

• On the latest 6-month moratorium commencing 7 July 2021 for all opt-in individual (B40, M40 and T20) and SME borrowers, we understand that interest will continue to be accrued and charged for all loans and financing while compounded interest and penalty charges will be waived. With that, we expect modification (mod) loss in 3Q21 to be significantly lower than 2Q20’s RM392mil (net). Recall, for the blanket automatic moratorium in 2020, accrued interest had to be waived for fixed rate HP and personal loans/financing.

• Through conservative front loading of provisions in FY20 (RM556mil) and top up in pre-emptive provisions in 1Q21 (RM94mil), total provisions buffers amounted to RM650mil. These buffers remained unutilised and will be able to cushion against the impact of the latest lockdown.

• Despite the moratorium not seeing a deterioration in staging, the group has adopted a prudent stance in provisioning. Provisions set aside for these loans will be as if the loans are in stage 2. In the case of provisioning for loans requesting for reduction in instalments, provisions for these loans will be based on the staging at the time of the 1 st request for repayment assistance.

• With the announcement of another 6 months’ moratorium, we understand that the group will further top up its provisions, thus increasing its provision buffers for potential credit losses. Nevertheless, the additional provisions to be set aside will be not be as large as the amount booked in for FY20. Management is now guiding for a credit cost of 30–40bps (closer to 40bps) for FY21. This compares to the guidance of 30bps earlier at the 1QFY21 results briefing. FY21’s credit cost will remain lower than FY20’s 58bps.

• In view of the moratorium, reduction of instalments and even R&R continuing to the made available to assist borrowers, we see the group’s asset quality remaining stable with a slight uptick in the worst-case scenario moving towards the end of FY21. Management sees some stress in asset quality on loans to microenterprises. Nevertheless, we gather that its exposure to microenterprises is small at circa RM200mil. Meanwhile, the group is not overly concerned on its corporate loan exposure as we understand that provisions have already been adequately set aside for the vulnerable sectors.

• Management continues to guide for a flat NIM in FY21 from FY20 (underlying NIM in FY20: 2.06%). As we expect no further OPR cuts for the rest of FY21 while growth in CASA could remain robust with the availability of withdrawals through i-Citra, we will not be surprised to see a moderate improvement in NIM for FY21.

• 2Q21 is likely to see further monetisation of securities to lock in gains. We see challenges ahead for investment and trading income in 2H21 as yields are unlikely to trend lower looking at market expectations of a gradual economic recovery with no further rate cuts priced in.

• In Singapore, the group’s performance is gaining good traction and its contribution to the group’s earnings is expected to be higher in FY21 than FY20.
   
• Management Is Holding on to the Guidance for Loan Growth at 4–5% for FY21.
   
• Recall that the group FY20’s final dividend was 7.65 sen/share (total dividend: RM17.65 sen, payout: 34.8%). The take-up rate for reinvesting the final dividend into additional shares under its DRP was high at 87.7%.

Source: AmInvest Research - 9 Jul 2021