Investment Highlights

• We maintain our BUY recommendation on RHB Bank with a revised fair value (FV) of RM6.70/share (previously RM7.10.share). This is after tweaking our FY23F/24F/25F earnings by -1.4%/-5%/-5% to factor in lower net interest margin (NIM) assumptions.

• We continue to peg the stock to a FY23F P/BV of 1.0x, supported by ROE of 11.1% with no changes to our neutral 3-star ESG rating.

• Domestic loans under repayment assistance (RA) are normalising to the pre-pandemic level. As at end Jan 2023, total domestic loans under RA of RM7.3bil represent 4% of the group’s outstanding loans for Malaysia. We gathered that 95% of these loans are current with no outstanding overdue while 2% are less than 30 days past due (dpd). 2% of the RA loans are between 30-60 dpd with only 1% that has turn impaired. Asset quality of RA loans is continuing to hold up.

• 4QFY22 saw upticks in GIL ratios for retail loans (mortgage, unsecured loans and auto finance) under the Group Community Banking segment. We understand that GIL ratios for retail loans have since then normalised. Meanwhile, asset quality for SME loans has remained stable.

• Loans to the construction sector accounted for 6.3% of the group’s total loans. Asset quality of these loans has been stable.

• Lately, the 10-year MGS yield has sustained at 3.9%. This compares to 4.1% in 4Q22 and 4.4% as at end 3Q22. With less hawkish US Fed rate hike expectations and the recent pause in OPR increase, we see room for the 10-year MGS yield to trend lower ahead. With the MGS yield normalising, we see potentially an improvement to the group’s investment and trading income with a room to monetise some gains from the securities portfolio in 2H23.

• The group is expecting 2 more OPR hikes to raise the benchmark interest rate from 2.75% to 3.25%. Management has kept their FY23F NIM guidance unchanged at 2.22%- 2.25% (FY22: 2.24%). Nevertheless, we expect some downward risk to this guidance based on: i) continued slow momentum on CASA growth, and ii) recent tapering of the 3-month KLIBOR, signifying that an OPR increase is likely to still be paused in the near term. The delay in rate hike is likely to see NIM compressed for 2Q23.

• Without provisioning top ups for corporate loans nor any impairments of bonds held by the group, we expect 1QFY23 credit cost to be stable, coming in within the FY23F guidance of 25-30bps.

• Remaining total management overlays still stands at RM410mil. 1QFY23 is not likely to see any additional provisions based on changes to macroeconomic variables (MEVs).

• Recall, RHB Bank’s loan loss coverage (LLC) stayed above 100.0% at 112% in 4Q22. Including regulatory reserves, its LLC at 130% was higher than the industry’s 118.2%. With asset quality looking stable in 1QFY23, we do not expect a decline in the group’s LLC.

• The group is still guiding for FY23F loan growth of 4%-5%, a slowdown from 6.9% YoY in FY22. Although the first 2 months of 1Q23 was slow in terms of growth for the retail and SME loans, momentum for financing has picked up pace in Mar 23. Management alluded to continued slow growth for ASB financing due to lower dividends declared by its unit trust fund. In Singapore, FY23F loan growth is anticipated to taper from 18.7% YoY in FY22 in line with the global economic slowdown. For FY23F, we have pencilled in an expectation for an overall loan growth of 5%.

• Two thirds of the group’s loans in Singapore are secured by collaterals with remaining balance backed by guarantees. This is expected to mitigate asset quality risk in Singapore with the steep rise in interest rates in tandem with hikes in the US Fed funds rate.

• Valuation of the stock remains undemanding, trading at an attractive FY23F P/BV of 0.8x and dividend yield of 8.9%, assuming a payout of 63%, similar to FY21 and FY22. We continue to like the stock due to the group’s strong capital position among peers with a CET1 ratio of 16.9% and its higher dividend payout in recent financial years. The group is progressing well in its sustainability efforts with RM14.5bil in sustainable financial services achieved that have exceeded its 2022 target by 60%.

Source: AmInvest Research - 26 Apr 2023