• RHB Bank’s 9MFY23 net profit (NP) was below our expectation at 70% of our full-year forecast, due to lower-than-expected non-interest income.

• We expect 4Q23F NP to rise 9.7% qoq, underpinned by continuous expansion in net interest income and lower LLP (on qoq basis).

• Reaffirm Add, given its highest dividend yield in the sector (6.1% in CY23F) and enticing valuation (CY24F P/E of 7.5x vs. sector average of 9.7x).

9M23 NP Below Our Expectation

RHB Bank’s 9M23 NP was below our expectation (at 70% of our full-year forecast) but within the street estimate (77% of Bloomberg consensus FY23 estimate). The variance to our forecast primarily emanated from the lower-than-expected non-interest income. 9M23 NP rose a solid 16.4% yoy due to (1) 11.7% yoy rise in non-interest income, (2) 81.4% yoy plunge in loan loss provisioning (LLP) and (3) non-recurrence of Cukai Makmur (CM) taxation. Meanwhile, 3Q23 NP dwindled 6.5% yoy, dragged down by a 16.9% yoy drop in net interest income due to a yoy contraction in net interest margin (NIM).

Positive Developments in 3Q23

Despite the yoy drop in 3Q23 NP, we note the positive developments in 3Q23, which could reflect improved earnings outlook in the coming quarters. These included (1) a 3bp qoq rebound in NIM in 3Q23 following qoq compression in the preceding two quarters, and (2) 3.7% qoq drop in 3Q23 overheads, possibly due to greater cost disciplines.

Projecting 9.7% Qoq Growth in 4Q23F NP

We project a NP of RM712.8m for RHB Bank in 4Q23F, representing qoq growth of 9.7%. This could be underpinned by the continuous qoq expansion in net interest income and our expectation of a qoq drop in LLP. The bank also guided that loan growth would remain robust in 4Q23F (our forecast: +1.8% qoq), compared with the lethargic trends in 1H23, and that 4Q23F NIM would be at least sustained qoq.

Lowering FY23-25F NP Forecasts

We cut our FY23-25F NP forecasts by 4-8%, as we lower our projection of FY23-25F noninterest income by 8-14%. Despite the NP cut, we raise our DDM-based target price (TP) from RM6.56 to RM6.70 (cost of equity of 11%; terminal growth rate of 4%) as we roll over our valuation to end-CY24F.

Reaffirm Add on RHB Bank

We reaffirm our Add call on RHB Bank, given its CY23F dividend yield of 6.1% (the highest in the sector) and attractive CY24F P/E of 7.5x (vs. the sector’s average of 9.7x). Potential re-rating catalysts are a partial write-back in management overlay (RM500m as at end-Sep 23) and an increase in its dividend payout ratio. The downside risks include a drastic slowdown in loan growth and a material deterioration in asset quality.

Source: CGS-CIMB Research - 27 Nov 2023