We attended a small group meeting with RHB’s management and walked away feeling positive on its earnings prospects. Loan growth was muted in 1Q18 at 2.7% annualised, however it expected to pick up in 2H18 driven by (i) Singapore loan growth (ii) stronger SME loan (iii) sustained growth at the mortgage loan. RHB will remain focused at the SME segment for now as it benefited both loan and deposits growth amid disruptive competition in the corporate segment. RHB is hopeful that its operations in Singapore will recover in the 2H18. Management is confident that it is able to keep its CIR at below 50% for the rest of FY18. Our forecast is unchanged and we maintain our BUY rating with TP of RM6.30.

We walked away from our recent small group meeting with RHB’s management, feeling positive on its earnings prospects.

Loan growth to pick up in subsequent quarters. To recap, RHB achieved annualised loan growth was just 2.7% in 1Q18 (vs. its loan growth target of 6% for FY18) mainly due to muted growth for corporate lending segment and Singapore operations. Despite the muted loan growth achieved in 1Q18, management seems confident that it is on track to achieve its loan growth target for FY18, underpinned by (i) an expected pick up in Singapore’s loan growth (arising from an expected improvement in economic activities), (ii) even stronger growth at SME segment, and (iii) sustained growth at the mortgage segment.

To remain focused on SME segment. We understand that RHB currently commands about 9% within the SME segment and management will remain focused on this as (i) competition within the corporate segment remains intense (which has in turn resulted in disruptive yield), and (ii) SME segment allows RHB to grow both loans and deposits (by using RHB’s payroll account, which will in turn lift its CASA) simultaneously. To further beef up the segment, RHB has undertaken several initiatives, which include, among others, introducing online account management and more personalised relationship manager.

Recovering overseas income. RHB is hopeful that its operations in Singapore will recover in the 2H18 (albeit at a gradual pace), mainly from higher oil price. To recap, Singapore operations posted a PBT of SGD11.4m in 1Q18 (vs. -SGD9.1m in 1Q17) primarily due to significantly lower allowances. Management shared that its exposure to O&G sector in Singapore is relatively small (Singapore’s O&G sector is ~1% of its total loan portfolio) and these loans are fully collateralised.

CIR below 50% for the rest of the year. Management is confident that it is able to keep its CIR at below 50% for the rest of FY18, as it incurred one-off expenses for digitalisation efforts (which will eventually drive down operating expenses) and ongoing cost management programs.

Less exposure in construction. The potential cancellation and/or delay in mega infrastructure projects will not have a significant impact on RHB’s loan portfolio given its limited direct exposure in these projects and construction sector accounts for only 8% of its total loan portfolio.

Forecast. Maintain.

Maintain BUY, TP: RM6.30. We raise our GGM-derived TP on RHB to RM6.30 (from RM6.00) as we update our valuation parameter (i.e. adjusted beta). We reiterate our positive stance on RHB, underpinned by strong earnings growth prospects.

Source: Hong Leong Investment Bank Research - 12 Jun 2018