Despite the 10% YTD rise in share price, we continue to like RHB for its buoyant 2019 outlook: (i) top-line is seen to be healthy with 3% growth, (ii) productivity gains helping cost-to-income ratio to stay steady at 49%, and (iii) asset quality is expected to remain resilient, with focus back to Malaysia operations. Also, its strong CET1 ratio (of 15.5%) allows room to divvy even more. In our opinion, the stock’s risk-reward profile is still skewed to the upside. No changes are made to our FY19-20 earnings forecasts and introduced FY21 estimates. Retain BUY and GGM-TP of RM6.60, based on 1.06x 2019 P/B.

RHB is one of the best performing banking stocks under our coverage as share price climbed 10% YTD. This is despite fear of more stake disposal by Aabar Investments (it still has a 10% holding); recall, back in Mar-19, Aabar sold 4.8% of its share interest at a price-tag of RM5.45 each. Nevertheless, solid fundamentals prevailed and the major drivers which led to the good price showing were: (i) undemanding valuations, (ii) improving financials, and (iii) higher dividend payout. Now, we are relooking at our investment thesis and its risk-reward profile.

Healthy top-line. In our opinion, the tilt towards better yielding assets like SME and personal financing along with the move to raise base rate (by 10bp in Apr-19) should help to alleviate NIM slippage (-3bp vs 2018: +6bp; guidance: 3-5% slippage). Also, with the support of a decent 4% loans growth (2018: +6%; guidance: +5%), we expect 2019’s net interest income to be relatively robust (+3% vs 2018: +10%). As for non interest income (+2% vs 2018: -4%), we see improving financials at its: (i) treasury business, following the decline in MGS yields, post a more dovish stance by the FOMC in Mar-19, and (ii) IB division given stronger IPO pipeline.

Steady cost-to-income. A flattish Jaws should ensue in 2019, on the back of similar growth pace between revenue (+3% vs 2018: +7%) and opex inflation (+3% vs 2018: +5%). By adopting the ‘Agile’ way of working, we understand in <6 months, RHB’s speed-to-market is now 2-6x faster and management saw productivity increasing by c.20%. However, these newly yielded developments may be crimped slightly by more digital investments going forward (>RM200m from 2018-22; RM100m already incurred and committed in 2018 alone). Overall, 2019’s cost-to-income ratio (CIR) is projected to be at 49.1% (2018: 49.3%; guidance: 49%).

Sturdy asset quality. In 2018, gross impaired loans (GIL) ratio improved to 2.06% (2017: 2.23%) while net credit cost (NCC) had fallen to 19bp (2017: 26bp). Since RHB has shifted its focus back to Malaysia, we see asset quality staying resilient (in the range of 2.0-2.1%; guidance: <2%) as domestic GIL ratio is 40-50bp lower than the group’s level. However, amid moderate economic expansion, we believe there is little room to narrow NCC further. Hence, we imputed a tad higher 21bp NCC assumption for 2019 (vs guidance of high-teen basis points).

Forecast. FY19-20 earnings forecasts unchanged. Introduced FY21 estimates. RHB is targeting to release its 1Q19 results on 27 May.

Retain BUY and GGM-TP of RM6.60, based on 1.06x 2019 P/B with assumptions of 9.9% ROE, 9.5% COE, and 3.0% LTG. This is above its 5-year average of 0.93x but below the sector’s 1.15x. The premium/discount is justifiable by its ROE generation, which is 1ppt/1ppt over/beneath its 5-year/industry mean. We continue to like RHB for its appealing risk-reward profile given improving asset quality and strong CET1 ratio of 15.5% (vs sector’s 13.7%), which allows room to divvy even more; we note that RHB’s current dividend payout ratio of 36% is still below the sector average of 45% (at this level, dividend yield of c.5% would make RHB an even more attractive stock to own).

Source: Hong Leong Investment Bank Research - 16 May 2019