RHB shined yet again with a robust 1Q19 earnings growth of 12% QoQ. This was backed by positive Jaws, writebacks, and lower effective tax rate. Also, loans growth was sustained sequentially. However, shrinking NIM and the slight weakness in asset quality were negative developments. Overall, results were in line with expectations but we lowered our FY19-21 forecasts by 1% to account for softer NIM outlook, following the recent OPR cut. In our opinion, the stock’s risk-reward profile is still skewed to the upside as RHB is in a more generous mood to divvy given its high CET1 ratio of >15%. Maintain BUY but with a lower GGM-TP of RM6.50 (from RM6.60), based on 1.05x 2019 P/B.

In line with estimates. RHB reported 1Q19 earnings of RM630m (+12% QoQ, +7% YoY). This was within expectations, making up 26% of both our and consensus full year forecasts. Recall, 1Q18 formed 26% of FY18’s bottom-line.

Dividend. None declared as RHB only divvy in 2Q and 4Q.

QoQ. A combination of (i) positive Jaws from lower opex (-3%), (ii) RM25m writeback of credit losses on financial assets, and (iii) lower effective tax rate (-4ppt due to reversal of tax overprovisioning), led to the 12% increase in net profit. However, we continue to see sequential net interest margin (NIM) compressing to 2.16% (-4bp). That said, this was cushioned by better non-interest income (NOII, +7%) performance as fee and treasury related income grew 2% and 40% respectively.

YoY. Bottom-line rose 7%, thanks to lower allowance for impaired loans (-9%). Also, the writeback of credit losses on financial assets and a decline in effective tax rate (- 2ppt) helped to fuel earnings upwards. However, total revenue (-2%) capped earnings from rising at a faster rate; this was owing to weak fee (-3%) and treasury related income (-3%) along with a 12bp contraction in NIM.

Other key trends. The growth pace for loans was sustained at 5.5% YoY (4Q18: +5.5%) while deposits posted a quicker acceleration of 10.1% YoY (4Q18: +7.6%). In turn, loan-to-deposit ratio (LDR) fell to 91% (-3ppt sequentially). As for asset quality, gross impaired loans (GIL) ratio weakened a little, seeing that it inched up 6bp QoQ to 2.12% due to some account reclassification (at the construction and manufacturing portfolio) into restructured and rescheduled loans.

Outlook. The tilt towards better yielding assets like SME and personal financing along with the move to raise base rate before the OPR cut (by 10bp in Apr-19) should help to alleviate NIM slippage vs peers (2019: -6bp). While for 2019 loans growth, we expect the momentum to sustain at 5%, as it gain market share over rivals in the consumer lending space. Besides, we see better NOII (2019: +2%) on the back of falling MGS yields and stronger IPO pipeline. Overall, 2019 total revenue is seen to grow by a decent 2%, helping to prevent a negative Jaws ratio. Also, asset quality is seen to be resilient since RHB has shifted its focus back to Malaysia (we note that domestic GIL ratio is 40bp lower than the group’s level).

Forecast. Although 1Q19 results were within estimates, we cut our FY19-21 earnings forecasts by 1% to account for weaker NIM outlook, following the recent OPR cut.

Maintain BUY but with a lower GGM-TP of RM6.50 (from RM6.60), following our earnings cut and based on 1.05x 2019 P/B (from 1.06x) with assumptions of 9.8% ROE (from 9.9%), 9.5% COE, and 3.0% LTG. This is above its 5-year mean of 0.93x but below the sector’s 1.14x. The premium/discount is justifiable by its ROE, which is 1ppt/1ppt over/beneath its 5-year/industry average.

Source: Hong Leong Investment Bank Research - 28 May 2019