It was another solid quarter for RHB whereby 2Q19 earnings grew 8% YoY. This was backed by positive Jaws and lower bad loan provision. Also, loans growth picked up pace. However, NIM continued to shrink and asset quality weakened a little. Overall, results were in-line with expectations but we raised our DPR assumption by 4ppt to reflect stronger than-expected DPS. 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 >16%. Maintain BUY and GGM-TP of RM6.45, based on 0.99x 2020 P/B.

Within expectations. RHB posted 2Q19 earnings of RM615m (-2% QoQ, +8% YoY), bringing 1H19 sum to RM1.3b (+7%). This met estimates, making up 52-53% of our and consensus full-year forecasts; we see a softer 2H19 due to the recent OPR cut.

Dividend. A 1st interim DPS of 12.5sen (+67% YoY) was declared. Ex-date TBD later. This beat expectations as we only forecasted DPS of 8sen.

QoQ. Despite lower loan loss provision (-25%), net profit fell 2% as 1Q19’s writeback of credit losses on financial assets did not reoccur and the effective tax rate was higher at 27% (due to under provision in prior years). Total revenue grew by only 2% given continuing slippage in net interest margin (NIM, -7bp) and non-interest income (NOII) fell 4% on the back of lower fee (-9%) and forex income (-51%).

YoY. Bottom-line increased 8%, thanks to positive Jaws as total income accelerated faster vs opex (by 2ppt) and bad loan allowances fell 1%. NOII jumped 50% due to strong investment (+89-fold), forex (+3-fold), and insurance (+46%) performances. However, the lack of writeback of credit losses on financial assets capped earnings from rising at a quicker rate.

YTD. Similar to YoY showing, net profit grew 7%, backed by positive Jaws and lower provision for impaired loans (-6%). Top-line grew 4% given robust NOII (+8%); this was owing to better investment (+60%) and insurance (+73%) performances.

Other key trends. Loans growth picked up pace to 6.8% YoY (1Q19: +5.5%) and deposits followed suit, accelerating by 11.5% YoY (1Q19: +10.1%). However, loan-to deposit ratio (LDR) inched up to 93% (+2ppt sequentially). As for asset quality, gross impaired loans (GIL) ratio weakened a little, seeing that it ticked up 3bp QoQ to 2.15% due to a bad corporate account (an utility company) in Singapore.

Outlook. We expect NIM to fall further given the full 6 months impact from May-19’s OPR cut and growing price-based competition for loans. However, we do not think it would be overly severe considering it has room to retire some its expensive funding. While for loans growth, we expect the momentum to sustain at 5-6% (despite slower domestic macro climate) as it gain market share over rivals especially in the consumer lending space. As for asset quality, it is seen to be resilient since RHB has shifted its focus back to Malaysia (domestic GIL ratio is 54bp lower than the group’s level).

Forecast. We keep our FY19-21 earnings forecast but raise the corresponding DPS estimates by 13-14% (implying DPR of c.40% from c.36%).

Maintain BUY and GGM-TP of RM6.45, based on 0.99x 2020 P/B with assumptions of 9.6% ROE, 9.7% COE, and 3.0% LTG. This is largely in line to its 5-year average of 0.92x and the sector’s 1.04x. We continue to like RHB for its appealing risk-reward profile given strong CET1 ratio of 16.7%, which permits the ability to divvy even more.

Source: Hong Leong Investment Bank Research - 27 Aug 2019