Following the meeting with management last week, we continue to like RHB for its stable 2019 outlook: (i) decent full year 5% lending growth, (ii) minimal NIM downside with recovery from 4Q19 onwards, (iii) strong NOII persist into 2H19, and (iv) GIL ratio seen to improve. Also, its robust 16.3% CET1 ratio (vs sector’s 13.7%) permits the ability to divvy even more. Besides, it is one of the very few domestic banks now with the ability to churn healthy profit growth rate (3% vs sector: flat). Overall, our forecasts are unchanged. Retain BUY and GGM-TP of RM6.45, based on 0.99x 2020 P/B.

We caught up with management last week to obtain some operational updates. In our view, RHB’s overall near-term outlook remains stable.

To eke out decent loans growth. Management kept its 2019 loans growth target of 5% despite only chalking in 1H annualized lending expansion of only 4.1%. In 2H19, growth is expected to pick up from: (i) retail mortgage - seeing a sizable undrawn loan stock (but was also cautioned that credit applications have tapered off recently), (ii) SME financing - fuelled on by its innovative e-solutions platform that offers an all-in one connected banking ecosystem, and (iii) Singapore operations - secured lending to a hotel developer.

NIM to improve in 4Q19. We see 3Q19 NIM continuing to descend (from 2Q’s level of 2.09%) given the full 3 month impact from May-19’s OPR cut; however, this will be cushioned by the RM1bn subordinated debt redemption in early July. A recovery should take place in 4Q19, since 71% of its non-CASA deposits are due for maturity in 6 months (calculated as at Mar-19) and will be repriced downwards. Overall, RHB is still guiding NIM slippage of 11-12bp for 2019. Besides, management is looking to redeem RM230m hybrid capital securities in Dec-19 to help buffer its 2020’s NIM.

Strong NOII to sustain into 2H19. To recap, RHB posted robust non-interest income (NOII) growth in 1H19 (+8% YoY) and this was mainly backed by higher investment gains. Considering that the average 10-year MGS yield has fallen further to 3.47% in 3Q19 (vs 3.77%/3.94% in 2Q/1Q), we see its good NOII performance sustaining into 2H19. Also, the act of beefing up its bond books (to mitigate negative carry arising from the recent quick deposit base built) is expected to enhance mark-to-market returns as well.

GIL ratio to improve. Although 2Q19 gross impaired loans (GIL) ratio has ticked up 3bp QoQ to 2.15% (owing to a bad utility corporate account in Singapore and some weakening at its personal financing portfolio), RHB remains optimistic that it will improve to below 2% by end-2019; this is by virtue of reclassifying some its prior reschedule and restructure (R&R) loans to performing status. In turn, there was also no change to its net credit cost (NCC) guidance for 2019, at high-teen basis points.

Forecast. Unchanged since there were no material positive/negative updates.

Retain 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 0.90x and the sector’s 0.99x. In our opinion, the valuation is fair, considering RHB’s current ROE generation is similar to its 5-year mean and sector average. We continue to like the stock for its appealing risk-reward profile given strong CET1 ratio of 16.3% (vs sector’s 13.7%), which permits the ability to divvy even more; we note that RHB’s current dividend payout ratio of 40% is still below the sector average of 45%. Also, it is one of the very few domestic banks now with the ability to churn healthy profit growth rate (3% vs sector: flat).

Source: Hong Leong Investment Bank Research - 16 Oct 2019