RHB reported 9M19 bottom-line growth of 7% YoY (largely in line), driven by positive Jaws, lower provision for bad loans, and higher credit loss writeback on other financial assets. Besides, NIM widened sequentially. However, lending growth lost some momentum and asset quality weakened a little. Overall, our forecasts were unchanged. In our opinion, the stock’s risk-reward profile is still skewed to the upside given: (i) its robust 16.9% CET1 ratio (vs sector’s 13.8%), which permits the ability to divvy even more and (ii) RHB is one of the very few domestic banks now with the ability to churn decent profit growth rate (3% vs sector: flat). Retain BUY and GGM-TP of RM6.45, based on 0.99x 2020 P/B.

Largely in line. RHB chalked in 3Q19 net profit of RM616m (flat QoQ, +6% YoY). This brought 9M19 earnings to RM1.9b (+7% YoY), which came in largely within expectations, making up 77-79% of our and consensus full-year forecasts.

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

QoQ. Bottom-line was flat as (i) lower loan loss provision (-4%), (ii) effective tax rate (- 1ppt), and (iii) credit loss writeback on other financial assets, helped to mask the 2% decline in total revenue; non-interest income (NOII) decreased 13% due to lower fees (-5%), trading income (-33%), and insurance underwriting surplus (-26%). That said, net interest margin (NIM) widened 4bp to 2.13% given downward deposit repricing.

YoY. Positive Jaws from quicker total income growth (+3%) and credit loss writeback on other financial assets lifted earnings up by 6%.

YTD. Net profit grew 7% on the back of positive Jaws, lower allowance for impaired loans (-3%) and higher credit loss writeback on other financial assets (+5-fold).

Other key trends. Lending growth lost momentum to 5.1% YoY (2Q19: +6.8%) while deposits followed suit, decelerating faster to 6.9% YoY (2Q19: +11.5%). In turn, loan to-deposit ratio (LDR) inched up 1ppt sequentially to 94%. As for asset quality, gross impaired loans (GIL) ratio weakened a little, considering that it ticked up 1bp QoQ to 2.16% - mainly due to its household segment (mortgage & personal financing) and a single large bad business account.

Outlook. We see 4Q19-1Q20 NIM improving from: (i) downward deposit repricing and (ii) recent cut in SRR ratio. However, contraction is likely to re-emerge after that, given difficulty to optimize its high LDR and price based competition for loans have turned fiercer. That said, we expect loans growth momentum to chug along at 4-5% (despite slower domestic macro climate) as it gains 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 48bp lower vs group’s level).

Forecast. Unchanged as 3Q19 results were largely within estimates.

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 1.01x. 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 16.9% (vs sector’s 13.8%), 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 decent profit growth rate (3% vs sector: flat).

Source: Hong Leong Investment Bank Research - 26 Nov 2019