After meeting management recently, we continue to like RHB for its stable near term outlook. Also, they kept their overall 2019 guidance with: (i) lending growth picked up pace, (ii) NIM expansion, (iii) NOII trending robustly, and (iv) GIL ratio improving in the final reporting quarter. Also, we believe RHB still has room for capital management, which points to potential dividend upside. Besides, it has an appealing risk-reward profile, underpinned by cheap valuations. Overall, our forecasts were unchanged. Retain BUY and GGM-TP of RM6.20, based on 0.95x 2020 P/B.

We met up with management recently to get some operational updates. Overall, we find that RHB’s near-term outlook remains stable.

Loans growth gained pace. Although 9M19 annualized loans growth was only 3.1%, management shared this will end close to its full-year target of 5% (in line with our estimates). We understand lending expansion was relatively broad-based but several segments like retail mortgage, SME financing, and its Singapore operations (secured loans to a hotel developer) were chief contributors.

NIM expansion. We expect 4Q19 NIM continuing to widen (from 3Q’s level of 2.13%) given lower cost of funds from downward deposit repricing and easing competition in the deposit taking space. Hence, we see upside risk to RHB’s full year NIM guidance, considering its steep 11-12bp slippage expectation; we estimate 2019’s NIM should compress by only c.10bp. Besides, management has redeemed RM230m hybrid capital securities in Dec-19 to help buffer its 2020’s NIM.

Good NOII trend to continue. Recall, RHB posted strong non-interest income (NOII) growth in 9M19 (+6% YoY), thanks primarily to higher investment gains. We believe this trend will largely sustain into 4Q19, seeing the 10-year MGS yield has carried on to slide to 3.40% vs 3.47%/3.77%/3.94% in 3Q/2Q/1Q). Also, RHB had only realized 11% of its debt instruments measured at fair value through other comprehensive income (FVOCI) in 9M19; this suggest it has more room vs peers (average of 20%) to transfer gains upon disposal to the income statement.

GIL ratio to recover. Despite gross impaired loans (GIL) ratio softened marginally to 2.16% (+1bp QoQ), RHB has guided it will improve near to the 2% level in 4Q19; this comes from reclassifying some its prior reschedule and restructure (R& R) loans to performing status. Also, there was no change to its net credit cost (NCC) guidance for 2019, at high-teen basis points.

Dividend upside. Considering RHB intends to raise dividends on a sustainable basis, it seems to us that its current 40% DPR run-rate is the new normal (10ppt above its dividend policy of at least 30%). Besides, we believe RHB still has room for capital management as its bank level CET1 ratio in 3Q19 remains high at 14.4%. Assuming this is reduced to its comfortable level of 13%, we estimate the DPR could rise to 90% (one-off) and add c.5% to dividend yield.

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

Retain BUY and GGM-TP of RM6.20, based on 0.95x 2020 P/B with assumptions of 9.6% ROE, 10.0% COE, and 3.0% LTG. This is largely in line to its 5-year average of 0.89x and sector’s 0.97x. In our view, the valuation is fair given 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, underpinned by inexpensive valuations and potential dividend upside.

Source: Hong Leong Investment Bank Research - 30 Jan 2020