RHB reported FY19 bottom-line growth of 10% YoY (largely in line), driven by positive Jaws and credit loss writeback on other financial assets. Besides, NIM widened sequentially. However, lending growth lost some momentum and asset quality improved. Surprisingly, RHB also raised its dividend payout ratio to 50% (vs our 40% expectations); this is sustainable, in our view, seeing that its bank level CET1 ratio is still high at 14.3%. However, we cut FY20-21 profit by 1-2% to factor in higher NIM slippage. Overall, we still like the stock for its appealing risk-reward profile, given cheap valuations and good management track record in remunerating shareholders. Retain BUY but with a lower GGM-TP of RM6.00 (from RM6.20), based on 0.91x FY20 P/B.

Largely in line. RHB chalked in 4Q19 net profit of RM621m (+1% QoQ, +10% YoY). This brought FY19 earnings to RM2.5b (+8% YoY), which came in largely in line with expectations, making up 103-105% of our and consensus full-year forecasts.

Dividend. A final DPS of 18.5sen (+42% YoY) was proposed. Ex-date TBD later. This beat expectations as we only forecasted DPS of 13sen.

QoQ. Bottom-line was up only 1% as higher opex (+9%) and bad loan provision (+12%), erased the 6% rise in total revenue; non-interest income (NOII) jumped 30% due to better fees (+17%), investment (+39%), and forex (+59%) income. Besides, net interest margin (NIM) widened 1bp to 2.14% given downward deposit repricing.

YoY. Positive Jaws from quicker total income growth (+6%) and credit loss writeback on other financial assets lifted earnings up by 10%.

YTD. Net profit grew 8% on the back of positive Jaws, rather flattish allowance for bad loans, and credit loss writeback on other financial assets.

Other key trends. Lending growth lost momentum to 4.3% YoY (3Q19: +5.1%) while deposits decelerated to 6.5% YoY (3Q19: +6.9%). In turn, loan-to-deposit ratio (LDR) inched down 2ppt sequentially to 93%. As for asset quality, gross impaired loans (GIL) ratio declined 19bp QoQ to 1.97%, mainly due to reclassification out from reschedule and restructure (R&R) loans to performing status.

Outlook. NIM slippage is seen to return in 1Q20 given the recent OPR cut. However, gradual recovery should ensue in the following 3-6 months from downward deposit repricing (lagged impact). As for the good NOII trend from higher investment gains, we expect this to sustain into 1Q20 as the 10-year MGS yield has continued to slide. Also, RHB had only realized 17% of its debt instruments measured at FVOCI in FY19, suggesting it has more room vs peers (average of 20%) to move gains upon disposal to the income statement. As for asset quality, it is seen to be resilient since RHB has shifted its focus back to Malaysia (domestic GIL ratio is 41bp lower vs group’s level).

Forecast. Despite 4Q19 results coming in largely within expectations, we cut FY20-21 profit by 1-2% to factor in higher NIM slippage.

Reiterate BUY but with a lower GGM-TP of RM6.00 (from RM6.20), following our profit cut and based on 0.91x FY20 P/B (from 0.95x) with assumptions of 9.4% ROE (from 9.6%), 10.0% COE, and 3.0% LTG. This is in line to its 5 -year mean of 0.88x and the sector’s 0.92x. In our view, the valuation yardstick is fair, given RHB’s current ROE output 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 good management track record in remunerating shareholders with higher dividends.

Source: Hong Leong Investment Bank Research - 28 Feb 2020