RHB reported 1Q20 net profit decline of 9% due to flat total income growth and higher loan loss provision. Also, NIM contracted sequentially, loans growth lost steam, and GIL ratio ticked up slightly. Overall, results fell short of expectations and with RHB painting a weaker showing ahead, we cut FY20-21 profit by 3-8%. That said, we still like RHB for its appealing risk-reward profile, underpinned by inexpensive valuations, strong CET1 ratio, and relatively large untapped FVOCI reserves. Retain BUY but with a lower GGM-TP of RM5.30 (from RM5.40), based on 0.77x FY21 P/B.

Below estimates. RHB chalked in 1Q20 net profit of RM571m (-8% QoQ, -9% YoY). This fell short of our and consensus expectations, making up 25-26% of respective full year forecasts; we see loan loss provision creeping up further in subsequent quarters due to the impact of Covid-19 crisis.

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

QoQ. Bottom-line was down 8% due to lower total income (-5%) and higher bad loan provision (+94%). Notably, non-interest income (NOII) fell 23% given weak investment (-60%) and forex (-67%) income. Also, net interest margin (NIM) slipped 3bp to 2.11% as OPR was cut by 50bp during the quarter.

YoY. With total income growth coming in flat and loan loss allowance increasing 56%, RHB’s profit dipped 9%. Again, NOII was a drag (-16%), no thanks to poor investment (-53%) and forex (-65%) income. Besides, the credit loss writeback on other financial assets was 96% lower.

Other key trends. Lending growth lost momentum to 3.6% YoY (4Q19: +4.3%) while deposits decelerated to 3.8% YoY (4Q19: +6.5%). In turn, loan-to-deposit ratio (LDR) inched down 2ppt sequentially to 91%. As for asset quality, gross impaired loans (GIL) ratio ticked up 3bp QoQ to 2.00%, mainly due to a single bad corporate account.

Outlook. NIM pressure is expected to persist into following quarters given the string of OPR cuts. Also, with the confluence of events from Covid-19 crisis and imminent recession, loans growth is likely to taper. That said, we see better NOII in 2Q20 (from investment gain) as the 10-year MGS yield has fallen. Besides, RHB had not realize a major portion of its debt instruments measured at FVOCI, suggesting it has room to move gains upon disposal to the income statement. As for asset quality, it is poised to weaken but it should not spiral out of control (at least till end Sep-20); this is because Malaysian borrowers were granted 6-mth loans deferment while any restructuring & rescheduling (R&R) of loans affected by Covid-19 will not be tagged as impaired.

Forecast. Seeing 1Q20 results were below expectations and management guiding for weaker 2020 financial performance, we cut FY20-21 profit by 3-8% to factor in higher NIM slippage and net credit cost assumptions. Also, we introduce FY22 estimates.

Maintain BUY but with a lower GGM-TP of RM5.30 (from RM5.40), following our profit cut and roll valuations to FY21. The TP is based on 0.77x P/B (from 0.81x) with assumptions of 8.1% ROE (from 8.4%), 9.6% COE, and 3.0% LTG. This is in line with the sector’s P/B of 0.78x but below its 5-year mean of 0.85x. The discount is fair as its ROE output is 1ppt below historical average. We still like RHB for its appealing risk reward profile, underpinned by inexpensive valuations, strong CET1 ratio of 16.6% (vs sector’s 14.1%), and relatively large untapped FVOCI reserves.

Source: Hong Leong Investment Bank Research - 8 Jun 2020