Post-speaking to management recently, we trust RHB has the financial muscle to weather this Covid-19 storm. Although GIL ratio is seen to rise going forward, we draw comfort that the bank’s loans are generally well collateralized. Besides, top-line pressure from NIM slippage and weak fee income can be cushioned by realizing its relatively large untapped FVOCI reserve. Also, RHB is committed to rein in discretionary opex and still intends to pay DPS of 31sen in FY20. Overall, forecasts were unchanged. We continue to like the stock for its appealing risk reward profile. Retain BUY and GGM-TP of RM5.80, based on 0.83x FY21 P/B.

We spoke to management recently for some operational updates. Although the overall tone was cautious and outlook is gloomy, we believe RHB has the financial muscle to weather this Covid-19 storm.

Outstanding loans are backed by good collaterals. Management emphasized the bank is well collateralized given that: (i) its mortgage book has a loan-to-value (LTV) of 64%, (ii) roughly half of its personal financing portfolio consists of salary deduction packages, and (iii) c.80% of its SME loans are secured. Also, they have turned stricter and more cautious on origination of new loans. Overall, its FY20 net credit cost (NCC) guidance of 30-35bp is premised on the expectation that gross impaired loans (GIL) ratio to rise to 2.10-2.20% from 2.00% in 1Q20; these are in line with our estimates of 36bp and 2.11% respectively.

Top-line under pressure. We believe 3Q20 quarterly net interest margin (NIM) to be the weakest (instead of 2Q20 as per management’s expectation), given another 25bp OPR cut recently; we estimate NIM contraction of 13bp in FY20 vs guidance of -12bp. Besides, 2Q20 fee income from commercial and investment banking was sluggish. To cushion these, RHB indicated they have been realizing more of their debt instruments measured at fair value through other comprehensive income (FVOCI); we understand this will be higher than the crystalized gains of RM73m in 1Q20 and it still has a relatively large untapped FVOCI reserve of RM937m. Thus, we are projecting a lower NOII decline of 10% for the full year vs -16% in 1Q20.

Other key updates. Seeing tepid top-line, negative Jaws should ensue and drive up cost-to-income ratio (CIR); however, management is committed to rein in discretionary expenses to keep CIR below the 50% mark (1Q20: 48.2%). Separately, RHB is poise to incur MFRS 9-related day 1 modification loss of RM200-300m (on a gross basis) at the net profit level in 2Q20. As for dividends, management still intends to pay DPS of 31sen in FY20 (same quantum vs last year), despite peers have been lowering their payout. However, we think BNM may pour cold water over the idea due to the tough operating environment; we estimate DPS of only 27sen, in tandem with the profit fall.

Forecast. Unchanged since there were no material positive/negative updates. Also, RHB kept its FY20 guidance: (i) 2-3% loans growth, (ii) 12bp NIM contraction, (iii) CIR <50%, and (iv) NCC 30-35bp.

Retain BUY and GGM-TP of RM5.80, based on 0.83x FY21 P/B with assumptions of 8.1% ROE, 9.1% COE, and 3.0% LTG. This is largely in line with the sector’s P/B of 0.82x and its 5-year mean of 0.84x. In our opinion, the valuation yardstick is fair, given that RHB’s current ROE output is similar to its 5-year mean and sector average. We like the stock for its appealing risk-reward profile, thanks to undemanding valuations, strong CET1 ratio of 16.6% (vs sector’s 14.0%), and relatively large untapped FVOCI reserves

Source: Hong Leong Investment Bank Research - 9 Jul 2020