RHB reported 2Q20 core earnings increase of 22% QoQ, thanks to positive Jaws from stronger NOII. Also, loans growth gained traction while asset quality held steady. However, NIM contracted sequentially. Overall, results were in-line with estimates but we cut our DPR assumption by 18ppt to reflect the DPS absence this quarter. We still like RHB for its appealing risk-reward profile, underpinned by undemanding valuations, strong CET1 ratio, and fairly large untapped FVOCI reserves. Retain BUY and GGM-TP of RM5.80, based on 0.82x FY21 P/B.

Largely within estimates. RHB posted 2Q20 core net profit of RM699m (+22% QoQ, +14% YoY), which brought 1H20 sum to RM1.3b (+2% YoY). This was largely within expectations, making up 62-63% of both our and consensus estimates; we see 2H to be softer as lumpy corporate loan provisioning may surface.

Dividend. Surprisingly, none declared (2Q19: 12.5sen) as management takes a wait and see approach, before divvying in 4Q.

QoQ. Core bottom-line was up 22% due to higher non-interest income (NOII, +69%), thanks to stronger forex, insurance and investment-related income. However, this was mitigated by higher bad loan provision (+34%). Also, net interest margin (NIM) slipped 6bp to 2.05%.

YoY. The drivers boosting core net profit by 14% were similar to QoQ showing, where NOII jumped 47%; this came from forex, insurance and investment -related income as well. However, loan loss allowance (tripled) was again a drag.

YTD. Positive Jaws from quicker total income growth (+6%) vs opex (-1%) was largely scrubbed off by higher provision for impaired loans (+2-fold). Thus, core earnings only nudged up 2%.

Other key trends. Both loans and deposits growth gained momentum to 4.9% (1Q20: +3.6%) and 7.8% YoY (1Q20: +3.8%) respectively. However, the sequential loan-to deposits ratio (LDR) was fairly unchanged at 91%. As for asset quality, gross impaired loans (GIL) ratio improved 13bp QoQ, given the effect of loan moratorium.

Outlook. With potentially another OPR reduction (-25bp) in 2H20, we believe this will continue to exert pressure on NIM. Also, loans growth is anticipated to taper as Covid- 19 related headwinds drag performance. That said, 3Q20 NOII should remain decent (from investment gain) as the 10-year MGS yield is still weak. 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. Separately, we see GIL ratio to stay at low levels for the rest of the year, considering troubled borrowers will receive targeted assistance from RHB; however, this may hide actual damage and cause a lag in non-performing loan (NPL) formation if the situation does not improve expeditiously or an advent of Covid-19 second wave paralyses the country again.

Forecast. We keep our FY20-22 earnings forecast but reduce FY20 DPS estimate by 33% (implying DPR of 36% from 54%), as we still expect a payout in 4Q.

Retain BUY and GGM-TP of RM5.80, based on 0.82x 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 0.78x and its 5-year mean of 0.83x. 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 16.6% CET1 ratio (sector: 14.4%), and fairly large untapped FVOCI reserves.

Source: Hong Leong Investment Bank Research - 1 Sept 2020