RHB reported 3Q20 core earnings decrease of 18% QoQ, no thanks to negative Jaws. Also, NIM contracted sequentially. However, loans growth gained traction while GIL ratio nudged down during the quarter. That said, results still came in above estimates due to stronger-than-expected NOII. Hence, we raise our FY20- 22 earnings forecast by 4-10%. We continue to like RHB given leading Covid-19 vaccines have high efficacy rates, indicating a step closer to winning the battle against the virus. Retain BUY call but with a GGM-TP of RM6.25 (from RM5.80), based on 0.89x FY21 P/B.

Beat estimates. RHB posted 3Q20 core net profit of RM574m (-18% QoQ, -8% YoY), which brought 9M20 sum to RM1.8bn (-1% YoY). This exceeded expectations, forming 91-93% of both our and consensus estimates; key variance came from stronger-than-expected non-interest income (NOII).

Dividend. None Declared as RHB Only Divvy in 2Q and 4Q.

QoQ. Core bottom-line declined 18% due to negative Jaws (total income fell 7% while opex ticked up 1%); net interest margin (NIM) slipped 6bp and trading-related income decreased 53%. However, this was cushioned by lower bad loan provision (-10%).

YoY. Higher loan loss allowance (+3-fold) dragged core net profit down by 8%. Otherwise, numbers would have looked better, since non-interest income (NOII) grew 44%; this came from stronger fees, trading, insurance underwriting, and forex income.

YTD. Positive Jaws from quicker total income growth (+6%) vs opex (flat) was largely offset by higher impaired loans provision (+2-fold). Thus, core earnings fell 1%.

Other key trends. Loans growth grew at a faster clip of 5.6% YoY (2Q20: +4.9%) but deposits tapered slightly to 7.5% YoY (2Q20: +7.8%). As a result, sequential loan-todeposits ratio (LDR) nudged up 2ppt to 93%. For asset quality, gross impaired loans (GIL) ratio improved 18bp QoQ, given recovery efforts and effect of loan moratorium.

Outlook. We see subsiding NIM pressure as OPR is already at all-time low. Besides, downward deposit repricing should aid gradual NIM recovery. That said, loans growth is seen to chug along despite Covid-19 headwinds as RHB grabs market share from peers. Separately, we expect GIL ratio to remain at low levels in 1H21, since troubled borrowers can seek for targeted assistance from RHB; however, it may mask actual damage and cause a lag in NPL formation if the situation does not improve swiftly. As such, management is likely to step up their pre-emptive provisioning in the short-haul but it will drop and normalize progressively.

Forecast. We Raise Our FY20-22 Earnings Forecast by 4-10% to Reflect Stronger NOII.

Maintain BUY but with a GGM-TP of RM6.25 (from RM5.80), based on 0.89x FY21 P/B (from 0.82x) with assumptions of 8.4% ROE (from 8.1%), 9.1% COE, and 3.0% LTG. This is largely in line with the sector’s P/B of 0.85x 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 remain positive on the stock given leading Covid-19 vaccines have high efficacy rates, indicating a step closer to winning the battle against the virus; this would spur a faster economic recovery, owing to improve business and consumer confidence along with more lenient safety distancing measures. Also, it alleviates strain on businesses, which in turn curbs NPL formation.

Source: Hong Leong Investment Bank Research - 1 Dec 2020