Management sounded more optimistic during our recent conversation but was still cautious on guiding forward looking numbers. Generally, RHB shared that: (i) FY20 NCC is likely to come in at the upper end of 45-50bp, (ii) NIM recovery is underway, (iii) loans growth is holding up well, (iv) NOII remains robust from the crystallization of financial assets at FVOCI, and (v) the typical final dividend pay -out in Feb is in the works. Overall, our forecasts are unchanged. We continue to like RHB for its strong CET1 ratio and fairly large untapped FVOCI reserves. Retain BUY and GGM-TP of RM6.55, based on 0.92x FY21 P/B.

We spoke to management recently for some operational updates. In general, the tone has turned more optimistic but was still cautious on guiding forward looking numbers.

Better FY21 after bigger 4Q20 provision. We gathered RM20bn of loans are under repayment assistance (+20% since mid-Nov-20); this represents 12% of outstanding loan balance and management sees it peaking at 16%. That said, RHB shared FY20 net credit cost (NCC) will likely come in at the upper end of its earlier guidance of 45- 50bp (stepping up on pre-emptive provisioning efforts in 4Q20) but maintained FY21 at 30-40bp; these are largely in line with our estimates of 46bp and 35bp respectively.

Sturdy top-line. Net interest margin (NIM) recovery is underway and is seen to close >2% in FY20 (at most slipping by 12bp vs our estimates of -13bp). Heading into FY21, NIM is guided to broadly improve by 2-4bp, within our projection of +3bp. Besides, we understand FY20 loans growth is holding up well at c.5% vs earlier guidance of 2-3% and our estimates of 4%. Also, RHB indicated they will continue to realize their debt instruments measured at fair value through other comprehensive income (FVOCI) in 1H21; the bank has crystalized gains of RM311m in 9M20 and still holds a fairly large RM2.1b FVOCI reserve. Hence, we continue to forecast elevated non-interest income (NOII) run-rate of c.RM2b for both FY20-21 vs RM1.9b in FY19.

Other key updates. Even with better income outlook, management intends to remain strict with cost control and look to deliver positive Jaws in FY21 where cost-to-income ratio (CIR) is guided to fall to 47-48% (9M20: 49%). Separately, RHB is determined to divvy in upcoming Feb-21 results release with a FY20 payout ratio of 50% vs our 33% assumption. Despite its strong CET1 ratio of 16.4% (vs system: 14.5%), management clarified the dividend reinvestment plan proposal is to provide a lever to work around rewarding shareholders.

ESG initiatives. Management is committed to extend sustainable green financing and have already dished out RM3bn loans relating to this effort as at Sep-20 vs RM2.8b in Dec-19 (this makes up c.2% of total lending); RHB looks to raise the amount to RM5b by 2025.

Forecast. Unchanged Since There Were No Material Positive/negative Updates.

Retain BUY and GGM-TP of RM6.55, based on 0.92x FY21 P/B with assumptions of 8.4% ROE, 8.9% COE, and 3.0% LTG. This is largely in line with the sector’s P/B of 0.92x but above its 5-year mean of 0.83x. In our opinion, the valuation yardstick is fair, given that its ROE output is similar to sector average while the premium is reflective of ample liquidity in the market and eventual demand returning for stocks with recovery, reopening, and deep value attributes. Despite the implementation of MCO2.0, we are not turning bearish given the impending Covid-19 vaccination rollout. In any case, we believe the Government and BNM will stay supportive in helping troubled borrowers. Also, we reckon it is only a matter of time when the market starts to look forward again on economic activities returning to the path of normalcy.

Source: Hong Leong Investment Bank Research - 14 Jan 2021