RHB reported 4Q20 core earnings decline of 28% YoY, no thanks to higher loan loss provision. Also, GIL ratio saw a slight uptick. However, loans growth held steady and NIM expanded. Overall, results came in largely within expectations. That said, we raise FY21-22 earnings by 4-9% to reflect new set of guidance. We still like RHB for its strong CET1 ratio and fairly large untapped FVOCI reserves. Retain BUY and with a higher GGM-TP of RM6.65 (from RM6.55), based on 0.93x FY21 P/B.

Largely in line. Excluding net modification loss, RHB registered 4Q20 core earnings of RM458m (-20% QoQ, -28% YoY), bringing FY20 sum to RM2.3bn (-8% YoY). This was largely within our expectations, making up 104% of our full-year forecast but beat consensus at 109%; suspect variance was from better-than-expected top-line growth.

Dividend. A final DPS of 7.65sen was proposed (vs 4Q19: 18.5sen; FY20: 17.65sen vs FY19: 31sen). Ex-date TBD later. This was within estimates as we forecasted DPS of 18sen, but fell short of consensus’ 21.3sen.

QoQ. Core profit fell 20% due to higher bad loan provision (tripled). However, this was cushioned by positive Jaws, thanks to quicker top-line growth (+14%) vs opex (+4%); we saw net interest margin (NIM) expanded 16bp.

YoY. Again, core earnings decreased 28% on the back of the 7-fold jump in loan loss allowances. That said, total income rose 14% and provided some offsetting impact; it was from loans growth (+5.6%), widening NIM (+1bp), and better fee income (+20%).

YTD. Higher impaired loans provision (+3-fold) dragged core bottom-line down by 8%. Similarly, the 8% total income growth mitigated a further profit decline.

Other key trends. Loans growth was steady at 5.6% YoY (3Q20: +5.6%) but deposits lost some traction to 6.8% (3Q20: +7.5%). Sequentially, loan-to-deposits ratio (LDR) ticked down 1ppt to 92%. As for asset quality, gross impaired loans (GIL) ratio nudged up 2bp to 1.71% due to the retail segment.

Outlook. We see NIM pressure returning (but will be short-lived) given budding 25bp OPR reduction in 1H21. That said, loans growth is seen to chug along despite Covid- 19 headwinds as RHB grabs market share from peers. Although GIL ratio has creeped upwards, we are not overly worried as RHB has already made heavy pre emptive provisioning in FY20 and we reckon credit risk has been adequately priced in by the market, looking at the high NCC assumption applied for FY21 by us and consensus (above normalized run-rate but below FY20’s level). Also, we believe the Government and BNM will be supportive in helping troubled borrowers, limiting a significant sag in GIL ratio.

Forecast. Although 4Q20 results were largely in line, we lift FY21-22 profit by 4-9% to reflect new set of management guidance.

Maintain BUY and with a higher GGM-TP of RM6.65 (from RM6.55), following the profit uplift and based on 0.93x FY21 P/B (from 0.92x) with assumptions of 8.8% ROE (from 8.4%), 9.2% COE, and 3.0% LTG. This is above the sector and its 5-year mean P/B of 0.90x and of 0.83x, respectively. In our opinion, the valuation yardstick is fair, even though its ROE output is similar to sector average as the premium is reflective of ample liquidity in the market and eventual demand returning for stocks and industries with recovery, reopening, and deep value attributes.

Source: Hong Leong Investment Bank Research - 8 Mar 2021