RHB reported 1Q21 net profit rise of 48% QoQ due to lower loan loss provision. Also, NIM widened sequentially, loans growth picked up momentum, and asset quality was sturdy. Overall, results were at the upper-end of estimates and thus, we raise FY21-22 bottom-line by 3%; besides, we introduced FY23 forecasts. We still like RHB for its higher CET1 ratio & larger FVOCI reserve to buffer against volatile yield curve. Maintain BUY recommendation but with a higher GGM-TP of RM6.85 (from RM6.65), based on 0.90x FY22 P/B.

Upper-end of expectations. Excluding net modification loss, RHB chalked in 1Q21 core earnings of RM679m (+48% QoQ, +19% YoY). This came in at the upper-end of estimates, making up 28% of both our and consensus full -year forecasts; the stronger net interest margin (NIM) contributed to the better overall bottom line growth.

Dividend. None declared as RHB only divvy in 2Q and 4Q.

QoQ. Core bottom-line was up 48% largely due to lower bad loan allowances (-69%). However, negative Jaws coming from weaker total income (-6% vs flat opex) capped financial showing; this was dragged by lower non-interest income (NOII, -21%), given poor investment (-92%) and forex (-70%) gains. That said, NIM nudged up 2bp during the quarter.

YoY. Despite the 14% rise in loan loss provision, quicker total income growth vs opex (+7ppt), led to positive Jaws and drove up RHB’s core earnings by 19%. NIM widened 6bp, loans grew 7%, and NOII increased 8% (fees income +27%).

Other key trends. Both loans and deposits grew at faster clip to 6.8% (4Q20: +5.6%) and 12.4% YoY (4Q20: +6.8%) respectively. As a result, loan-to-deposit ratio (LDR) fell 5ppt QoQ to 86%. For asset quality, gross impaired loan (GIL) ratio declined 5bp QoQ due improvement at corporate banking, auto finance, and Singapore operations.

Outlook. We expect NIM to remain stable premised on no OPR reduction (since it is already at an all-time low) and benign deposit rivalry in 2021. Also, lending growth is seen to chug along despite MCO3.0 implementation as RHB grabs market share from peers. Separately, GIL ratio is likely to creep upwards but we are not overly worried as RHB already made heavy pre-emptive provisioning in FY20 and in our view, credit risk has been adequately priced in by the market, looking at the elevated NCC assumption applied for FY21 by both us and consensus (above the normalized run-rate but below FY20’s level). Furthermore, we believe the Government & BNM will remain supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio.

Forecast. Since 1Q21 results were at the upper-end of expectations, we raise FY21- 22 earnings by 3% to account for stronger NIM and reverse the 25bp OPR cut that we had earlier baked into our projections. Also, we introduced FY23 estimates.

Keep BUY but with a higher GGM-TP of RM6.85 (from RM6.65), following our uplift in profit and roll valuations to FY22. The TP is based on 0.90x P/B with assumptions of 9.6% ROE (from 8.8%), 10.4% COE, and 3.0% LTG. This is above its 5 -year mean of 0.82x but in line to the sector’s 0.89x. In our opinion, the valuation yardstick is fair, given its ROE output is similar to sector average & 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 - 3 Jun 2021