Despite lingering Covid-19 headwinds, management appears optimistic during our recent conversation and broadly kept its financial guidance. In general, RHB shared that: (i) FY21 NCC is now likely to come in at the upper end of 30-40bp, (ii) NIM has tapered, (iii) loans growth held up well, (iv) NOII still robust, thanks to better treasury along with resilient fee income, and (v) there is headroom for interim dividend payout in the upcoming 2Q21 results announcement. Overall, our forecasts are unchanged. We still like RHB for its undemanding valuations, high CET1 ratio, and large FVOCI reserve to buffer against potential yield curve volatility. Maintain BUY and GGM-TP of RM6.85, based on 0.90x FY22 P/B.

We spoke to management recently for some operational updates. In general, the tone was optimistic despite lingering Covid-19 headwinds.

NCC to come in at upper end of guidance. RHB’s loan repayment assistance (RA) outstanding improved, where it now makes up 8.3% of total domestic loans book (vs Mar-21: 10.4%). However, this may likely spike, since a prolonged MCO may spawn more troubled borrowers. Taking a cue from peak approved targeted RA, 16% of local loans could be vulnerable to Covid-19 adversities. In turn, RHB’s FY21 net credit cost (NCC) is seen to land at the upper end of its 30-40bp guidance (in line with our 39bp forecast). Downside risk to NCC will surface if RA level shoots above 16% but should not exceed FY20’s 58bp.

Sturdy top-line. Unchanged flattish FY21 net interest margin (NIM) guidance (despite widening 11bp in 1Q21 against FY20’s level), which we find to be overly conservative vs our estimates of +2bp. That said, we understand NIM tapered sequentially as most deposits have repriced downward and also, RHB deliberately dish out safer loans to improve asset quality; management shared that lending growth held up well vs FY21 guidance and our forecast of +4-5%. Besides, RHB indicated 2Q21 treasury income was better QoQ, thanks to falling 10-year MGS yield. Moreover, fee income continued to be resilient during the quarter. Nevertheless, to err on the side of caution, we still project a lower non-interest income (NOII) run-rate of RM1.9bn for FY21 vs RM2.2bn in FY20, given patchy recovery pattern amid Covid-19 woes.

Other key updates. RHB is looking at alternatives to minimize day 1 modi fication loss from the new 6-mth loan moratorium. In any case, there will likely be accrued interest being charged and hence, the damage would not be as significant as the 1st automatic loan deferment; the run-rate should be closer to 4Q20-1Q21’s level (<RM50m). To our knowledge, 15% of its local retail loan book are B40 borrowers, 17% are M40, and the remaining 68% are T20. As for dividends, potentially good quarterly earnings in 2Q21 (similar to preceding quarter) would create headroom for interim payout but, it will still largely be dependent on regulatory approval, in our opinion.

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

Maintain BUY and GGM-TP of RM6.85, based on 0.90x FY22 P/B with assumptions of 9.6% ROE, 10.4% COE, and 3.0% LTG. This is above its 5-year mean of 0.82x but in line to the sector’s 0.88x. We believe the valuation yardstick is warranted, since its ROE output is close to sector average and the premium is reflective of ample market liquidity, together with eventual demand returning for stocks with recovery, reopening, and deep value attributes. As such, we are not becoming bearish on RHB despite an extended FMCO (Phase 1), considering vaccination rollout will help to lead the return to normality. Also, risk-reward profile remains tilted favourably to the upside, since any negative sentiments, we reckon would have been already factored in by the market.

Source: Hong Leong Investment Bank Research - 19 Jul 2021