RHB’s 2Q21 net profit ticked up 3% QoQ on the back of positive Jaws and lower effective tax rate. However, NIM narrowed sequentially and loans growth slowed down. That said, asset quality was sturdy. Overall, results were within estimates and hence, our forecasts were unchanged. We still like RHB for its higher CET1 ratio & larger FVOCI reserve to buffer against any volatile yield curve. Maintain BUY and GGM-TP of RM6.85, based on 0.90x FY22 P/B.

Within estimates. RHB registered 2Q21 net profit of RM701m (+3% QoQ, flat YoY on a core basis, after removing modification losses in 2Q20 & 1Q21), bringing 1H21 sum to RM1.4bn (+9% YoY). This came in within estimates, making up 55-56% of our and consensus full-year forecasts; we see loan loss provision creeping up in subsequent quarters due to Covid-19 lockdowns.

Dividend. 1st interim DPS of 15sen was declared (vs 2Q20: nil). Ex-date TBD later.

QoQ. Bottom-line was up 3% on the back of positive Jaws (total income +2% vs opex -2%) & lower effective tax rate. At the top, non-interest income (NOII) grew 15% due mainly to better investment-related gains but was slightly offset by the 2bp contraction in net interest margin (NIM). Also, we note that higher allowance for bad loans (+28%) capped overall growth.

YoY. Positive Jaws generated by better total income growth (+2%) was largely erased by the 8% rise in impaired loans provision, which in turn caused earnings to be flat.

YTD. The 9% rise in net profit was led by positive Jaws (total income expanded 3ppt faster than opex). However, the 11% increase in bad loan allowances, capped overall growth.

Other key trends. Both loans & deposits growth tapered to 5.7% (1Q21: +6.8%) and 8.1% YoY (1Q21: +12.4%) respectively. As a result, loan-to-deposit ratio (LDR) ticked up 2ppt QoQ to 89%. For asset quality, gross impaired loan (GIL) ratio fell 3bp QoQ due to improvement at wholesale banking, auto finance, and Singapore operations.

Outlook. We expect NIM to remain stable premised on no OPR cut (since it is already at an all-time low) and limited scope for further CASA expansion. Also, loans growth is seen to chug along given gradual economic reopening under the National Recovery Plan. 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. Unchanged as 2Q21 results were within estimates.

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. Moreover, demand is returning for stocks with recovery, reopening, and deep value attributes. Also, we continue to like RHB for its high CET1 ratio & large FVOCI reserve to buffer against any volatile yield curve.

Source: Hong Leong Investment Bank Research - 30 Aug 2021