Management was cautiously optimistic on its outlook and broadly kept its FY21 financial guidance (save for loans growth which may end stronger). However, it appears that we under accounted for FY22 NCC in our model and thus, we trim FY22-23 profit estimates by 2-6% while maintaining FY21 forecasts. We believe recent negative news flow on few of its troubled corporate accounts would have been deliberated and tackled internally. We still like RHB for its high CET1 ratio and undemanding valuations. Keep BUY recommendation but with lower GGM TP of RM6.60 (from RM7.00), based on 0.87x FY22 P/B.

We spoke to management recently for some operational updates. In general, the tone was cautiously optimistic.

NCC to remain elevated. RHB’s loan repayment assistance (RA) remains relatively unchanged at 30% of total domestic loans book (vs 31% in Nov-21). However, this is poise to decline, considering most RAs under the PEMULIH program are set to expire in Feb-22 (expected to gradually normalize down to 7% level as seen back in Jun-21). Besides, URUS’ take-up rate is slow with <1k applications so far (total approved only RM60m or 0.03% of total loans). Management guided FY21 net credit cost (NCC) to be close to 40bp and trend slightly lower than that in FY22; we note it is largely in line with our estimates for FY21 (at 43bp) but there could be some downside risk since we imputed a smaller NCC of 22bp for FY22.

Robust top-line outlook. Loans growth in FY21 could likely end stronger at c.6% (vs +4-5% guidance and ours: +4%), thanks to the mortgage and SME segments. Going forward, management is looking to expand its auto financing franchise and originate more secured loans. For net interest margin (NIM), it would widen 3bp for every 25bp rise in OPR; RHB expects 1x/2x OPR increase in FY22/23. We gathered the current deposit taking landscape remains competitive while for lending side, pricing discipline still persists in the market. Separately, RHB has been building back its AFS and HFT treasury portfolio position to capitalize on the higher MGS yield (e.g. the 10-year note has recovered 120-130bp from its low, ahead of actual OPR hikes).

Other key updates. We understand that 22% of its local consumer loan book are B40 borrowers, 17% are M40, and the remaining 61% are T20. RHB also shared Covid-19 vulnerable segment (tourism, hospitality and air transport) makes up 5% of total loans. As for any potential provision writebacks, it will likely take place only towards end-22 and FY23. On the matter of M&A, management appears more keen to pursue organic growth. With regards to dividends, RHB did not commit on a 50% payout ratio in FY21 (1H21: 44%) but is working towards returning to those level sooner rather than later.

Forecast. We left our FY21 estimates unchanged but cut FY22-23 earnings projection by 2-6% to account for higher NCC as cued by management.

Keep BUY but with a lower GGM-TP of RM6.60 (from RM7.00), following our profit reduction. The TP is based on 0.87x FY22 P/B (from 0.91x) with the assumptions of 9.7% ROE (from 10.3%), 10.7% COE, and 3.0% LTG; this is above its 5-year mean of 0.81x but largely in line with the sector’s 0.89x. In our opinion, the valuation multiple is fair, since its ROE output is similar to sector average while the premium is reflective of ample market liquidity. We believe recent negative news flow on some of its troubled corporate accounts would have been deliberated and tackled internally since they are not fresh from the oven and the Covid-19 pandemic has already lingered for >2 years. We continue to like RHB for its high CET1 ratio and undemanding valuations.

Source: Hong Leong Investment Bank Research - 7 Feb 2022