RHB’s 2Q22 net profit fell 10% YoY, no thanks to weak total income and higher effective tax rate. Also, GIL ratio escalated sequentially. However, NIM widened QoQ while loans growth held steady. Overall, results missed expectations and hence, we reduce FY22-24 earnings by 6%. Despite the weaker-than-anticipated showing, we continue to like RHB for its high CET1 ratio (indicating headroom for attractive dividend payout in the future) along with undemanding valuations. Retain BUY but with a lower GGM-TP of RM6.60 (from RM7.00), based on 0.88x FY23 P/B.

Missing estimates. RHB posted 2Q22 net profit of RM635m (+6% QoQ, -10% YoY), bringing 1H22 total to RM1.2bn (-11% YoY). This fell short of our estimates, forming 44% of full-year forecasts but was in line with consensus at 46%; key variance came from weak non-interest income (NOII).

Dividend. Declared 1st interim DPS of 15sen (vs 2Q21: 15sen). Ex-date TBD later.

QoQ. Bottom-line rose 6% given higher total income (+2%) and lower impaired loans provision (-91%). However, it was capped by the rise in opex (+3%) and effective tax rate (+6ppt). At the top, we saw the broadening of net interest margin (NIM, +7bp) and loans expansion (+1.8%), being largely erased by sluggish NOII (-23%).

YoY. Weak total income (-3%) coupled with higher effective tax rate (+15ppt) brought earnings down 10%. Again, NOII was a drag, falling 38% given tepid showing across all line items. However, lower loan loss allowances (-94%) offered some respite.

YTD. The 11% drop in net profit was led by negative Jaws (total income fell 3% while opex was flat) and higher effective tax rate (+11ppt). However, the 58% decline in bad loans provision helped to alleviate the damage.

Other key trends. Both loans and deposits growth held steady at +7.3% YoY (1Q22: +7.0%) and +4.8% YoY (1Q22: +3.9%). However, loan-to-deposit ratio (LDR) nudged up 2ppt QoQ to 91%. For asset quality, gross impaired loan (GIL) ratio ticked up 12bp sequentially to 1.62%, no thanks to personal financing, SME, and its Cambodia unit.

Outlook. Following Jul-22’s OPR hike, NIM is seen to continue widening sequentially. However, the magnitude may be capped by downward CASA mix normalization. That said, loans growth is expected to chug along for now, considering economic recovery is strong. Separately, GIL ratio is likely to rise further but we are not overly concerned, since RHB has made heavy pre-emptive provisions in FY20-21 to cushion this impact. Moreover, FY22-23 NCC assumptions built in by both us and consensus are still fairly elevated (above the normalized run-rate but below FY20-21’s level).

Forecast. Following the profit miss, we cut FY22-24 estimates by 6% to reflect softer NOII.

Maintain BUY but with a lower GGM-TP of RM6.60 (from RM7.00), after cutting our profit forecast. This TP is based on 0.88x FY23 P/B (from 0.93x) with the assumptions of 10.5% ROE (from 11%), 11.4% COE, and 3.0% LTG. This is above its 5-year mean of 0.81x but in line with the sector’s 0.92x. In our opinion, the valuation multiple is fair, since its ROE output is comparable to sector average. Despite the earnings miss, we still like RHB for its elevated CET1 ratio (indicating headroom for attractive dividend payout in the future) along with undemanding valuations.

Source: Hong Leong Investment Bank Research - 30 Aug 2022