Held a meeting with management recently and the tone was rather guarded. We gathered for FY22: (i) NCC could come in at the lower end of its earlier 30-40bp guidance, (ii) loans growth may end stronger at 5-5.5%, and (iii) NIM expanding by a narrower 3-4bp. Also, NOII remains subdued in 3Q22, overall asset quality is steady, and management is committed on a 50% payout ratio this year. All in all, our forecasts were kept and we continue to like RHB for its high CET1 ratio (indicating headroom for attractive dividend payout in the future) coupled with undemanding valuations. Maintain BUY and GGM-TP of RM6.60, based on 0.88x FY23 P/B.

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

NCC at the bottom end of FY22 guidance. Outstanding repayment assistance (RA) remains relatively unchanged at 3-4% of total domestic loans book (vs 4% in Jul-22) as all Pemulih deferments for both retail and SME have expired, leaving behind only typical BAU Rescheduled and Restructured (R&R) loans. Hence, improvement should be limited from here on, since normalized pre-pandemic R&R also stood at c.3% level. That said, RHB indicated net credit cost (NCC) for FY22 could come in at the lower end of its earlier 30-40bp guidance (in line with our estimates at 29bp), which implies annualized 45bp NCC run-rate for the remaining of the year (3Q-4Q22 against 1H22: 16bp); we expect provision top-ups for macroeconomic variable (MEV) adjustments and further management overlay allowances going forward.

Mixed top-line outlook. Lending growth in FY22 would likely end stronger at 5-5.5% (vs +4-5% guidance and ours: +5%), thanks to robust economic recovery. However, net interest margin (NIM) may expand by a narrower 3-4bp (vs +5-6bp guidance and ours: +2bp) considering that gains from the overnight policy rate (OPR) hikes are now broadly neutralized by: (i) price competition for fixed deposits, (ii) current and savings account (CASA) being run down, along with (iii) expiry of using Malaysia Government Securities (MGS) to meet the Statutory Reserve Requirement (SRR) compliance at year end. Regardless, RHB still guided NIM to widen by 2-3bp for every 25bp rise in OPR. Separately, we gathered non-interest income (NOII) remains subdued in 3Q22.

Other key updates. Gross impaired loans (GIL) ratio for SME has plateaued (2Q22: 3.23%) but Retail climbed a little (2Q22: 0.76%). That said, we are not overly worried since the latter is backed by high collaterals. For both the corporate and commercial segments, asset quality stayed stable (GIL ratio of 2.30% and 0.14% respectively in 2Q22), same goes for its Singapore operations (2Q22: 1.92%). Whereas, Cambodia was still challenging (2Q22: 6.81%). With regards to dividends, RHB is committed on a 50% payout ratio in FY22 (1H22: 51%).

Forecast. Unchanged since 3Q22 reporting season is already around the corner.

Retain BUY and GGM-TP of RM6.60, based on 0.88x FY23 P/B with assumptions of 10.5% ROE, 11.4% COE, and 3.0% LTG. This is above its 5-year mean of 0.81x but in line with the sector’s 0.88x. In our view, the valuation multiple is fair, since its ROE output is comparable to sector average. For mid-sized banks, we continue to like the bank for its elevated CET1 ratio (indicating headroom for attractive dividend payout in the future) along with undemanding valuations.

Source: Hong Leong Investment Bank Research - 8 Nov 2022