RHB Bank’s 9M18 net profit of RM1,739.7m (+16.8% yoy) came in above Affin’s estimate, though it was within street estimates. RHB’s 9M18 impaired loan allowances were lower than our expectation of 35bps due to some credit recovery. Nonetheless, we expect a more normalized credit charge level in 4Q18, while 2018’s average credit cost will possibly hover around 20-25bps. Fund-based income held up well as loans continued to pick up in 3Q18 (+4.0% yoy; +1.8% qoq), though 3Q18 NIM came under more pressure (-6bps qoq to 2.23%). We upgrade to BUY from Hold, with a revised PT of RM6.10 (from RM5.80) as we lift 2018E/19E/20E net profit by 6.2%/6.9%/6.8%.

Higher Fund-based Income, Lower Provisions Drive 3Q18 Up Yoy

RHB Bank reported a decent 3Q18, with net profit of RM578.7m, up 18.4% yoy and 1.5% qoq, while 9M18 core net profit of RM1,739.8m (+16.8% yoy) was above our expectation by 7.4% (on an annualized basis), though within the consensus estimate. RHB’s 9M18 impaired loan provisions have been lower than our estimates due to recoveries seen in 2Q18 and 3Q18, whereby net credit charges have been at lows of 19bps and 16bps respectively. As a result, the 9M18 net credit charge was much lower at 20bps against our 2018 conservative assumption of 35bps. The 9M18 preprovision operating profit grew by +8.6% yoy, driven by 9M18 fund-based income (+10% yoy; 9M18 NIM at 2.27% (+6bps yoy)) and flat non-interest income while offset by higher overheads. The 9M18 cost-to-income ratio came in at 49% (vs. KPI of 50%).

2018E/19E/20E Net Profit Lifted by 6.2%/6.9%/6.8%

As we pencil in lower net credit cost assumptions of 25bps for 2018-20E (from 35bps), our 2018E/19E/20E net profit increases by 6.2%/6.9%/6.8%. This results in a re-rating of our valuation for RHB.

Upgrade to BUY (from Hold); PT Revised to RM6.10 (from RM5.80)

We Upgrade Our Rating on RHB to BUY From Hold and Raise Our 12-month Price Target to RM6.10 (at a 2019E P/BV target of 0.96x) from RM5.80 (2019E P/BV target of 0.90x), while our valuation assumptions include a 2019E ROE of 9.35% and cost of equity of 9.5%. RHB continues to work on its FIT22 programme (2018-2022), whereby the focus is primarily on affluent SMEs, mid-caps and large-caps, and strengthening Malaysia as a core market. Downside risks: NIM pressure, weaker asset quality.

Source: Affin Hwang Research - 28 Nov 2018