RHB Bank reported a robust 1Q19 net profit of RM630.2m (+6.7% yoy; +11.5% qoq), broadly within Affin’s estimate and market expectation. Although fund-based income was marginally lower by 2.2% yoy and 2.7% qoq (with a NIM compression of 12bps yoy to 2.16%), a decline in allowances for expected credit losses, credit writebacks and lower overheads contributed in a stronger bottomline growth. RHB saw a 1Q19 group loan growth of 5.6% yoy, with domestic loans at 5.1% and overseas at 9.8% yoy. Maintain BUY, with a TP of RM6.30 (at 0.94x CY20 P/BV target).

1Q19 Results In-line – Lower Provisions From Writebacks

RHB Bank saw a robust start to the year, with a 1Q19 net profit at RM630.2m (+6.7% yoy; +11.5% qoq) on lower impairment allowances (-36.4% yoy) as operating income came in marginally lower by 1.5% yoy. Operationally, fund-based income saw a reversal in growth and declined by 2.3% yoy and 2.7% qoq as a result of NIM compression (-2bps qoq to 2.16%; -12bps yoy). Non-interest income was flat yoy and grew by 8.7% qoq due to stronger investment income. Overheads declined by 1.9% yoy, with 1Q19 CIR remaining steady at 48.6% vs. 48.8% in 1Q18.

Management Guidance of a 5bps NIM Compression, ROE 10.5%

From the conference call, management is guiding for a 5bps NIM compression in 2019, with a year-end expectation of circa 2.13% largely due to the impact of the OPR cut. Though management believes that the group could achieve its 2019 ROE target of 10.5% through fee income initiatives, lower provisions yoy, and lower funding cost (with the expiry of a RM1bn sub-debt, which may not be renewed), we are of the view that the coming quarters may moderate given a more cautious outlook.

Reiterate BUY. PT Unchanged at RM6.30 Based on CY20 Valuations

We keep our 2019-21 earnings forecasts unchanged, as we believe that RHB’s earnings will remain resilient, supported by sound asset quality. We maintain our BUY rating on RHB. Despite rolling over our valuation horizon to CY20, our Price Target remains unchanged at RM6.30 based on a 2020E P/BV of 0.94x (previously 2019E P/BV of 1.0x), underpinned by our 2020E ROE of 9.4% and cost of equity of 9.6%. RHB continues to work on its FIT22 programme (2018-2022), focussing primarily on affluent SMEs, mid-caps and large caps, and strengthening Malaysia as a core market. Downside risks: NIM pressure and weaker asset quality.

Source: Affin Hwang Research - 28 May 2019