RHB Bank reported a 6M19 net profit of RM1,245.6m (+7.3% yoy), outperforming our forecasts but in line with consensus estimates. The results were driven by higher non-fund based income (+21.8% yoy) and lower allowances on expected credit losses (-7.4% yoy), while effective cost management brought down its cost-to-income ratio (CIR) to 48.5% (-6ppts yoy). To our surprise, RHB Bank proposed an interim DPS of 12.5 sen (2Q18’s 7.5 sen). On the other hand, results were slightly weaker qoq, on lower non-interest income and due to a NIM a compression (-7bps qoq) to 2.09%. For 2Q19, RHB saw loans growing at 6.9% yoy, with domestic loans being the key driver and supported by resilient growth in mortgages and SMEs. Maintain BUY, with a higher TP of RM6.60 (at 1.0x CY20 P/BV target).

1H19 Profits Driven by Improved Operating Income, Lower Provisions

RHB Bank saw robust performance for 6M19, with net profit at RM1,245.6m (+7.3% yoy) on the back of lower impairment allowances (-7.4% yoy) while non-fund based income surged 22% yoy (due to better fee income, insurance underwriting surplus and treasury gains). Operationally, fundbased income saw a marginal pullback, down 2.7% yoy due to higher interest expense (+12.7% yoy) and this was reflected in an aggregate NIM compression of 18bps yoy to 2.11% for 6M19 (6M18:2.29%).

2H19 NIM Outlook to Improve, on Track to Achieve Higher ROEs

As the high funding cost for 6M19 was attributable to the aggressive deposit campaigns last year, we expect the effects to taper off in 2H19. Hence, RHB’s NIM outlook is likely to improve in 2H19. This would also be driven by the effects of repricing down of fixed deposit rates and expiry of some senior debt securities/hybrid capital (of which, would not be renewed. RHB is on track to achieve better ROEs in 2019-21E, on the back of its FIT22 initiatives to focus on the affluent SMEs, mid and large cap companies.

Reiterate BUY. PT Revised to RM6.60. Dividend Forecasts Raised

We raise our 2019-21E earnings forecasts by 4.6-6.4%, as we tweak our assumptions on provisions and operating income. We also raise our dividend payout ratio from 36% to 40% for 2019-21E based on management’s guidance. Maintain BUY, with Price Target increased to RM6.60 (2020E P/BV target of 1.0x) from RM6.30. Our assumptions are a 2020E ROE of 10% and cost of equity of 9.94%. Downside risks: NIM pressure, weaker asset quality.

Source: Affin Hwang Research - 27 Aug 2019