RHB Bank reported a 9M19 net profit of RM1,861m (+7% yoy), in line with our and consensus estimates. The results were driven by higher non-fund based income (+15% yoy), lower allowances on expected credit losses (-3.1% yoy) and impairment write-backs. The group saw flat net earnings on a qoq basis, as non-interest income declined by a larger extent of 16% qoq, despite an improvement of 4.6% in fundbased income (as NIM started to normalize, rising by 4bps qoq to 2.13%). Loans growth tapered off sequentially in 3Q19, although yoy growth remained at a decent 5.1% (key drivers being mortgages and SMEs). Meanwhile, we believe that the outlook will be more subdued in 2020E-21E, and this will further weaken RHB’s loan growth. In line with our cautious industry outlook, we cut our 2019-21 earnings forecasts by 1-6% as we lower our loan growth target from 5.0% to 3% for 2019E-21E. We downgrade the rating from BUY to HOLD, with a lower 12-month TP of RM6.00 (at 0.9x CY20 P/BV target).

9M19 Earnings +7% Yoy on Better Operating Income, Lower Provisions

RHB Bank saw marginally better operating income for 9M19, up 3.7% yoy as non-interest income grew by 15.4% yoy (driven by better investment results and insurance underwriting profits), while 9M19 fund-based income remained relatively flat due to the impact of the OPR cut (although we saw a qoq recovery of 4.6%). Coupled with a 3.1% yoy decline in impaired loan allowances and some impairment write-backs, 9M19 net profit grew by 7% yoy. The group’s asset quality has remained sound, with a GIL ratio of 2.16% as at 3Q19 though it has risen from 2.06% as at end-2018.

2019-21E Loan Growth May Dip to 3% Yoy as Sentiment Remains Soft

We are revising down our loan growth forecast from 5% to 3% for 2019-21E, in line with our house view of a moderation in domestic growth and slowdown in global growth. This resulted in 1%-6%% earnings forecast cuts for 2019-21.

Downgrade to HOLD. PT Revised to RM6.00 (from RM6.60)

We downgrade our call to HOLD (from BUY) as we revise down our TP from RM6.60 to RM6.00 (based on a 2020E P/BV multiple target of 0.9x [from 1x], with a 2020E ROE of 10% and cost of equity of 9.9%). Though we see downside risks from competitive NIM pressure and potentially weaker asset quality, upside risk is supported by its FIT22 initiatives to boost growth in affluent SMEs, and mid and large cap accounts.

Source: Affin Hwang Research - 26 Nov 2019