RHB’s 1Q20 net profit declined 9.4% yoy and 8.1% qoq, largely due to the impact of higher impaired loan allowances and weaker noninterest income yoy. The results were within our expectation but below consensus, as we expect earnings to weaken ahead. RHB’s management has cautioned that: i) 2020E net credit cost (NCC) may potentially rise further (our estimate 30-40bps) due to more preemptive provisioning; and ii) more NIM pressure kicking-in, with a guidance of 12bps lower yoy to 2.0%. Reiterate SELL, with a revised TP of RM4.00 (based on 0.58x P/BV target on 2021E BVPS).

Results Within Our Expectations, Expect Weaker Quarters Ahead

RHB saw its 1Q20 net operating income coming in flat yoy while qoq was down 5.2%. Despite a total of 50bps rate cut in 1Q20, RHB saw fund-based income up 4.3% yoy (though was down 2.1% qoq), largely driven by lower funding cost given a decline in FDs and supported by strong CASA growth. Meanwhile, pre-provision profit was offset by a sharper rise in NCC, which had increased to 34bps in 1Q20 vs. 22bps in 1Q19. 1Q20 provisions also included a RM50m pre-emptive allowance for potential defaults due to COVID-19 impact.

Key takeaways from 1Q20 results – loan growth holding up, NIM pressure

Key takeaways from the results: i) RHB’s group loans grew marginally at +3.5% yoy (key drivers coming from mortgages, SMEs and RHB Singapore) though was flat ytd (due to corporate repayments); ii) 1Q20 NIM pulled back to 2.11% in 1Q20, i.e. down 5bps yoy and 3bps qoq; and iii) weaker non-interest income result in 1Q20 is expected to turn more favourable in 2Q20.

2020E/21E/22E Forecasts Maintained

We maintain our 2020E/21E/22E earnings forecasts. Nonetheless, there could be more downward revision in 2Q20 when management will be able to share more clarity on the ‘modification loss’ impact on fund-based income.

Maintain SELL. PT Adjusted to RM4.00 (from RM3.80)

Reiterate SELL on RHB, with a revised Price Target of RM4.00, based on a P/BV multiple target of 0.58x on 2021E BVPS (as we shift our valuation horizon from 2020). We see minimal risks of capital-raising at this juncture given its robust capital ratios (CET1 16%; TCR 18.3%), among the best capitalized banks. Upside risks: lower credit default risks.

Source: Affin Hwang Research - 1 Jun 2020