• 2Q20 net profit of RM400.8 (-35% yoy; -30% qoq) was broadly within our and consensus estimates, with 1H20 net profit (RM971.7m, -22% yoy) accounting for 48% of our estimate (prior to minor revisions). 1H20 BAU net profit (ex-net ‘mod loss’ impact of RM392.4m) stood at RM1,273m (+2.3% yoy).
•  The quarters ahead could remain muted, with potential downside risks from: i) continued proactive provisions; and ii) further rate cuts (25bps to 50bps).
•  We make minor housekeeping adjustments for 2020E-21E earnings forecasts, while raising 2022E earnings by +11.3%. Maintain HOLD with PT unchanged at RM5.00. No 2Q20 interim dividend was declared (2Q19: 12.5 sen).

1H20 operating results (BAU basis) up 5.5% yoy, excluding impact of ‘mod-loss’

On a ‘BAU” basis, RHB’s 1H20 operating income expanded by 5.5% yoy, with fundbased income up 3.5% yoy (excluding a net ‘modification-loss’ of RM392.4m in 2Q20) while non-interest income rose 9.8% yoy. Other key takeaways: i) 2Q20 NIM slipped 69bps qoq and 22bps yoy to 1.42%, while 1H20 NIM stood at 1.7% (-42bps yoy). Excluding the net ‘mod-loss’ impact, 1H20 NIM would have been at 2.07% (-5bps yoy); ii) loans were up 2.6% ytd ; iii) 2Q20 annualised NCC spiked to 46bps vs. 34bps (1Q20) and 18bps (2Q19), while 1H20 annualized NCC was 40bps vs 20bps (1H19) (10bps for COVID19 pre-emptive provisions and 18bps for macro provisions).

What to Expect Ahead? Downside Risks to Earnings Remain Down the Road

Earnings outlook in 2H20 may be muted due to: i) continued proactive provisions, as delinquencies may rise for borrowers in vulnerable sectors, upon the expiry of the loan moratorium period (Sept20). Altogether, management expects NCC for 2020 to be at c. 40bps to further account for a potential increase in loans that may potentially trigger a significant increase in credit risk (from Stage 1 to 2); ii) any further rate cuts. RHB’s NIM may see a 2-3bps compression for every 25bps rate cut (net profit impact at ~RM76m or around 3%).

Maintain HOLD, Price Target Unchanged at RM5.00

We maintain our HOLD rating on RHB, with our PT unchanged at RM5.00 (based on a 0.7x P/BV on CY21E BVPS) underpinned by a CY21E ROE at 7.7% and cost of equity of 9.6%. We made some minor housekeeping adjustments for 2020E-21E (as we raised both fund-based income generation and provisions) while revised 2023E earnings higher by 11% due to higher fund-based income (as overall funding-cost has been lower than our expectations). Downside/Upside risks: interest rate cuts/hikes; higher/lower provisions.

Source: Affin Hwang Research - 1 Sept 2020