• 4Q20 net profit came in at RM438.6m (-29.4% yoy; -30% qoq) while 2020 net profit amounted at RM2,032.5m (-18% yoy), in line with our but above consensus estimates
• Provisions rose sharply in 4Q20 (annualized NCC of 118bps), while 2020 NCC (58bps) was higher than management’s guidance of 50bps. This was due to deterioration in the retail book and adjustments due to macroeconomic factors
• Upgrade to BUY based on an unchanged 12-month TP of RM6.20, given upside potential of 14%. Meanwhile, DPS proposed of 4.8 sen was disappointing, even though the CET1 ratio of 16.2% remained intact despite a challenging year

2020 operating results marginally better yoy driven by recovery in 2H20

RHB’s 2020 operating income was marginally higher by 1.2% yoy, with fund-based income declining 2.3% yoy attributable to the net ‘modification-loss’ impact of RM418m for the full year, while non-interest income rose 9% yoy (driven by higher investment and trading income, brokerage and wealth management fees). Normalized 4Q20 NIM continued to recover, +16bps qoq to 2.15% (given the repricing down of deposit costs) while 2020 NIM averaged at 1.96% (including the mod-loss impact) vs. 2.12% in 2019. Meanwhile, RHB’s loan growth was ahead of most of its peers at +5.6% yoy, mostly underpinned by mortgages (+7.7% yoy), business banking (+11.3% yoy) and its Singapore operation (+21.4% yoy). For 2020, CIR was 0.9ppts lower at 47.1% vs. 48% in 2019, while excluding the impact of the mod-loss, at 45.6%

2021E earnings expected to see marginal growth, with upside from lower NCC

Though 2020 saw net credit cost (NCC) at an elevated level of 58bps (with the bulk of it in 4Q20, at 118bps annualized), we expect these provisions to decline to circa 46bps (based on our assumption) in 2021 vs. management’s expectation of 30-40bps. Preemptive buffers (macro provisions and management overlays) built in 2020 amount to ~52% (or 30bps) of total provisions. Loans under the Targeted Repayment Assistance program, which was at 9% of loanbook in 3Q20 had risen to 15% as at Dec20, but has since seen new applications tapered off. As we expect business and consumer sentiment to gradually recover, default risk could be mitigated as more economic activities resume.

Upgrade to BUY, TP Unchanged at RM6.20

We upgrade RHB to a BUY, with our PT unchanged at RM6.20 (based on a 0.86x P/BV on CY21E BVPS) underpinned by a CY21E ROE at 7.7% and cost of equity of 9.6%. Our forecasts are unchanged, with the following assumptions for 2021E/22E/23E: loan growth at 3.6%/3.3%/3.4% yoy; NCC at 46bps/38bps/35bps; NIM 2.06%-2.08%; CIR at 47-48%. Downside/Upside risks: interest rate cuts/hikes; higher/lower provisions.

Source: Affin Hwang Research - 1 Mar 2021