Stronger FY19 earnings (CNP +8%) came within our/market expectations on account of lower impairment allowances and improved fee-based income. Management is cautiously optimistic on its FY20E targets which we find tough given the challenging economy and Covid-19. TP reduced to RM5.85 and MARKET PERFORM reiterated.

In line. FY19 CNP of RM2.5b is in line with our/market estimates accounting for 103% each. A final DPS of 18.5 sen was declared bringing total DPS of 31.0 sen (vs. our expectation of 21.0 sen) hitting its highest dividend pay-out ever at 50%.

MTM gains. YoY, RHB ended on a stellar note as CNP saw uptick of +8% driven by top-line revenue of RM7.1b (+4%) and lower impairment allowances (-15%). Top-line was driven by Islamic Income (+13%) and NOII (+9% due primarily to a 2.5x gain in MTM securities. While loans (domestic/overseas loans at +3.9%/8.1%) improved +4.3% (below guidance/estimation of +5%), NIM fell 12bps (higher funding costs and soft asset pricing). CIR was flat at 49% as opex increased 3%. Asset quality improved as GIL fell 9bps to 1.97% with credit charge at 18bps (within guidance).

QoQ, despite stronger top-line (+6%), CNP was under +1% due to as higher erosion from Opex (+9%). Top-line was supported by stellar NOII (+30%) as NII was soft (+1.5%) with Islamic Income falling 8%. Re-pricing of deposits continued as NIM saw 1bps uptick to 2.14% and loans improved +2%. Asset quality improved as GIL fell 19bps to 1.97% with credit costs remaining flat at 16bps.

Target ROE of 10.5% looks challenging. Management guided for a FY20E target of 10-10.5% which we deemed challenging. Its other guidance; ((i) loans at +4%, (ii) NIM at 5-10bps compression (assuming 2 rate cut), and (iii) credit charge at 18-19bps. Given the uncertainties coming from trade tensions and Covid-19, we impute; (i) loans at +3.3%, (ii) NIM at 8bps compression, and (iii) credit charge at 20bps giving a ROE of 9.5%.

FY20E earnings revised downwards. Our FY20E CNP is revised by - 1% to RM2.5b. We expect fee-based income to be resilient (on account of MTM gains on account of OPR cut). We introduce our FY21E earnings, where we expect advances in CNP by +1.0% on account of improvement in loans, lower credit charge and lower contribution from NOII.

TP lowered to RM5.85 (from RM6.05) based on a lower FY20 PBV target of 0.87x (from 0.92x) (implying a 0.5SD below mean valuation) - to reflect the risks from uncertainties undermining fee-based income growth. Despite a decent dividend yield of 5.5%, potential total returns are under 10%. Hence, we maintain it at MARKET PERFORM.

Key risks to our call are: (i) steeper margin squeeze, (ii) lower-than expected loans & deposits growth, (iii) higher-than-expected rise in credit charge, and (iv) further slowdown in capital market activities.

Source: Kenanga Research - 28 Feb 2020