After the recent conference call with management, we maintain FY20E earnings of RM2.2b and TP of RM5.20. We are comfortable with management’s revised guidance despite potential uptick in risk given the fluid pandemic situation. From management’s current outlook, asset quality looks to be as guided previously with loan growth revision a welcomed surprise as management looks for undisbursed loans to underpin loans growth.

Loan moratorium. RM110b or 62% of RHBBANK’s loans (FY19: RM177b) are subject to moratorium. Corporate loan book size is at RM42.9b with RM3.5b approved for corporates (RM2.7b – Corporates, RM800m for commercial and overseas). For its SME book (RM19.9b), the Group assumes the moratorium take-up will be at 90%. Its SME portfolio consists of RM15.2b of retail SME with RM4.7b defined as mid-market SMEs (revenue of RM35-50m).

Exposures to vulnerable sectors. We understand its portfolio exposure to vulnerable sectors due to COVID-19 is at ~11% of which 8- 9% is to non-retail and 1.8% to retail. Exposure to the airline industry is at 0.3%. O&G exposure is at 2.4% of its loan book (RM4.2b). One third of its O&G portfolio is under watch-list with 75% of the coming from domestic entities.

No funding issue. Liquidity Coverage Ratio has fallen to 90% from 130% with NSFR below regulatory requirements at 96%. We understand that this is due to cash-flow issue arising from the loan moratorium. We do not expect funding issue to be a problem ahead with the recent cut in SRR and muted demand for loans which will mitigate NIM compression. Incidentally, the Group expects another rate cut by the end of the year; thus, NIM guidance of 5-10bps compression (or 8bps compression) is maintained.

Loans target revised. Management guided for 2-3% loans growth for FY20 (from +4% in tune with the then expected GDP growth of ~4%). The significant variance from the current consensus opinion of flat/negative growth in GDP stems from its RM11b undisbursed mortgage loans.

Asset quality is looking stable presently. Management is expecting Gross Impaired Loans to hover at 2.0% for FY20 (FY19: 1.97%). With moratorium and Reschedule & Restructured (R&R) in place, the Group does not expect significant uptick. However, credit charge guidance has been revised to 31bps (from 18-19bps previously). The uptick is broad based with no specific sectors. Management guided that it does not expect to utilise its Regulatory Reserves (FY19: RM839m). CET1 is at 16.9%, well above regulatory requirements and well buffered from the potential adverse scenario as envisaged by BNM. While BNM has guided for prudent dividend payout for FY20, management is comfortable to replicate its FY19 DPS of 31.0 sen for FY20.

Top-line challenging. We understand that NOII is likely to be subdued ahead as investment gains from FVOCI (or MTM gains) will be hard pressed to be replicated given that FVOCI reserves have come down. MTM gains for FY19 was to the tune of RM400m. Opex is likely to see a +5% YoY uptick coming from IT and Digitization spending. The group’s IT spending averages RM200-250m/year with Digitization expenditure of RM100m expected in the next 2 years (with RM100m spent in the last 2 years). With slower earnings, we expect cost-to income ratio of >50% (from FY20 target of 48%). ROE is revised to 8- 9% from the initial >10%.

No change in earnings. Our FY20E/FY21E earnings are maintained at RM2.2b/2.4b with unchanged assumptions; (i) loans growth at +2.2%/+4.3%, (ii) NIM with 15bps compression (to 2.0%) as we assumed another 50bps OPR cut ahead for FY20, and (iii) conservative credit charge of 36bps/34bps. TP and call maintained. TP maintained at RM5.20 using PB of 0.78x with the PB multiples based on 1SD below mean. We feel this is justifiable given that the forward ROE of 8-9% implies 1SD below its mean. We maintain our OUTPERFORM call given potential total returns at >15% supported by decent dividend yields of ~6.5%.

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

Source: Kenanga Research - 23 Apr 2020