We reiterate our OUTPERFORM call on RHB with an unchanged TP of RM5.15. Despite reporting 8% QoQ/9% YoY drop in 1QFY20 net profit, the results generally met expectations. More positively, its balance sheet looks solid heading into the tougher environment ahead with asset quality fairly contained thus far, strong CASA growth and a CET-1 ratio of 16%. RHB’s robust capital underpins its plan to maintain an absolute DPS of 31.0 sen, which translates to a yield of 6.5% while trading at FY21E PER and PBV of just 8.4x and 0.7x, respectively.

In line. 1QFY20 CNP of RM571m (-8% QoQ/-9% YoY) is broadly in line with our/market expectations at 26%/25% of full-year estimates, assuming no material deviation down the road to its credit cost guidance.

Results’ highlights. Main negatives were: (i) weaker NoII (-16% YoY/-23% QoQ) mainly on lower forex and MTM losses from the FVTPL book as the MGS yield curve steepened in Mar. This was cushioned by stronger brokerage income and realised gains from FVOCI portfolio. As per management, the MTM losses subsequently reversed post-1QFY20, in tandem with the drop in yields as the market anticipated another round of OPR cuts in May; and (ii) higher loan provisions (+63% YoY/+88% QoQ) with credit cost at 34bps (1Q19: 22bps; 4Q19: 18bps), of which RM50m (11bps credit cost) is related to potential Covid-19 impact. Otherwise, NIM was fairly resilient (estimated +1-2bps YoY and QoQ) as lower funding cost (CASA jumped 16% YoY/+9% QoQ led by wholesale and retail CASA) helped offset the drop in asset yields. Loans expanded by 4% YoY (flat QoQ), led by Singapore and Cambodia, while domestic loans moved at a slower clip. Deposits grew 4% YoY/+2% QoQ, driven by CASA deposits. That said, we would not be surprised if some of the CASA growth from wholesale is given up ahead. Impaired loans were flattish (-2% YoY/+1% QoQ) while LLC ticked up to 87% from 86% at end-2019 (1Q19: 90%). CET-1 ratio remains healthy at 16%. 1QFY20 ROE stood at 8.8% vs. the earlier 10.3-10.5% target.

Keeping a lid on asset quality. While visibility is still poor, we think RHB’s guidance that FY20 credit cost can be contained within the 30-35bps range (possibly going up to 40bps) is a positive as compared to the three-year average of 22bps and our FY20 estimate of 36bps. This is also significantly lower than the 83-87bps in 2008-09. Management cited a smaller corporate loan book currently as a factor in sustaining asset quality. Households and SME that have taken up the moratorium ranges between 84% and 94%, while the proportion overseas was lower at 10%. RHB guided for NIM squeeze of 12bps, excluding further rate cuts and MFRS 9 modification losses vs. our 14bps assumption (Day One losses are not too significant for RHB). Finally, capital levels are solid and supports RHB’s target to keep its DPS at 31.0 sen, similar to FY19. We note that RHB has a further RM778m in regulatory reserves, which serves as a capital buffer as RHB does not anticipate the need to utilise the reserves.

Forecasts unchanged while OUTPERFORM call and TP of RM5.15 retained. Our TP is based on a GGM-derived PBV of 0.78x, ascribed to our FY20E BVPS. We like RHB for the following reasons; (i) capital strength, with its CET-1 ratio that is the highest among peers providing ample room to absorb higher loan impairments whilst sustaining dividends, (ii) levers to support earnings from investment revaluation reserves of RM937m in shareholders’ equity and potential lumpy income from a new Takaful bancassurance deal, and (iii) relatively minimal impact from Day One modification losses of c.3% to PATMI. Asset quality, at this juncture, also appears contained.

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) weaker-than-expected market-related income.

Source: Kenanga Research - 1 Jun 2020