In a recent meeting with management, we gathered that RHB is likely to shift its interim DPS and instead, make a full payout in 4Q. This is similar to a scenario that CIMB highlighted recently. Higher NIM compression (from July OPR cut) and credit cost that is expected to be at the top-end of guidance were other highlights, but other arrears appear relatively stable. We lowered our FY20F/FY21F net profit by 11%/7% for NIM and credit cost revisions and tweaked down our TP to RM5.75 (from RM6.00). No change to our OUTPERFORM call.

We recently met up with RHB’s investor relations team and set out below the salient points from the meeting.

Skipping interim dividend but keeping to full-year DPS guidance. In our view, the key highlight was that RHB is likely to defer its 2QFY20 interim dividend (2QFY19: 12.5 sen) and declare its entire FY20 dividend in the 4Q results. At this juncture, management is still hopeful in keeping to its 31.0 sen DPS guidance for FY20. Recall that CIMB (UP; TP: RM3.45) had recently told analysts the possibility of shifting its entire dividend payout to 4Q, where visibility on the outlook may improve. At this stage, we are not able to ascertain if other banks such as MAYBANK (MP; TP: RM7.85) and PBK (MP; TP: RM18.00), which typically declare interim dividends in Aug, are following suit.

Asset quality outlook still cloudy. c.61% of group loans are presently under moratorium but RHB was not able to provide more colour as to the proportion of these loans that will require an extension post Sep or what peak GIL levels could be. Vulnerable sectors made up 9.5% of group loans, mainly relating to tourism and hospitality (3%), and retail and wholesale trade (3%). Meanwhile, the Oil & Gas portfolio (2.4% of gross loans) has been stable while exposure to airlines was an insignificant 0.1%. RHB intends to intensify further its engagement with customers before the end of the moratorium period.

Credit cost to rise sequentially, as RHB books in macro-economic variable adjustments. With that, management now thinks 2020E credit cost is likely to end up closer to the 40bps level, as compared to the earlier guidance of 30-35bps, and possibly up to 40bps. Hence, we have raised our FY20E/21E credit cost assumptions to 42bps/41bps from 36bps/32bps, respectively.

NIM pressure but stronger trading gains sequentially. 2QFY20 NIM will be under pressure from May’s 50bps OPR reduction while Jul’s 25bps OPR cut will add another 4bps pressure to the earlier NIM compression guidance of 12bps. Management is not expecting any further policy rate cut this year. In mitigation, non-interest income (NoII) should see sequential improvement from better trading activities while brokerage is doing well. Loan and IB feerelated income, however, remain soft. Finally, the impact from Day One modification losses to bottom-line is expected to be around RM200-300m. We have adjusted down our NIM forecast and now expect a contraction of 22bps for FY20 (includes modification losses) but forecast an expansion of 8bps in FY21.

FY20F/FY21F profit forecasts lowered by 11%/7%, respectively, after taking into account the above adjustments to NIM and credit cost, coupled with some fine-tuning to our model. Our revised FY20E/FY21E ROE stands at 7.4%/7.9%, respectively. We have also reduced our FY20E/FY21E DPS forecasts to 19.5 sen (-25%) and 26.5 sen (-5%), based on more conservative payouts of c.40% for FY20 (from 48%) and 50% for FY21 (no change).

OUTPERFORM call retained with revised TP of RM5.75 (from RM6.00), post earnings revisions. Our TP is based on a GGM-derived PBV of 0.84x, ascribed to our FY21E BVPS. Notwithstanding the earnings downgrades, we continue to like RHB for the following reasons; (i) capital strength, with its CET-1 ratio which is the highest among peers providing ample room to absorb higher loan impairments whilst keeping dividend payouts healthy, (ii) levers to support earnings from investment revaluation reserves of RM937m in shareholders’ equity, and (iii) relatively minor impact from Day One modification losses. Asset quality, at this juncture, also appears contained.

Source: Kenanga Research - 30 Jul 2020