We reiterate our OUTPERFORM call on RHB with an unchanged TP of RM5.75. Modification losses (net) of RM392m led to the 30% QoQ/35% YoY drop in reported net profit, but underlying trends were generally positive especially with respect to asset quality. Its balance sheet continues to look solid heading into the end of the automatic loan moratorium period with CET-1 ratio rising further to 16.6%. We think FY21E PER and PBV of just 8.6x and 0.7x, respectively, are attractive while FY20-21E dividend yields look very decent at 4-6%, based on 40-50% payout ratios.

In line. 2QFY20 PATMI of RM401m (--30% QoQ/-35% YoY) met expectations with 1HFY20 PATMI of RM972m (--22% YoY) at 50%/47% of full-year estimates. Excluding modification losses of RM392m, 2QFY20 pre tax profit would have been up 21% QoQ (+8% YoY) while 1HFY20 pre-tax profit would have been flat YoY with higher NoII offset by higher loan provisions. As mentioned in our recent meeting with management, RHB’s interim dividend has been deferred to 4Q.

Results’ highlights. 2QFY20 positives were: (i) stronger NoII (+69% QoQ/+47% YoY), underpinned by stronger trading and MTM gains, as well as brokerage fees, partly offset by a drop in banking and IB fees; (ii) flat opex (-2% YoY) on controlled discretionary spending, although this may return as activities pick up; (iii) 4% QoQ/9% YoY drop in GIL thanks to the moratorium and recovery efforts. GIL ratio was 1.9% while LLC rose to 88% (1QFY20: 87%; 2QFY19: 85%); and iv) further accumulation in capital as CET-1 ratio increased 60bps QoQ/30bps YoY to 16.6%. The main negative was loan allowances rising 38% QoQ (+174% YoY) resulting in credit cost of 47bps (1Q20: 34bps; 2Q19: 18bps). RHB booked in RM160m in provision relating to macro-economic factors while another RM40m (1QFY20: RM50m) was made for potential Covid-19 impact. Together, these accounted for virtually the entire quarter’s allowances. Apart from that, we estimate NIM slipped 13bps QoQ (-15bps YoY), loans expanded by 5% YoY (+3% QoQ), led by Singapore while domestic loans rose 3% YoY and QoQ while deposit growth (3% QoQ/+8% YoY) was aided by strong CASA growth (+7% QoQ/+16% YoY). 1HFY20 ROE (annualised, ex modification loss) stood at 9.6% vs. revised > 8% target.

Briefing highlights. RHB continues to seem confident of its asset quality, despite having raised the guidance for FY20 credit cost to 40bps from 30- 35bps due to further overlays. 2021 credit cost is expected to be elevated, but at a lower c.30bps level. Management thinks GIL would end 2020 around current levels with the increase only eventually taking place from 2H 2021. Households/SME loans that are under the moratorium stood at 83%/80%, respectively, while the proportion overseas was lower at 15%. Exposure to vulnerable segment is at 12% of loan book. RHB’s confidence in its asset quality is due to the followings; (i) while still early days, RHB estimates 9-10% of retail and 18% of SME customers may need further assistance, i.e. situation does not seem as bad as feared; (ii) a high proportion of secured loans (e.g. 80% of SME and business banking loans are fully or partly secured); and (iii) more conservative stance on provisioning pre-pandemic days. RHB guided for NIM squeeze of 16bps, excluding further rate cuts and modification losses.

No change to earnings forecasts as we had already made adjustments post our meeting with management last month. Our FY20E PATMI forecasts/assumptions include: (i) 22bps NIM squeeze, inclusive of modification losses and another 25bps OPR cut; (ii) credit cost of 42bps/41bps for FY20E/FY21E; and (iii) revised FY20E dividend pay-out ratio of 40%.

OUTPERFORM call and RM5.75 retained. Our TP is based on a GGM derived PBV of 0.84x, ascribed to our FY21E BVPS. We continue to like RHB for the following reasons; (i) capital strength. Its CET-1 ratio is the highest among peers providing room for more aggressive capital management activities down the road, (ii) regulatory reserves of RM778m and RM1.7b in investment revaluation reserves (1QFY20: RM937m) in shareholders’ equity provide headroom to absorb higher loan impairments, and (iii) inexpensive valuations with FY21E PE and PBV of 8.6x and 0.7x, respectively. Asset quality also appears under control at this juncture.

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 Sept 2020