We reiterate our OUTPERFORM call on RHB with a revised TP of RM6.30 (from RM5.75). Management is open to front load even more provisions this year, guiding room for FY20 credit cost to rise to 45-50bps (40bps guided previously). We are positive on this as it helps to pave the way for earnings recovery in FY21. We note that asset quality thus far appears to be under control while the continued build-up in loan loss reserves has already lifted LLC to 108%. Balance sheet continues to look solid with a CET-1 ratio of 16.4%, leaving ample room for capital management initiatives ahead.

In line. 3QFY20 PATMI of RM622m (+55% QoQ/+1% YoY) met expectations despite 9MFY20 PATMI of RM1.6b (-14% YoY) at 82-83% of our and consensus full-year estimates. RHB left room to book in further pre- emptive provisions in 4QFY20, which could nudge up FY20 credit cost to 45-50bps vs 9M: 39bps (annualised) and the earlier guided 40bps. No dividend declared.

Results’ highlights. Excluding the RM392m modification losses in 2QFY20, 3QFY20 pre-tax profit was down 13% QoQ. Key drags were: (i) estimated NIM squeeze of 6bps QoQ due to lagged impact of the repricing of deposits, which only started to kick-in in Sep, and (ii) softer NoII due to lower trading-related gains from the securities portfolio, cushioned by improved brokerage and commercial banking fee income. The above were partly offset by lower loan impairment allowances during the quarter. Despite having booked in RM215m in overlays in 3QFY20, net loan impairment allowance for the quarter was lower at RM168m (-19% QoQ) thanks to higher loan recoveries during the moratorium period. This can also be seen from asset quality trends, where GIL eased 8% QoQ, with improvement noticed across the board and region. As such, LLC jumped to 108% from 94% in 2QFY20. Apart from that, loans expanded by 1% QoQ (+6% YoY), which was domestic driven, deposits were slightly lower but CASA growth was still robust (+8% QoQ/+33% YoY) with broad-based growth. As a result, CASA ratio rose further to 31% from 29% in 2QFY20. Capital remains solid with the CET-1 ratio at 16.4% while 9MFY20 ROE (annualised) stood at 8%.

Briefing’s highlights. Despite potentially flagging higher credit cost in 4Q, management stressed that this would be pre-emptive in nature and not due to any specific asset quality issues. Re-payment trends post September have been healthy with the proportion of days-past-due loans currently even lower than pre-moratorium period. As for the O&G portfolio, RHB said that top-up provisions had been done during the move to MFRS 9 and hence, management is comfortable with the existing provision levels. With respect to the targeted repayment assistance programme, the approved R&R proportion for retail/business banking/corporate was 10%/13%/9% of the respective loan segments. RHB had earlier estimated that c.23% of the corporate book may require assistance and will continue to engage with affected borrowers (related to sectors such as tourism, hotels, air transport, recreation and shopping complexes). Overall, R&R loans formed 10% of the domestic loan book. As for the B40 segment, this accounts for 14% of the retail book (mortgage takes up 50%, with the balance split evenly between auto and personal loans).

Earnings forecasts relatively intact. While we raised our FY20E/FY21E credit cost assumptions to 48bps/43bps, respectively, (from 42bps/41bps), this is cushioned by downward revisions of 1-3% in opex forecasts, leaving our PATMI forecasts relatively unchanged.

OUTPERFORM maintained with revised TP of RM6.30 (from RM5.75). Our GGM-derived target FY21E PBV has been raised to 0.92x from 0.84x after we incorporate the following revisions: (i) risk- free rate assumption of 2.7% (from 3.0%), and (ii) 25bps reduction in market risk premium assumption to reflect recent vaccine development. We continue to like RHB for the following reasons; (i) capital strength where its CET-1 ratio is the highest among peers providing room for more aggressive capital management activities down the road, (ii) regulatory reserves of RM207m and RM2.1b in investment revaluation reserves in shareholders’ equity provide headroom to absorb higher loan impairments, and (iii) inexpensive valuations with FY21E PE and PBV of 9.7x and 0.8x, 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 Dec 2020