We hosted a meeting with En. Nik Rizal Kamil, CFO and came away feeling assured by its near-term prospects. Overall, the group is expected to remain unfazed by the reinforcement of movement controls and confident of maintaining its FY21 targets. Economic recovery opportunities are anticipated on better subsequent quarters but further clarity on its Dividend Reinvestment Plan (DRP) is pending approvals. We believe the group’s merit for strong capital reserves remains intact in the current landscape. Maintain OP and TP of RM6.25.

No major concerns for loans growth so far. En. Nik described that RHBBANK has fairly weathered through the MCO 2.0 in Jan-Feb 2021 as the movement restrictions were not as restrictive as compared to FY20. That said, loan applications did see some set-backs but is not detrimental to the group’s loans growth target of 4%-5% (vs. our FY21E target of 6.2%) on hopes of better economic activity in the coming quarters, propelled by expectations of higher mortgages, auto financing, SMEs and Singapore’s contributions (which is striving in the non-retail space). That said, the bank’s Targeted Repayment Assistance (TRA) experienced further applications to RM26b (16% of domestic loans, from RM24.4b or 15% as of 8 Feb 2021). This mainly comes from business and wholesale banking, which provides comfort to us as it shows that the group’s retail strength is still persisting, in addition to at least 70% of its TRA being partially or wholly secured.

Same goes for credit costs. FY21 credit cost guidance of 30-40 bps (vs, our FY21 estimate of 43 bps) remains unchanged, as management shares a similar notion that the coming quarters should uphold its expectation of economic recovery. Recall that in FY20, credit cost registered at 58 bps which was above the target of 40-50 bps, partly due to pre-emptive provisioning to buffer against further uncertainties in FY21.

Asked if 4QFY20’s unwinding of mod losses of RM170m could persist into the coming quarters, management highlighted that the process would be progressive based on the affected loans’ tenure and can be up to 8 years. As of FY20, the group registered a net mod loss of RM248m.

NIMs will be supported by deposits. With OPR expected to remain stable and most of its loans being repriced, management expects its FY21 NIM of 2.06% to be held by its high CASA mix of 30% and pricing opportunities in the fixed deposit segment. On the other hand, NOII is expected to stay buoyant, albeit likely to be moderate compared to 2HFY20’s performance. Management expressed that there is still encouraging interest in wealth management products while brokerages are still strong, but the lion’s share of fees from commercial banking (22% of total NOII) will be pegged to the success of its loans.

However, dividend expectations should be moderated for now as the group await its DRP to be approved in its AGM in May. Previously, the group withheld from paying more generous dividends are it evaluated its capital position in 4QFY20. That said, management is hopeful to reward its shareholders with an aspirational 50% payout ratio (similar to FY19) eventually. Currently, we have only factored in an expected payout of c.40% which still yielded dividend return of close to 5%, which is the second best amongst peers.

Maintain OUTPERFORM and TP of RM6.25. Our TP is based on a FY22E GGM- derived PBV of 0.83x (closely within 5-year mean) with our FY21E/FY22E assumptions unchanged. Overall, we favour RHBBANK in light of its industry leading CET-1 ratio of 16.2% which enables greater allowance to implement capital management strategies. Going forward, we expect other banks to also come forth with higher levels of targeted assistances and those seeking safety could keep an eye on RHBBANK for it. As also mentioned above, its dividend proposition could also be attractive to yield-seeking investors.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) further slowdown in capital market activities, and (v) adverse currency fluctuations.

Source: Kenanga Research - 16 Apr 2021