Kenanga Research & Investment

RHB Bank - Margin Stress Lessened by Treasury

Publish date: Mon, 29 May 2023, 02:46 PM

1QYFY23 net profit of RM762.2m (+31%) came within expectations.  Interest margins were burdened by the past OPR hikes as asset yields were outpaced by funding costs. While efforts are in place to narrow the gap, fair value gains are alleviating earnings together with lower provisions and taxes. RHBBANK is expected to generate dividend yield of c.7% should current expectations hold. Maintain OUTPERFORM and  GGM-derived PBV TP of RM7.10. RHBBANK is one of our 2QCY23  Top Picks.

1QFY23 within expectations. 1QFY23 net profit of RM762.6m made up  24% each of both our full-year forecast and consensus full-year estimates. No dividend was declared, as expected given the group’s typical biannual payments.

YoY, 1QFY23 registered a 4% decline in net interest income. Despite a  6% growth in gross loans led by higher mortgages, net interest margin  (NIM) eroded by 19 bps as fund cost rose as a result of the four 25 bps hikes in OPR in 2022. On the flipside, non-interest income surged 33%  as treasury income enjoyed fair value gains from losses in prior years,  offsetting the decline in fee-based income. Cost-income ratio remained stable at 44.9% (+0.1ppt) as operating expenses grew in line with total income. Meanwhile, thanks to credit costs reporting at 10 bps (-19 bps)  on lower asset quality stresses, pre-tax profit saw a 16% expansion.  Following the lapse of Prosperity Tax, 1QFY23 net profit came in at  RM762.6m (+31%).

Briefing highlights. Though there are some headwinds flagged in the recent results, the group sought to maintain its guidance, pending better clarity from 2QFY23’s performance.

  1. While most of the NIM compression could have been felt in  1QFY23, substantial catch-up is required to meet the group’s initial  2.22%-2.25% NIMs target. Deposits were stagnant while CASA  levels narrowed to 28.1% (-0.9ppt, which could indicate further pains in NIM management.
  2. They opine that targeted penetration could help revitalise its CASA  books to lower funding costs. The group also maintains a CASA  target of 30% for FY23.
  3. Loans growth should remain intact as access to liquidity is not an issue. Currently, the group reports a loans-to-deposits ratio of 95%,  which it deems to be well balanced. Aside from sustained retail  lending, stronger overseas operations (mainly Singapore) should  keep the group’s 4%-5% growth target in check.
  4. Non-interest income is expected to be helmed by treasury gains as  fee-based streams may still see softness.
  5. Credit cost guidance of 25-30 bps is kept for now, as the group reviews the possibility of some top-ups or write-backs which may  lower this guidance later on. As present, a Covid-related overlay of  RM411m is maintained.

Forecasts. Post results, our FY23F/FY24F earnings are largely unchanged safe for 1QFY23’s model inputs.

Maintain OUTPERFORM and TP of RM7.10. Our TP is based on an unchanged GGM-derived FY24F PBV of 0.91x (COE: 10.7%, TG:  3.0%, ROE: 10.0%). It is positioned as a leading dividend yield candidate with yields averaging above 7% at current price levels. This could be further lifted should the group decide to release its hefty CET1 portfolio to reward shareholders. The stock will still likely be monitored closely due to its tie-in with Axiata-Boost in relation to the upcoming launch of a new digital bank in the near future. There is no adjustment  to our TP based on ESG given a 3-star rating as appraised by us. RHBBANK is one of our 2QCY23 Top Picks.

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, (v) adverse currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 29 May 2023

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