RM7.15 (COE: 10.5%, TG: 3.0%, ROE: 10%) from RM7.25 on FY23F/FY24F earnings cut of 12%/5% on revised NIM expectations. The group may continue to see margin compression as deposit rates may remain high while more impairment may need to be booked during the coming periods. That said, loans growth could be on track with its digital bank likely due to be launched soon.

Key takeaways from our recent meeting with the group are as follows:

- Moderate loans performance intact. For FY23, the group anticipates loans growth of 4%-5% which is in line with our broader industry target. The group is still seeing sustained demand from its community and SME banking segments. Personal financing and credit card also appear supportive, indicating stronger consumer spending poststabilised expectations of interest rates. This could translate to support 2HFY23 performance and uplift 1HFY23-YTD growth of 1%.

- Margins could remain under threat. RHBBANK’s 1HFY23 NIMs marked at 1.85% (FY22: 2.24%) as they were not spared the intense deposits competition spurred from rising OPR expectations in Dec 2022. Despite two consecutive quarters of margins erosion, the group may continue to see readings coming off as product rates could remain competitive in spite of peers consciously easing down their product rates. We believe this move is not liquidity-driven as the group’s loan-to-deposit ratio is still below 100%. That said, this may cause its FY23 NIMs target of 2.22%-2.25% to fall short.

- Balancing asset quality expectations. On the flipside, the group had previously guided for GIL to come in below 1.5% in FY23, which would reflect solid improvement from 1HFY23’s 1.64%. This target may also experience some deviation with indication that impairments may still come about. With regards to continually vulnerable segments, the group noted that businesses dependent on Chinese tourism may still see pressures due to the lower-than-expected arrivals.

- Credit cost may be slightly loaded up. The group was in a net provisions write-back situation in 1HFY23 (credit cost: -4bps) from the recalibration of Covid overlays. On a BAU basis, annualised credit cost readings would have otherwise come in at 21bps. With that, its 25-30 bps BAU target would mean additional albeit moderate inclusions to be added in the 2HFY23 period. This may in turn make up for the dilution of loan loss coverage of 82% as seen in 2QFY23 following lumpy impairment from certain borrowers.

- Digital bank should be on track. With regards to its upcoming digital bank venture with Axiata-Boost, the group is optimistic that it could pass Bank Negara’s operational readiness review during the quarter. The group is also hopeful to debut its maiden deposit product earliest by 4QFY23 with financing offerings later on. That said, its target markets will lean towards microfinancing as mandated by Bank Negara for the digital bank licensees’ foundational stage.

Post update, we take this opportunity to trim our FY23F/FY24F earnings by 12%/5%, mainly in lieu of our revised NIM expectations where we project FY23F levels to be more modest at c.2.0% from 2.2% with FY24 also only reflecting a gradual increase.

Maintain OUTPERFORM with a revised TP of RM7.15 (from RM7.25). Our TP is based on an unchanged GGM-derived FY24F PBV of 0.93x (COE: 10.5%, TG: 3.0%, ROE: 10.0%). It is positioned as a leading dividend candidate with yields averaging above 7% at current price levels. This could be further lifted should the group decide to release its hefty CET-1 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.

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

Source: Kenanga Research - 17 Oct 2023