In a report today (1 Dec), Macquarie Equities Research (MQ Research) highlights that RHB Bank (RHB) reported an adjusted net profit of RM574mil for the third quarter, ahead of expectations. RHB continues to be MQ Research’s top pick for the banking sector as valuation remains attractive, with an Outperform rating reiterated.

Event

• RHB reported 3Q20 adjusted net profit (NP) of RM574m (-8.2% year-on-year (YoY), -18.4% quarter-on-quarter (QoQ)), which is ahead of MQ Research/consensus’ expectations. 9M20 adjusted NP of RM1.86bn (-1.8% YoY) is 100%/93% of MQ Research/consensus’ FY20 forecasts, excluding RM392m modification losses (2Q20) and an RM55m gain on disposal in 3Q20. Return on equity (ROE) was 8% for 9M20; no dividend was declared nor was one expected.

Impact

• Key takeaways: In MQ Research’s view, RHB delivered a respectable 3Q FY20 operational performance, bringing 9M20 pre-provisioning operating profit to RM3bn (+10% YoY). Net interest margins (NIMs) eased to 199bps (2Q20: 205bps) due to the 125bps YTD interest rate cuts vs relatively slow deposit repricing. Management guides that the impact of deposit repricing will be relatively strong for 4Q20 and is guiding to 200bps for FY20. Meanwhile, loans grew a robust 5.6% YoY (second only to HLBK’s +6.8% YoY), underpinned by domestic mortgage/auto loans (+7.9%/+3.3% YoY). RHB also enjoyed robust 18% YoY growth in Singaporean loans, in contrast to Maybank/CIMB’s -7.8%/-0.6%. Overall net interest income (NII) contracted 1.7% YoY and rose 0.1% QoQ. Non-interest income (NoII) of RM590m (-17% QoQ, +26% YoY) remained a key income driver, driving RM1.8bn net income (-6.2% QoQ, +5.8% YoY). Coupled with modest cost growth of 3.8% YoY, the positive jaws drove 3Q20 PPOP to RM976.4m (+7.6% YoY, -13.2% QoQ). RHB booked an exceptional one-off gain on disposal of RHB Securities Singapore of RM55m.
• Dividend: While Maybank pleasantly surprised with a 13.5sen dividend (100% electable for dividend reinvestment scheme), RHB did not declare an interim dividend, as the group does not have a dividend reinvestment plan (DRP) scheme on standby and does not conventionally declare a dividend with 3Q results. However, MQ Research expects RHB will declare a final dividend with 4Q results, given the ample capital position (CET: 16.4%), perhaps with a payout of around 40–45%.
• Provision guidance: Management maintained credit cost guidance of 40bps for FY20 but flagged downside risk: potentially 45–50bps. The primary trigger for credit cost downside hinges on several lumpy corporate exposures that are currently under discussion; the outcomes are still uncertain. These corporates are tourism-related: hotels, air travel, recreation, and shopping; MQ Research believes this includes the reported exposure to Genting Hong Kong. MQ Research estimates the aforementioned corporate exposure will lift corporate R&R (rescheduling and restructuring) to 23% from the current 9% level.
• Repayment: Management reported repayment rates of more than 90% post-moratorium, in line with the broader industry. Total retail book under repayment assistance was only 10%, with 52% seeking reduction and 46% seeking deferment of instalments. Meanwhile, RHB’s SME/Commercial/Corporate book R&R was 11%/22%/9%; corporate is likely to increase for 4Q20.

Action and Recommendation

• RHB remains MQ Research’s top pick for the sector, with peer-leading capital buffers (higher potential for dividend payouts), relatively low credit costs of 45–50bps (worst case, in MQ Research’s view) vs corporate peers (May/CIMB/AMMB), and substantial FVOCI unrealised gains (RM2bn) in reserves to absorb credit cost shocks. Valuation remains attractive, with the shares trading at 0.7x FY21E P/B. MQ Research is reiterating its Outperform rating.

12-month Target Price Methodology

• RHBBANK MK: RM6.00 based on a Price to Book methodology

Source: Macquarie Research - 1 Dec 2020