Macquarie Equities Research (MQ Research) hosted a call with RHB Bank’s (RHBBANK) Group CEO Datuk Khairulsalleh Ramli and investors recently. Among the key takeaways include the dividend payouts hike planned by the management, the group’s better-than-peers performance, and its organic growth plan which has been a priority, among others. MQ Research also notes that RHB’s operational changes have been key to RHB’s outperformance, thus reiterating RHBBANK as its top pick in the Malaysian banking sector, while keeping the target price at RM6.35 (21.2% higher than Wednesday’s closing price).

MQ Research hosted RHB’s Group CEO for a conversation with investors

• MQ Research came away positive from the call with RHB’s Group CEO, Datuk Khairulsalleh Ramli, which spanned the bank’s post-pandemic outlook, digitalisation, and environmental, social, and governance (ESG).

Keeping the Momentum

• Elevated capital buffers to stay, for now: RHBBANK is sitting pretty with a peer topping common equity tier 1 (CET1) of 16.8%. While management is keen to bump up dividend payouts (MQ Research thinks >60% is reasonable), the capital buffers are only going to trend sideways for the foreseeable future. In other words, best not to hope for any extraordinary capital returns; payouts >100% are unlikely to be approved by the central bank. This leaves two avenues for management to make use of the capital: mergers and acquisition (M&A) and/or asset growth.
• No M&A on the cards, focus is organic: Management was explicit that its priority remains focusing on organic growth. Acquisitions simply do not offer meaningful payoff, relative to the risks and effort required. However, management points out that RHB has gone from being a target (underperforming, undervalued) to becoming an acquirer (well-capitalised, well-run), if at all a deal were to materialize.
• Grow grow grow: RHBBANK outperformed peers with asset growth of +6.7% y/y or +1.9% q/q in 3Q21. What is interesting is how/why RHB managed to achieve this outperformance. It appears that operational changes have been key; though surplus liquidity/capital and lesser asset quality indigestion helps as well. On the consumer front, RHBBANK has moved towards leverage its branch network to drive loans, where it previously relied on more centralised sales force. Small and medium enterprises (SME) loans growth was even more interesting. RHB has implemented digital solutions like virtual onboarding and virtual site-visits in order for its sales force to access and assess customers through the pandemic. SME loans grew by +3.5% q/q.
• Making the digital bank shortlist: Management shared that RHB’s 40:60 digital bank license application with Axiata Group (AXIATA MK, RM3.90, Outperform, TP: RM4.34) has been shortlisted. The digital bank will aim for higher yield but smaller size loans in the consumer and micro enterprise space. For scale, management expects the average loan size will be RM50-100k for the micro enterprise segment and mostly for the purpose of working capital. While management thinks the entrance of digital banks will not be disruptive to the existing fund-based income business, it could pose a bigger challenge to fee-based products targeting consumers – wealth management, insurance, etc. The mitigating factor will be the divergence in the size/scope of products offered, with the assumption that digital banks will offer smaller/bite-sized insurance/wealth management products.
• The price of ESG: Management stressed the importance for banks to understand customers and the ESG risks. This will require data gathering, and potentially more compliance/audit costs. Banks are only beginning to scratch the surface on this front. Next step, perhaps assigning risk-weight assets (RWA) weight for ESG risks.

Reiterate Outperform, Top Pick

• RHBBANK remains MQ Research’s top sector pick with RM6.35 target price (+28% total shareholder return), solid capital buffers, loans growth outperformance and reasonable 0.8x FY22E price-to-book ratio.

Source: Macquarie Research - 2 Dec 2021