Review

• RHB Bank posted higher 9MFY19 results, with net profit accounting for around 78% and 77% of ours and consensus full year estimates. Advancing 7.0% YoY to RM1,861mn from RM1,740mn a year ago, the improved performance was anchored by a combination of lower allowances for ECL along with a 3.7% YoY increase in total operating income.

• Sequentially, PBT slipped by 0.9% QoQ, underpinned by contractions in other operating income and contributions from Islamic Banking operations. Muting the impact however, were declines in overhead expenses (-2.1% QoQ) and allowances (-13.6% QoQ).

• 3QFY19 net fund based income expanded by 5% QoQ. Compared to 9MFY18 however, net fund based income contracted by 1% YoY as YTD net interest margin (NIM) declined by 13 bps YoY due to higher funding costs. That said, growth in customer deposit of 7% YoY continued to be driven by costlier fixed/investment deposits. Against a competitive backdrop, total CASA was rather stagnant, increasing 1% YoY to RM46.4bn.

• 3QFY19 loan growth expanded at a softer pace of 5.2% YoY (2QFY19: +6.9% YoY). In tandem with slower industry growth trends, we believe loan growth may fall slightly below management’s 2019 target of 5%. While the overall loan growth momentum remains lacklustre, RHB registered decent YoY growths in key segments such as mortgages and SMEs. Total group retail loans expanded by 7.6% YoY. Group business banking, which comprises SME and commercial segments also broadened by 4.4% YoY. By geography, overseas loans advanced by 5.7% YoY, led by Singapore (+7.4% YoY). Domestically, total loans and advances widened by 5.1% YoY.

• Including Islamic Banking operations, non-fund based income declined by 16% QoQ on lower fee income and treasury related income. YoY, 9MFY19 non-fund based income surged by some 15%, underpinned by higher IB related fees, trading and investment income and insurance underwriting surplus. Yearly, we note that increases in IB related fees (+20% YoY) and Gain & MTM on Securities (>100% YoY) helped offset decreases in brokerage income (-15% YoY), wealth management fees (-8% YoY) and lower forex gains.

• Within FY19 target of 49%, RHB’s cost-to-income (CTI) ratio stood at 48.5% during the quarter, thanks to positive JAWS. Total operating expenses climbed 3% YoY (-2% QoQ) on the back of higher personnel costs, IT-related expenses and marketing costs.

• Allowances for loan impairment improved both on a YoY and QoQ basis. The credit charge ratio improved to 18 bps vs. 20 bps a year ago. However, total gross impaired loans for the group rose to c. RM3.74bn vs RM3.7bn in 2QFY19 due to a large account in Malaysia. With that, the gross impaired loans (GIL) ratio for the group saw a slight uptick to 2.16% from 2.15% in the previous quarter.

• RHB Bank Group’s capital position would remain healthy with a CET1 and Total Capital Ratio as at end-September 2019 of 16.5% and 19.0%.

Impact

• No change to our earnings estimates.

Outlook

• We believe RHB may miss some of its FY19 targets as the challenging operating environment intensifies due to global trade tensions and heightened uncertainties. Falling short on an annualised basis, we believe loan and deposit growth could remain soft in 4Q. GIL ratio also remains stubbornly above management’s target of 2%, underpinned by some lumpy corporate accounts in Singapore and Malaysia. On a positive note, RHB is back by its solid capital position and pockets of growth envisaged from the ongoing execution of its FIT22 strategic roadmap. Going into 2020, downside risks to earnings have deepened due to the risk of another OPR cut and possible asset quality weakness – in our view.

Valuation

• Tweaking: 1) risk free rate assumption to 3.6% from 4.0% in our Gordon Growth model, and 2) removing the premium accorded for RHB’s digitalisation initiatives, we derive a new implied PBV of 1.0x. With that, we adjust RHB’s TP to RM6.50 from RM6.40. BUY reiterated on RHB.

• Key downside risks to TP include: 1) lower-than-expected contribution from overseas operations, 2) weaker-than-expected cost savings and revenue synergies from implementation of new 5-year strategy, 3) weak non-NII from lacklustre capital market activities in the region, 4) inability to further strengthen deposit mix and effectively manage funding costs, and 5) sustained outflow of foreign funds from the country.

Source: TA Research - 26 Nov 2019