Review

• RHB Bank reported stronger QoQ and YoY results. The more robust YoY performance was underpinned by a net writeback of RM131.5mn in 2Q23. The 6M net profit stood at RM1,570mn, accounting for 50% of our forecast and 53% of consensus. Annualised ROE stood at 10.6%, higher than 9.9% in 1H22.

• An interim dividend of 15 sen per share, representing a 40.9% payout, has been declared.

• 1H23 net fund-based income declined by 10.4% YoY due to the steep increase in funding costs. 2Q23 NIM compressed by another 8 bps QoQ to 1.82%. YTD, 1H23 NIM declined by 39 bps. Total deposits fell by 4.7% YoY on the back of lower CASA and MMTD, although FDs rose by 16.4% YoY. As such, the CASA ratio stood at a softer 27.6% vs 29.3% a year ago.

• Loans and advances accelerated by 4.5%. The increase was led by mortgages (+9.1% YoY), auto finance (+8.6% YoY), SME (+4.8% YoY) and overseas operations. Group Wholesale Banking fell by 3.9% YoY, underpinned by a 4.9% decline in Corporate loans. Meanwhile, loans in the Commercial segment rose by 2.2% YoY. Total group retail loans advanced by 6.1% YoY. By geography, overseas loans advanced 13.6% YoY, led by Cambodia (+21.5% YoY) and Singapore (+13.0% YoY). Domestically, total loans and advances widened by 3.1% YoY.

• Overall, non-fund based income broadened by 46.3% YoY, attributed to higher net gain on forex and derivatives and higher net trading and investment income. Fee income slipped YoY. In descending order, the contraction in fee income was driven by Brokerage Income (-18.7% YoY) and Asset Management (-6.2% YoY), while fees from IB and Commercial Banking expanded by 2.4% and 0.3% YoY, respectively. Elsewhere, the 6M Forex Gains/Derivatives and Gain & MTM on Securities ballooned to RM363.6mn (1H22: RM154.4mn) and RM187.5mn (1H22: -RM15.8mn).

• Operating expenses expanded by 6.5 YoY (+10.1% QoQ). Yearly, the increase was led by Admin & General Expenses (+13.3% YoY), Marketing Expenses (8.2% YoY) and Establishment Costs (+9.1% YoY). Personnel Costs reversed an earlier decline to rise by 4.2% YoY due to collective agreement adjustments in 2Q. RHB’s 1H23 cost-to-income (CTI) ratio stood at 47.5% (1H22: 44.9%).

• Allowances for losses on loans improved to a net writeback of RM47mn in 1H23 compared to an allowance of RM165mn in 1H22. With that, the credit charge ratio improved to -4 bps from 16 bps a year ago due to lower expected credit losses and writeback of management overlay. QoQ, credit cost stood at a net writeback of 19 bps vs. an allowance of 10 bps in 1Q23. However, RHB’s gross impaired loans (GIL) ratio deteriorated sequentially to 1.64% vs 1.59% in 1Q23 and 1.62% a year ago. By segment, we note YoY upticks for most major segments within Group Community Banking (such as mortgage, unsecured and auto finance), Group Wholesale Banking (commercial) and Group International Business (from Cambodia).

• RHB Bank Group’s capital position remains healthy with a CET1 and Total Capital Ratio ending June 2023 of 16.7% and 19.4%. The liquidity coverage ratio remains healthy at 136.7% (FY22: 162.1%).

Impact

• No change to our earnings estimates.

Outlook

• While the group managed to chalk up a healthy YoY performance, management remains cautiously optimistic for the remainder of FY23 and, as such, maintains a prudent stance while staying on course in executing its TWP24 strategy. For now, management is keeping its FY23 targets where 1) loans to grow by c. 4-5% in areas like mortgage, auto finance, SME, and Singapore, 2) credit costs to soften to around 25-30 bps, and 3) higher non-fund-based income on a YoY basis. However, downside risks include NIM being impacted by rising deposit competition and rising overhead expenses as the group continues to invest in IT and Digital to drive efficiencies.

• In the medium term, we foresee TWP24 potentially creating new revenue streams and increasing fee income from a more holistic wealth management proposition, expanding the insurance business, developing a more integrated Islamic ecosystem, strengthening overseas operations, and accelerating sustainable financial services. However, competition in the industry will remain fierce. Furthermore, although we believe that RHB's plans to increase ROE to 11.5% by 2024 (from 9.7% in FY22) are achievable given its good track record under FIT22, macro challenges such as rising interest rates, inflationary pressures, and a potential regional slowdown could dampen RHB's aspirations.

Valuation

• We lowered the sector’s market risk premium assumption to 6.0% from 6.5% on the back of an improved domestic political climate. As such, we raised RHB’s TP to RM5.90 from RM5.30. Our valuation is based on an implied PBV of c. 0.76x based on the Gordon Growth Model. Hold reiterated on RHB.

Source: TA Research - 30 Aug 2023