Review

• RHB Bank reported softer 3Q23 results. YTD, the 9M net profit stood at RM2,220mn, accounting for 71% of our forecast and 78% of consensus. Annualised ROE stood at 10.0%, slightly lower than 10.3% in 9M22.

• 9M23 net fund-based income declined by 11.9% YoY due to the steep increase in funding costs as NIM compressed 39 bps YoY to 1.85%. On a positive note, the net fund-based income improved by 3.1% QoQ on the back of stronger sequential NIM (+3 bps QoQ). Total customer deposits broadened by 4.7% YoY on the back of higher FDs (+14.7% YoY). On the other hand, CASA and MMTD declined by 5.9% and 13.3% YoY, respectively. As such, the CASA ratio stood at a softer 26.9% vs 29.9% a year ago.

• Loans and advances accelerated by 4.6% YoY. The increase was led by mortgages (+8.7% YoY), auto finance (+8.3% YoY), unsecured business loans (+8.3% YoY), SME (+4.4% YoY) and overseas operations. Group Wholesale Banking fell by 5.1% YoY, underpinned by a 6.5% decline in Corporate loans. Meanwhile, loans in the Commercial segment rose by 3.2% YoY. Total group retail loans advanced by 5.9% YoY. By geography, overseas loans advanced 17.2% YoY, led by Singapore (+19.7% YoY) and Cambodia (+9.5% YoY). Domestically, total loans and advances widened by 2.6% YoY.

• Overall, 9M23 non-fund-based income broadened by 30.3% 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 (- 10.0% YoY), IB Related (-9.0% YoY) and Asset Management (-8.5% YoY), while fees from Commercial Banking expanded by 1.9% YoY. Elsewhere, the 9M Forex Gains/Derivatives and Gain & MTM on Securities ballooned to RM578.1mn (9M22: RM353.6mn) and RM254.2mn (9M22: RM26.4mn).

• 9M23 operating expenses expanded by 3.3 YoY (-3.7% QoQ). Yearly, the increase was led by Marketing Expenses (+7.8% YoY), Establishment Costs (+6.1% YoY) and Personnel Costs (+2.5% YoY). Admin & General Expenses declined by 1.0% YoY. RHB’s 9M23 cost-to-income (CTI) ratio stood at 47.1% (9M22: 44.3%).

• YoY, 9M23 allowances for losses on loans declined by 81.4% YoY to RM71.4mn (9M22: RM384.8mn), driven by a writeback of management overlay. QoQ, total allowances ballooned to RM166mn vs a net writeback of RM102mn in the previous quarter. With that, the credit charge ratio normalised to 30 bps in the 3Q (2Q23: -19 bps), while the 9M23 credit charge stood at 7 bps vs 24 bps a year ago. Excluding writebacks, the credit cost stood at 24 bps in 9M23.

• Meanwhile, RHB’s gross impaired loans (GIL) ratio deteriorated sequentially to 1.79% vs 1.64% in 2Q23 and 1.57% a year ago. The steep increase in the GIL ratio was due to overseas operations. By segment, we note YoY upticks for most major segments within Group Community Banking (such as mortgage, unsecured, auto finance and SME), Group Wholesale Banking (commercial) and Group International Business (from Cambodia).

• RHB Bank Group’s capital remains healthy, with a CET1 and Total Capital Ratio ending September 2023 of 16.2% and 19.0%, respectively. The liquidity coverage ratio remains healthy at 144.8% (4Q22: 162.1%).

Impact

• We tweaked our NIM slightly lower to align with the 9M results performance. With that, we reduced RHB’s FY23/24/25 net profit to RM2,941/3,187/3,386mn from RM3,148/3,369/3,518mn.

Outlook

• While the group managed to chalk up a healthy YoY performance, management remains cautiously optimistic for the remainder of FY23. Despite that, management updated its FY23 targets, expecting 1) healthier loan growth of 5-5.5% (from 4.5%) but maintaining 2) credit cost guidance of around 25-30 bps and 3) higher non-fund-based income on a YoY basis. However, downside risks include steeper-than-expected NIM compression and rising overhead expenses as the group continues to invest in IT and Digital to drive efficiencies. ROE is envisaged to end FY23 in excess of 10%.

Valuation

• We lowered RHB’s TP to RM5.70 from RM5.90 on the back of the slight downward revision to our earnings estimates. Our valuation is based on an implied PBV of c. 0.74x based on the Gordon Growth Model. With that, we downgrade RHB from buy to HOLD as the risk-reward potential has narrowed to between 7% and 12%.

Source: TA Research - 28 Nov 2023