Review

• RHB Bank reported softer sequential results, with 4Q23 net profit falling 9.9% to RM586mn from RM650mn in the previous quarter due to higher allowances. Nevertheless, the FY23 net profit grew 4.8% YoY to RM2,806mn, accounting for 95% of our forecast and 98% of consensus. ROE stood at 9.5%, slightly lower than the 9.6% registered in FY22.

• A second interim dividend of 25 sen per share, with 15 sen cash and 10 sen subject to DRP, was proposed. Including interim dividend, total dividends for the year stood at 40 sen (FY22: 40 sen) – representing a payout ratio of 61.1%.

• FY23 net fund-based income declined by 14.6% YoY due to the steep increase in funding costs as NIM compressed 42 bps YoY to 1.82%. The net fund-based income also declined by 5.3% QoQ as NIM slipped by 8 bps sequentially. Total customer deposits broadened by 7.9% YoY on the back of higher FDs (+14.1% YoY). CASA deposits rebounded to grow by 3% YoY, while MMTD declined by 8.9% YoY. As such, the CASA ratio stood at a softer 27.9% vs 29.2% a year ago.

• Loans and advances accelerated by 4.8% YoY. The increase was led by mortgages (+8.6% YoY), auto finance (+7.8% YoY), unsecured business loans (+9.3% YoY), SME (+4.9% YoY) and overseas operations. Group Wholesale Banking fell by 3% YoY, underpinned by a 4.6% decline in Corporate loans. Meanwhile, loans in the Commercial segment rose by 6.0% YoY. Total group retail loans advanced by 6.0% YoY. By geography, overseas loans advanced 13.8% YoY, led by Singapore (+17.5% YoY) and Cambodia (+5.2% YoY). Domestically, total loans and advances widened by 3.4% YoY.

• Overall, the FY23 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 expanded slightly by 2.3% YoY. In ascending order, the recovery in fee income was driven by IB Related (+3.5% YoY) and Commercial Banking (+7.5% YoY). Meanwhile, Brokerage Income (-7.6% YoY) and Asset Management (-7.4% YoY) continued to contract. Elsewhere, treasury income, which comprises Forex Gains/Derivatives and Gain & MTM on Securities, ballooned to RM1,194.3mn (FY22: RM613.4mn).

• FY23 operating expenses expanded by 2.3 YoY (+8.0% QoQ). Yearly, the increase was led by Establishment Costs (+7.1% YoY), of which most of it was for IT enhancements (+6.5% YoY), followed by Marketing Expenses (+1.6% YoY) and Personnel Costs (+1.4% YoY). Admin & General Expenses declined by 2.8% YoY. Due to negative JAWs, RHB’s FY23 costto-income (CTI) ratio deteriorated to 47.5% (FY22: 44.2%).

• YoY, FY23 allowances for losses on loans rose by 15.2% YoY to RM356mn (FY22: RM309mn), underpinned by rising ECL for overseas operations. QoQ, total allowances ballooned to RM237mn vs RM166mn in 3Q and a net writeback of RM65mn in 4Q22. With that, the credit charge ratio rose to 16 bps in FY23 (FY22: 15 bps), thanks to a writeback in Covid-related overlays.

• Meanwhile, RHB’s gross impaired loans (GIL) ratio improved sequentially to 1.74% vs 1.79% in 3Q23 but deteriorated compared to 1.55% a year ago. The steep YoY increase in the GIL ratio was due to overseas operations, where the GIL ratios for Singapore and Thailand jumped to 1.1% and 24.0% in December 2023 vs 0.86% and 4.34% in December 2022. By segment, we note YoY upticks for most major segments within Group Community Banking (such as mortgage, auto finance and SME), as well as Group Wholesale Banking (commercial).

• RHB Bank Group’s capital remains healthy, with a CET1 and Total Capital Ratio ending December 2023 at 16.7% and 19.4%, respectively. The liquidity coverage ratio remains healthy at 177.4% (December 2022: 162.1%).

Impact

• Incorporating the FY23 results, we conservatively adjust RHB’s FY24/25 net profit lower to RM2,904/3,106mn from RM3,187/3,386mn. We forecast FY26 net profit to increase by 6.7% to RM3,22mn.

Outlook

• In 2023, RHB focused on tightly managing operating expenses, with spending focused on enhancing IT innovation and efficiency. The growth in non-fund based income was robust, driven by higher net gains on forex and derivatives, net trading and investment income, and fee income. This helped offset the impact of lower net fund-based income. The group’s balance sheet also remained healthy with sustained asset growth.

• Despite that, management only achieved 3 out of 5 targets for the year. Looking ahead to 2024, the management aims to surpass a 10% ROE via a stable 4.5% loan growth (FY23: 4.58%), more robust CASA accumulation contributing to a better NIM of 1.8-1.9% (FY23: 1.82%), and effective cost management with a targeted CTI ratio below 47.5%.

• In the coming year, the primary focus will also be on managing asset quality, as there is a potential increase in domestic GIL due to SMEs and specific major accounts, along with GIL from international businesses. The management guides for a net credit cost of approximately 20-25 bps and aims to keep the GIL ratio below 1.75%. Other priorities include maintaining a consistent dividend payout to reward shareholders with a dividend yield exceeding 7% and continuously optimising capital utilisation for better returns.

Valuation

• Updating beta assumptions based on the latest data available on Bloomberg, we adjusted RHB’s TP to RM5.90 from RM5.70 despite the slight downward revision to our earnings estimates. Our valuation is based on an implied PBV of c. 0.8x based on the Gordon Growth Model. With that, we reiterate our HOLD recommendation on RHB.

Source: TA Research - 28 Feb 2024