RHB Bank Bhd - Defensive But Rewarding Pick

Date: 
2023-03-28
Firm: 
KENANGA
Stock: 
Price Target: 
7.10
Price Call: 
BUY
Last Price: 
5.61
Upside/Downside: 
+1.49 (26.56%)

We maintain our GGM-derived PBV TP of RM7.10 (COE: 10.7%, TG: 3.0%, ROE: 10%) and OP call. The group seeks to adopt more targeted strategies to acquire quality assets. Meanwhile, net interest margins (NIMs) should be contained by planned CASA expansion with normalising non-interest income sought to bolster earnings. With our anticipated c.55% payout to garner 7%-8% dividend yield at current price points, RHBBANK looks to be a promising dividend play.

Key takeaways from our recent meeting with the group are as follows:

- Modest but selective expansion in loans base. A more moderate loans growth of 4%-5% in FY23 is guided by RHBBANK (FY22: 6.9%) as economic prospects may wane amidst inflationary uncertainties. That said, the group opines that it could capitalise on its retail stronghold in housing loans as demand for primary market properties still persist. Meanwhile, mid-market SMEs also appear to be an area of promise while not being too susceptible to cost pressures. Regionally, Singapore looks to gain from a growing focus in REITs while Cambodia is likely to benefit from the boost in hospitality with the influx of Chinese tourists. Both markets registered double-digit growth in FY22, albeit also due to their low base (<15% of total group loans).

- Upbeat for flattish margins. The group looks to achieve NIMs of 2.22%-2.25% (FY22: 2.24%) whereas most peers are guiding up to double-digit erosion in respective performance. This could be supported by targeted CASA acquisitions which could offset NIM pressures from heightening deposits competition that may ease in 2HFY23. Meanwhile, asset yields would stay competitive.

- Asset quality concerns to ease. Group gross impaired loans (GIL) are expected to see some improvements, mainly due to the progressive retirement of repayment assistance programs. There may still be concerns surrounding the construction sector as well as net import industries due to rising exchange rates, but we opine that these accounts make up less than 20% of overall books. Hence, a target of <1.5% GIL from FY22’s 1.55% could be possible.

On the flipside, the group continues to hold RM820m in provisions (RM410m Covid-related overlays and RM410m general allowances) which may be considered for writebacks should conditions improve. However, general allowances could be more sensitive to changes in asset quality if macro conditions worsen.

- Dividend sparks shine bright. In FY22, the group declared total dividend of 40.0 sen which translates to a payout of c.60%. While the group is conservative by guiding its mandated 30% policy, it has marked the second consecutive year of such generous levels. We opine that it is not unlikely for the group to match similar payouts in the coming year. Our inputted 55% payout translates to dividend yields close to 8%.

Post update, we leave our FY23F/FY24F assumptions unchanged. A key variance in our model inputs are our FY23F credit cost seen to linger at 20 bps which is more optimistic than the group’s 25-30 bps guidance. We premise this on its willingness to write back excess Covid-related overlays.

Maintain OUTPERFORM and TP of RM7.10. Our TP is based on a GGM-derived PBV of 0.91x (COE: 10.7%, TG: 3.0%, ROE: 10%) on our FY24F BVPS of RM7.79. Its high capital ratios (CET-1: 17% vs peer average: 14%) could allow to group to deliver more dividend surprises in spite of management’s existing guidance. Chiefly, we believe the 8% dividend yield could attract investors seeking alternatives from other large cap names. Meanwhile, ongoing fallouts in the global financial system could drive investors to look for fundamentally safer names, of which we believe RHBBANK’s CET-1 ratio would offer better capital safety amongst peers.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) slowdown in capital market activities, (v) unfavourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 28 Mar 2023

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