• We maintain HOLD on RHB Bank with a revised fair value (FV) of RM6.50/share from RM6.40/share pegging the stock to FY25F P/BV of 0.8x based on a FY25F ROE of 9.5%. The stock's current valuation at 0.8x FY25F P/BV near its 5-years historical average appears fair. No changes to our neutral 3-star ESG rating.
   
• We revised our FY24F earnings by +4.7% to reflect a slightly lower C/I ratio and credit cost assumptions.
• The group is scheduled to release its 3Q24 results on the 29th of Nov 2024.
• 3Q24 earnings is likely to be a modest improvement from 2Q24's RM722.3mil underpinned by a higher total income from an enhanced NIM and decent non-interest income (NOII) coupled with lower provisions.
• Modest QoQ loan growth in 3Q24. We gather that the net growth was RM1bil for the 1st 2 months (July and Aug 2024) in 3Q24 from the end of June 2024. This is after netting off the FX translation impact (weaker SGD) of its loans in Singapore.
  
  Key positives on the group:
   
  • 3Q24 NIM likely to be higher from 2Q24's 1.89% attributed to: i) 10bps reduction in board FD rates in the previous week, ii) less intense deposit competition, iii) release of expensive corporate deposits under wholesale banking, iv) replacement of securities issued earlier with lower interest rates funding, v) reduction in multi-currency deposit rates and vi) the push for CASA under MySiswa initiatives. Management guided for its FY24 NIM to improve to 1.88-1.89% from 1.82% in FY23.
  • On operating expenses, personal cost is likely to trend lower in the near term due to a drop in headcount from attritions. The group targets to maintain its 1H24 CI ratio of 46.3% in the 2H24.
  • Credit cost in 3Q24 is expected be lower than the 26bps reported in 2Q24 on the back of a tighter credit underwriting and improved recoveries for SME loans. Group is on track to meet its credit cost guidance of 20-25bps for FY24. GIL ratio for SME loans decreased to 3.33% from 3.37% in 2Q24. No impairments of any corporate loans are expected in 3Q24. Efforts to recover from impaired loans related to the hospitality sector in Thailand and Cambodia are still in progress.
  • Loan loss coverage (without regulatory reserves) to trend higher ahead from 70.4% in 2Q24 to around 73-74% from a top up in management overlays and potential recoveries from 2 corporate loans related to the hospitality and property sector towards end of FY24. Resolution of these 2 loans could potentially lower the group's GIL ratio to below 1.76%.

Developments to be watchful of:

1. The turnaround of Boost Bank (digital bank owned 60% by Boost and 40% by RHB) to profitability after the launch of its digital microlending and other lending products. As of end 1H24, RHB Bank’s share of loss from Boost Bank was RM15mil.
2. US Fed rate cuts will put pressure on the NIM of its Singapore operations. The group’s loans in Singapore accounted for 13.1% of the group’s total gross loans as at end 2Q24. Nevertheless, owing to the smaller presence in Singapore, we expect the pressure on NIM to be lower compared to the larger cap banks, Maybank and CIMB.
3. Progress of the bancassurance partnership arrangements. The bancassurance partnership arrangement with Tokio Marine which started on 29th December 2014 has expired on the 31st of December 2024. Meanwhile, the bancatakaful partnership with Syarikat Takaful Malaysia Keluarga will be due for renewal in July 2025.

We prefer Hong Leong Bank (BUY, FV: RM24.90/share) and Alliance Bank (BU, FV: RM4.80/share) in the space of midcap sized banking stocks which offers value play and higher liquidity. Hong Leong Bank trades at a compelling FY25F P/BV of 1.0x with a ROE of 11.2% while Alliance Bank is trading at FY26F P/BV of 0.9x.

Source: AmInvest Research - 10 Oct 2024