• Keep NEUTRAL and GGM-derived TP of MYR1.95, 5% upside and c.4% yield. RCE Capital’s 9MFY23 (Mar) results met our and consensus estimates, with stronger fee income and sequentially improving impairment allowances being the key standouts. While financing growth has been strong YTD, the expected upward normalisation of credit costs led to flattish bottomline growth on a 9M basis. We deem the counter to be fairly valued at the current juncture given it is trading near +2SD from its 5-year mean forward P/BV.

• 9MFY23 earnings within expectations. 9MFY23 net earnings of MYR103.9m met our and Street forecasts. Earnings growth of 2.3% YoY was largely due to higher non-II (+42% YoY) on higher customer refinancing activities, while NII remained flattish. The higher operating income base and lower opex (-1% YoY) led to a PIOP of MYR158m (+12% YoY). Impairment allowances of MYR20.5m were up three-fold YoY, although this mainly arose from the low base effect as credit costs were exceptionally low between FY21-22. At the 9-month mark, the group’s ROE stood at 16.9% (9MFY22: 16.8%).

• Financing growth still robust. Gross financing as at 31 Dec 2022 stood at MYR1.98bn – up 6% YoY and 5% YTD. Discussions with management suggest that financing demand among civil servants is still being sustained, despite the rising cost of living and upward repricing of assets. Management is hopeful that the company’s financing growth can track the wider banking industry’s, which we expect to grow at a mid-single digit rate.

• Asset quality continues to improve. RCE recorded impairment allowances of MYR5.5m in 3QFY23 – down 20% QoQ, but tripled YoY. This does not immediately concern us as credit costs were exceptionally low during the pandemic and are now returning to pre-pandemic levels of 100- 200bps (3QFY23 credit cost: 111bps). Despite this, management is observing stable repayment trends, leading us to believe that the group’s asset quality remains solid.

• Forecasts and valuation. Our forecasts remain relatively unchanged as lower asset yields are offset by higher non-II. Our TP is kept at MYR1.95, and includes a 2% ESG premium, which is in line with our in-house methodology. The counter is currently trading at a forward P/BV of 1.4x, near +2SD from its 5-year mean. We believe RCE’s defensive attributes – namely its resilient salary deduction scheme and prudent asset quality controls – have been well priced in by the market, and thus, we stick to our NEUTRAL call.

• Key risks include higher-than-expected credit costs and weaker-than- expected financing growth. The converse, including favourable regulatory developments concerning civil servants, present upside risks.

Source: RHB Research - 16 Feb 2023