RHB Bank - Margins Downside Seemingly Over

Date: 
2023-11-28
Firm: 
KENANGA
Stock: 
Price Target: 
7.15
Price Call: 
BUY
Last Price: 
5.60
Upside/Downside: 
+1.55 (27.68%)

RHBBANK’s 9MFY23 net profit (+16% YoY) was above our expectation as group NIMs have reverted positively in the 3QFY23 reporting, possibly indicating that downside pressures have subsided. On the other hand, nearterm challenges may drag certain metrics which have led to lower FY23 guidances. However, loans growth should stay supportive. This led us to revise our FY23F/FY24F earnings higherby 4%/5%. Maintain OUTPERFORM and GGM-derived PBV TP of RM7.15.

9MFY23 beat our expectations. RHBBANK’s 9MHFY23 net profit of RM2.22b was above our full-year forecast, making up 81% of that. The deviation was owing to lower-than-expected NIMs performance following concerns of continued funding cost strain to the group. That said, it was within consensus full-year estimate (at 78%).

YoY, 9MFY23 total income fell slightly (-3%) following some softness in net interest income (-6%). While the group sustained a 5% growth in loans base, it saw compressed NIMs at 1.85% (-37 bps) on greater competition of deposits. Meanwhile, non-interest income grew by 12% supported by stronger gains from investments. Attributed by the lower income, cost-income-ratio rose to 47.1% (+2.8ppt) despite a 3% growth in overall operational costs. With regards to impairments, the group booked a credit cost at 7 bps (-17 bps) following write-backs on pandemic-related overlays. Paired with normalised effective taxes, 9MFY23 net profit came in at RM2.22b (+16%).

QoQ, 3QFY23 saw similar signals particularly but with NIMs extending (1.85%, +3 bps) as funding cost eases. Notably, 3QFY23 recorded impairments of RM166.1m as opposed to 2QFY23 net write-back of RM102.2m. This gap in provisions led to 3QFY23 net profit of RM649.9m to be 20% softer.

Briefing highlights. Owing to some challenges, the group opted to revise most of its headline targets downwards, with the exception of loans growth which it believes could do better than expected.

1. Loans growth expectations have inched up slightly to 5.0%-5.5% (from 4.0%-5.0%). Aside from mortgages (for RM500k-RM700k homes), the group is seeing strong acquisitions from its Singapore books fuelled by corporate accounts in the real estate segment, which may continue to support till the end of the year.

2. NIM pressures have elevated despite previous warnings of continued compression, as the group managed to contain further increases to funding costs. That said, it will likely remain softer when compared to FY22 paired with the lack of aggressive interest rate upcycle. Maintaining at 1.80%-1.90% is expected by the group.

3. Although it has loan loss coverage of 75% without utilising regulatory reserves, the group does not appear to be in a hurry to shore up further provisions. Asset quality concerns are not as significant, with risks leaning towards unsecured SME accounts which may only be 20% of segment portfolio.

4. In lieu of the above mentioned, deterioration has already been seen with GIL guidances now higher at 1.7%-1.8% (from <1.5%). On the flipside, BAU credit cost is expected to land at 20-25 bps which may not reflect a heavy 4QFY23 provisioning. Meanwhile, the group maintained its management overlays of RM538m.

Forecasts. Post results, we had revised our NIMs assumptions following a more upbeat tone to its trajectory, following close to its NIM range of 1.80%-1.90% for FY23 and some improvements in FY24. This led a +4%/+5% change to our earnings forecasts.

Maintain OUTPERFORM and TP of RM7.15. Our TP is based on an unchanged GGM-derived FY24F PBV of 0.93x (COE: 10.5%, TG: 3.0%, ROE: 10.0%). It is positioned as a leading dividend candidate with yields averaging above 7% at current price levels. This could be further lifted should the group decide to release its hefty CET-1 portfolio to reward shareholders. The stock will still likely be monitored closely due to its tie-in with Axiata-Boost in relation to the upcoming launch of a new digital bank in the near future. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

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

Source: Kenanga Research - 28 Nov 2023

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