Near-term outlook for RHB expected to be stable

RHB Bank Bhd
(Jan 30, RM5.73)
Maintain buy with an unchanged target price of RM6.20:We met up with the management recently for some operational updates. Overall, we find RHB Bank Bhd’s near-term outlook remains stable.

Although RHB’s annualised loans growth for the nine months ended Sept 30, 2019 (9MFY19) was only 3.1%, the management said this will end close to its full-year target of 5%, in line with our estimates. We understand lending expansion was relatively broad-based but several segments such as retail mortgage, small and medium enterprise financing, and its Singapore operations — secured loans to a hotel developer — were main contributors.

We expect its net interest margin (NIM) for the fourth quarter of financial year 2019 (4QFY19) to continue widening, from 3QFY19’s 2.13%, given a lower cost of funds from a downward deposit repricing and easing competition in the deposit-taking space.

Hence, we see an upside risk to RHB’s full-year NIM guidance, considering its expectation of a steep 11- to 12-basis-point slippage; we estimate 2019’s NIM should compress only about 10 basis points. Besides, the management has redeemed RM230 million of hybrid capital securities in December 2019 to help buffer its 2020’s NIM.

Recall RHB’s strong non-interest income growth for 9MFY19, up 6% y-o-y, thanks primarily to higher investment gains. We believe this will largely be sustained in 4QFY19, considering the 10-year Malaysian Government Securities yield slid to 3.40% versus 3.47%, 3.77% and 3.94% in 3QFY19, 2QFY19 and 1QFY19.

Also, RHB only realised 11% of its debt instruments measured at a fair value through other comprehensive income in 9MFY19, suggesting it has more space versus peers’ average of 20% to transfer gains upon disposal to the income statement.

Despite its gross impaired loan ratio softening to 2.16% — up one basis point quarter-on-quarter — RHB has guided it will improve near to the 2% level in 4QFY19; this comes from reclassifying some of its prior reschedule and restructure loans to performing status.

Considering RHB intends to raise dividends sustainably, it seems to us that its current 40% dividend payout run rate is the new normal — 10 percentage points above its dividend policy of at least 30%. — Hong Leong Investment Bank Research, Jan 30