Maybank Investment Bank (Maybank IB) Research maintains a HOLD call on RHB Bank (RHB) but has raised its net profit forecasts by 3 to 5 per cent to factor in lower credit cost assumptions.
It holds unchanged TP of RM6.20 on FY23F/FY24F earnings raised.
In its Research Note, Maybank IB has lower the dividend payout assumption ratio to 50% from 62.5% for RHB in the financial year 2023 (FY23) and FY24.
“We understand that RHB’s dividend payout ratio of 62.9% in FY21 was in response to a low payout ratio of 34.8% in FY20, while the 62.5% payout ratio in FY22 was due to the lower earnings base caused by Cukai Makmur.
“Moving forward, RHB maintains a minimum payout ratio policy of 30% but its management will strive for a higher payout ratio. Our previous dividend payout ratio assumption of 62.5% for FY23/24E appears optimistic at this stage, for which we are lowering to 50%,” the report said.
In its report, Maybank IB said that the FY23 return on equity (ROE) estimate of 9.2% trails RHB’s 1H23 ROE of 10.6% on expectation of a weaker 2H23 due to higher credit cost.
FY23 forecast net interest margin (NIM) was assume to compress a bit more stabilizing.
“The operating environment remains challenging, but positively, we expect RHB’s loan growth to pick up in 2H23, and NOII to hold up.
“Moreover, the focus on cost efficiencies should lead to more tempered expense growth. We expect NIMs to compress a bit more QoQ in 3Q23 before stabilizing moving forward,” it said.
Asset quality remains stable, though property and construction are sectors to monitor, as well as the smaller SMEs, it added.
Maybank IB has also lowers credit cost assumption as the management has maintained its gross credit guidance of 20 to 25 basis points (bps) for FY23, which would imply higher provisions in 2H23 (against 21bps in 1H23). We have lowered our FY23/24/25E average gross credit cost assumption to 3/20/19bps from 29/23/20bps respectively.
Key variances include RHB has written back/reassigned its MYR411m COVID overlays, but it still holds about MYR560m worth of economic overlays that could potentially be written back should economic conditions improve.
The report also notes that RHB loan growth is expected to pick up pace RHB’s loan growth as at end-June 2023 was just 0.9% YTD (+4.5% YoY) due to lumpy repayments and dampened consumer loan growth, due in part to the festive holidays, during the period.
“Into 2H23, we expect faster loan growth emanating predominantly from corporate loan demand in Singapore, as well as a pick-up in consumer lending.
“SME lending continues to expand (+4.8% YoY end-June 2023) but management is more cautious with regards to lending to this segment. For FY23, we have imputed a loan growth forecast of 4%, which is at the lower end of management’s 4-5% target for the year,” Maybank IB said.
Maybank IB also notes that RHB’s deposit growth was just 1.5% YoY and 0.9% YTD as at end-June 2023. CASA, meanwhile, contracted 4.7% and its CASA ratio slipped to 27.6% end-June 2023 from 29.2% end-Dec 2022. Fixed deposit rate competition has since eased slightly and we would expect some flow back into CASA in 2H23, though probably not of significant magnitude.
Other notable figures was that 2Q23 NOII rose 13% YoY and was up 24% in 1H23. Although fee income declined 6% YoY, this was offset by realised and unrealised investment gains and higher gains from the revaluation of derivatives. Sustaining this momentum into 2H23 could be a challenge, but there is room for realizing some of its investment gains still, in our view. We expect RHB’s NOII to come in relatively flat HoH in 2H2
Maybank IB also adds that RHB management has embarked on a group-wide cost-cutting initiative, looking at its processes and systems for ways to drive greater efficiencies.
“1H23 operating expenses rose 6.5% YoY and would have been a slower 4.7% YoY if not for one-off union costs. Management hopes to keep expense growth at around the 5% mark.
“With NIM compression having impacted the group’s cost/income ratio (CIR), which stood at 47.5% in 1H23, management’s FY23 target of sub-45% is unlikely to be achieved, but the aim is to cap expense growth at around the 5% YoY mark. Our forecasts impute a higher CIR of 47.9% for FY23.”
It added the the RHB’s gross impaired loans (GIL) have risen 6.8% YTD, resulting in a higher GIL ratio of 1.64% end-June 2023 versus 1.55% end-Dec 2022.
Nevertheless, it says this is in line with the industry’s trend and asset quality has generally been stable, with the GIL ratio still below its pre-pandemic level of 1.97% in 2019.
“On the consumer front, there was an uptick in the GIL ratio in 2Q23 due to the festive holidays, but should normalize into 3Q23. The one segment that management is monitoring is the SME segment.
“The larger SMEs are faring decently but there is some stress among SMEs that are reliant on imports and those in the construction (due to fewer infrastructure works) and hospitality (especially those that rely on tourism) industries.
Sector wise, property development and construction (contractors involved in larger infra projects) are segments to monitor at this stage.
The bank’s exposure to construction and property development is about 11.7% of total loans, of which exposure to real estate alone is about 8% of total loans. Its exposure to O&G is only about 1.5% of total loans and bonds.
The management said that the fourth largest domestic financial institution in Malaysia in terms of asset size, any economic slowdown in the country would have a knock-on effect on the group’s operating performance.
“This could also potentially effect our estimates, rating, and target price. Volatility in the O&G sector could result in asset quality issues for both its Malaysia and Singapore loan exposure.”
RHB’s 40%-owned digital bank (60%-owned by Axiata’s Boost) is currently in the operational readiness review stage with BNM, with the intention of launching the digital bank by this year-end or early 2024.
