RHB Bank Berhad - Initiation
Wed, 04-Dec-2024 10:19 am
by Samuel Woo • Apex Research

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RHBBANK (1066)

Target Price (RM)

6.92

Recommendation

Hold

Investment Highlights

 

  • Asset quality outlook should improve, which could reduce loan compression pressure. RHB has had asset quality issues, though the Group seems very confident about significant recoveries by FY25. This is a good sign, as it could finally prop up RHB’s low LLC (currently at 70%, from the industry ideal of 90-100%) and add positive upside to NCC.

 

  • Another core aspect is that management slowed loan growth in some of these problematic segments – particularly those concerning its overseas operations (Thailand and Cambodia). These impairments are largely from SMEs from Covid-19-related segments. These impairments seem to have stabilised in recent quarters, and management is confident that they will be able to resume stronger growth by early FY25.

 

  • A conducive environment for NOII – particularly from non-fee sources. RHB’s topline has been buoyed by non-fee income recently. A volatile positive market and declining interest rate situations – conditions expected to persist in FY25 – will likely imply another solid year for these income sources. 

 

  • We think fee income should also start picking up once more – improved market conditions imply solid brokerage income and asset management revenue streams. A higher preference for debt and equity market funding should also provide more income for RHB’s investment banking franchise.

 

  • CASA outlook may turn. Historically, RHB has struggled with COF, namely due to its weak deposit franchise. To fund its above-average loan growth, the Group took in a high level of promotional FDs, which tend to be pricier.

 

  • However, the Group seems more optimistic lately, having been tied up with various government programmes (most notably, mySiswa) to secure valuable retail inflows – which tend to be cheaper than non-retail counterparts. This is a work in progress, but we deem it a good start: in time, it should be able to buoy the CASA reductions seen in other core segments. 

 

  • Elevated CET 1 ratio provides opportunities for improved dividend payouts and a sleeker capital structure. RHB’s CET 1 ratio, at 16.6%, is among the highest of its peers. Paring this down (which RHB intends to do gradually to a healthier 13% range) will lead to a more streamlined capital structure, implying room for further ROE improvement without needing to increase earnings. This also provides upside possibilities for dividends: RHB’s 6-7% dividend yield is among the industry’s highest, but we think special dividends or a sustained increase in dividend payouts is within the realm of possibility.

 

Valuation & Recommendation

 

  • We initiate coverage on RHB with a HOLD recommendation and a target price of RM6.92 based on an FY25F PBV of 0.89x GGM-PBV valuation. (GGM Assumptions: FY25F ROE of 9.5%, LTG of 4.0%, & COE of 10.2%.) Despite upsides in the form of better NOII and large recoveries, we are worried about potential headwinds such as NIM compression (particularly from the loan yield side) and slow loan growth.

     

  • Watch RHB for: (i) Improvements in asset quality, which could alleviate loan compression pressure, (ii) A conducive environment for NOII, particularly on the non-fee side, (iii) A positive turnaround in CASA outlook, and (iv) RHB’s elevated CET 1 ratio, which provides opportunities for improved dividend payouts and a sleeker capital structure (leading to better ROEs).

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