We maintain our OP call and GGM-derived PBV TP of RM7.25 (COE: 10.5%, TG: 3.0%, ROE: 10%). RHBBANK could be operating with more modest loans prospects in FY24, with stable NIMs likely met with a balanced set of non-fund based streams. Boost Bank looks to debut in this quarter and appears to be more cost efficient against a comparable peer. While we slightly trim our FY24F/FY25F earnings (-2%), its dividend yields appear generous at c.8% at current price points. RHBBANK is one of our 2QCY24 Top Picks.

Key takeaways from our recent meeting with the group are as follows:

- Loans expectations tied to GDP. RHBBANK looks to maintain its 4.5% loans growth target (lower from FY23’s 4.8% achievement). The group ties this to the group’s in-house GDP expectation of 4.6% (close to Kenanga’s 4.7%) as the group anticipates its books to be mostly supported by its home-based retail and SME portfolios. For now, the group plans to stay its ground in mortgage markets where it sees encouraging growth. We note that RHBBANK has not factored in upcoming infrastructure projects as part of its projections, opening the possibility for better-than-expected delivery should they are roll out accordingly.

- NIM to find balance. In lieu of its mortgage efforts, RHBBANK could participate competitively but opines that it will be selective with its pricing. On the flipside, the easing of funding costs is seeping in with fixed deposit rates in the recent months appearing to fall below FY23’s mark. This supports the NIM guidance of 1.8%-1.9% (FY23: 1.82%).

- Non-interest income (NOII) seeking prospects. FY23’s NOII was led by strong returns from its liability management initiatives which comprises of forex swaps. The group believes that interest rates movements may pose more risks to its returns than forex rates. Given that the street is expecting rate cuts in 2HCY24, we believe its contributions during the year could decline. On the other hand, stockbroking and fee-based sources are likely to benefit from a more vibrant stock market to support overall performance.

- Nimble asset quality management eases hefty reserves. We note that the group has fully exhausted its pandemic-related overlays, with its RM320m booking being mainly for risk-sensitive SME accounts.

That said, although the group continues to maintain certain at-risk profiles (skewed to a few large corporate accounts), it believes that most of its staged books are well contained. Though it may continue to top up provisions as needed, its diluting loan loss coverage of 106% (including regulatory reserves) is not an urgent concern.

- Boost Bank setting its eyes on 2QFY24 launch. Boost Bank is poised to launch in the coming months with introductory deposit products. Lending products are due to be integrated progressively following further reviews by BNM, as with its digital banking peers. We note that Boost Bank has largely contributed to the RM26m associate losses to RHBBANK for its 40% stake (or c.RM65m in entirety), as it has yet to generate revenue. Assuming this prevails as a run rate, it translates to significantly higher cost efficiency against its peer, Aeon Bank which appears be seeing net losses of c.RM130m/year.

Forecasts. Post update, we take this opportunity to trim our FY24F and FY25F earnings by 2% each. This comes from incorporating the above losses from associates while also fine-tuning our NIMs projections.

Maintain OUTPERFORM and TP of RM7.25. Our TP is based on an unchanged GGM-derived FY25F 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, although for now the group may keep its buffers to cushion against the upcoming implementation of Basel 3 frameworks in CY25. The stock will still likely be monitored closely as a proxy of Boost Bank’s deliveries. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

RHBBANK is one of our 2QCY24 Top Picks.

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

Source: Kenanga Research - 24 Apr 2024