Date: Monday, 30 September 2024
Broker Name: UOB Kay Hian Securities (M) Sdn. Bhd.
Overview of RHB Bank
RHB Bank (RHBBANK MK) is the fifth-largest fully integrated financial services group in Malaysia by total asset size. The bank offers universal banking services and has a market capitalization of RM26.59 billion (US$6.45 billion). RHB Bank is listed on the Financials sector in the Bloomberg ticker, and the stock is currently trading at an attractive 0.80x P/B ratio, which is well below the sector’s 1.24x despite delivering similar ROE.
The stock price stands at RM6.10, with an upgraded target price of RM6.80, implying an 11.50% upside. The major shareholders include EPF (39.6%) and OSK Holdings (10.3%).
Financial Performance
RHB Bank has shown robust financial results across various metrics. Key financials include:
- Net Interest Income (2024 forecast): RM4,042 million
- Non-interest Income (2024 forecast): RM1,978 million
- Net Profit (2024 forecast): RM2,995 million
- Earnings Per Share (2024 forecast): 69.9 sen
- PE Ratio (2024 forecast): 8.7x
- Dividend Yield (2024 forecast): 6.1%
The bank recorded a net credit cost of 30 basis points (bp) in 1H24, with an improving trend expected to lower net credit costs to 20 bp by 2H24. Additionally, RHB Bank’s gross impaired loan (GIL) ratio has improved to 1.76% in 2Q24 from 1.83% in 1Q24.
Key Highlights
1. Asset Quality Improvements
RHB Bank’s asset quality has stabilized, with its GIL ratio improving to 1.76% in 2Q24, down from 1.83% in 1Q24. Management projects further improvement in the GIL ratio, potentially reaching 1.60% by the end of 2H24. The improvement is driven by the resolution of domestic corporate loans in the hospitality sector and stabilization in asset quality in Thailand, particularly within the tourism industry.
2. Loan Loss Coverage and Credit Costs
RHB Bank’s loan loss coverage (LLC) ratio stands at 70.4%, below the industry standard. However, the bank expects gradual recovery, with an increase towards 75% by year-end, driven by the resolution of impaired loans and further provisioning. The credit cost is also trending downward, with management’s target for net credit costs set at 20-25bp for 2024, after already improving from 30bp in 1H24.
3. Net Interest Margin (NIM) on the Rise
Disciplined loan and deposit pricing and robust retail CASA growth have supported NIM improvement. RHB Bank’s 2Q24 NIM improved by 6bp qoq to 1.89%, and the bank is expected to maintain a stable NIM of 1.88%-1.90% for the full year 2024.
4. Loans Growth Gaining Momentum
In 1H24, RHB Bank recorded a 4.9% annualized loan growth, which was slightly below its full-year target of 6.5%-7.0%. However, the easing of large corporate loan repayments and a strong approval pipeline are expected to support the bank’s growth momentum in 2H24. Key growth drivers include mortgage loans (+10%), auto loans (+11%), and corporate loans recovery.
5. Non-Interest Income Growth
RHB Bank posted a 41% yoy growth in non-interest income during 1H24, driven by increased fee income (+28%), forex gains (+260%), and trading income (+20%). Although forex gains are expected to normalize in 2H24, strong fee income from loan disbursement fees is anticipated to sustain non-interest income growth.
Dividend Outlook and Capital Management
RHB Bank has a strong Common Equity Tier 1 (CET1) ratio of 16.5%, indicating sufficient capital to support potential capital management initiatives. The bank currently projects a 50% full cash dividend payout ratio, offering a 6% yield. If the payout ratio increases to 62%, similar to 2023, the cash dividend yield could rise to an attractive 7.5%.
ESG Initiatives
RHB Bank has made notable strides in its Environmental, Social, and Governance (ESG) efforts:
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Environmental: As of June 2021, RHB Bank had extended RM3.3 billion in green loans, with 20% allocated to renewable energy projects. The bank has committed to a RM5 billion green financing target by 2025 and has ceased financing new thermal coal projects.
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Social: The bank maintains 30% female representation on its board and 26.1% in senior management. Additionally, RHB has allocated over RM2 million for scholarships to support underprivileged students through its X-Cel programme.
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Governance: The composition of Independent Non-Executive Directors on RHB’s board is 60%, meeting governance standards.
Outlook for 2024
RHB Bank has provided key guidance for 2024, including:
- Loans Growth: 6.5%-7.0%
- Net Credit Cost: 20-25bp
- Return on Equity (ROE): 10%
- GIL Ratio: Less than 1.75%
- Cost-to-Income Ratio (CIR): Less than 47.5%
- Net Interest Margin (NIM): 1.88%-1.90%
The bank remains on track to deliver strong growth, driven by its improving asset quality, solid loan growth, and disciplined cost management.
Valuation and Recommendation
RHB Bank has been upgraded to a BUY with a target price of RM6.80, up from RM6.39. The stock is currently trading at a 0.80x P/B ratio, a clear value laggard compared to the sector’s 1.24x. With stabilizing asset quality, strong pre-provision operating profit growth, and capital management initiatives, RHB Bank is well-positioned to outperform the sector in 2H24.
