CIMB Research keeps RHB Bank an Add, top pick

RHB Bank is CIMB Research's top pick for the sector.

KUALA LUMPUR: CIMB Equities Research is retaining RHB Bank as as Add and its top pick for the banking sector with a target price unchanged at RM6.23. Its last traded price was RM5.40.

The research house said RHB Bank was its top pick based on attractive valuations, currently at 2019F price-to-earnings (P/E) of 8.7 times and price-to-book value (P/BV) of 0.8 times, and the expected benefits from its ongoing transformation programme. 

“The strong showing in 2Q18 could also act as a re-rating catalyst for the stock. The potential downside risks are deterioration in loan growth and asset quality,” it said.

CIMB Research said although RHB Bank’s 1H18 net profit accounted for 53% of its full-year forecast and 54% of Bloomberg consensus estimate, it regarded the 2Q18 results as in line with expectations in anticipation of lower 2H18 earnings. 

“This is premised on our view that the low loan loss provisioning (LLP) in 1H18 (especially 2Q18) will not be sustainable. Also in line with expectations was the interim DPS of 7.5 sen. We retain our FY18-20F EPS forecasts and DDM-based target price of RM6.23,” it said.

RHB Bank recorded another strong quarterly net profit of RM570.3mil (+13.8% on-year) in 2Q18, not far off from the record-high net profit of RM590.8mil in 1Q18. 

“This was mainly driven by the 58% on-year plunge in its 2Q18 LLP. We are also amazed that it managed to sustain its net interest margin on-quarter at 2.29% in 2Q18 while most other banks experienced on-quarter margin contractions. 

“The 1H18 net profit grew by a solid 16% on-year, underpinned by (1) an 8.1% on-year rise in total operating revenue, and (2) a 42.4% on-year slump in the LLP,” it said.

CIMB Research pointed out RHB Bank’s loan growth moderated from 4.3% on-year at end-March 2018 to 3.1% on-year at end-June 2018, below the industry’s pace of 5%. 

The growth was mainly driven by property loans, with an expansion of 14% on-year for residential mortgages and 10.2% on-year for non-residential mortgages at end-Jun 18. On the flip side, working capital loans fell by 3.6% on-year at end-June 2018 while auto loans only rose by 1.5% on-year.

It ssaid RHB Bank’s gross impaired loan ratio inched up from 2.29% at end-March 2018 to 2.33% at end-June 2018 while the loan loss coverage fell from 85.3% to 84.2% over the same period.

“Based on the performance in 1H18, RHB met three of its FY18 KPIs, i.e. (1) ROE of 9-10%, (2) cost-to-income ratio of less than 50%, and (3) positive profit contributions from overseas operations. 
"However, it also missed three FY18 KPIs, i.e. (1) loan growth of 6%, (2) low-cost deposit growth of 10%, and (3) gross impaired loan ratio of less than 2.2%,” it said.