This article first appeared in The Edge Financial Daily on May 13, 2019

RHB Bank Bhd
(May 10, RM5.74)
Maintain buy with a higher target price (TP) of RM6.50: Despite the headwinds plaguing the sector (net interest margin [NIM] pressure, a cautious business environment and slow markets), we think RHB Bank Bhd’s continued execution of its FIT22 strategy in targeted segments should help it weather through the tough operating climate.

Loan growth will still be driven by the retail and retail small and medium enterprise segments, and could see some better traction as the group builds on its existing digital capabilities to win market share.

Although the recent overnight policy rate (OPR) cut will weigh on RHB Bank’s NIM beginning in the second quarter of financial year 2019 (2QFY19), its recent 10-basis-point increase in base rates and base lending rates will bear the brunt of the overall impact. Non-interest income may also stage a comeback as capital market activity has improved after 1QFY19, and there could be investment income gains from declining bond yields. Overall, we expect asset quality to remain healthy after turning a corner in the second half of FY19 (2HFY19) with more stable credit costs going forward. We are more conservative in our FY19 estimates, likely due to lower non-interest income growth expectations.

A meaningfully higher dividend payout beyond its floor policy of 30% would be accretive to the return on equity and generate more interest in the stock. More consistent earnings delivery over time will also drive the group’s share price higher.

We have raised our TP to RM6.50 from RM6.10, after rolling over our base valuation year to FY20. Valuations are still compelling at 0.9 times FY20 book value even though the stock has risen 9% year to date. — AllianceDBS Research, May 10