Highest Returns to Shareholders over three years, Highest growth in profit after tax over three years: FINANCIAL SERVICES (RM10 billion and above market capitalisation: RHB Bank Bhd - Star performer in financial services sector

This article first appeared in The Edge Malaysia Weekly, on December 14, 2020 - December 20, 2020.
Highest Returns to Shareholders over three years, Highest growth in profit after tax over three years: FINANCIAL SERVICES (RM10 billion and above market capitalisation: RHB Bank Bhd - Star performer in financial services sector
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RHB Bank Bhd seems to be on the right path, judging by the growth of its profits. The group’s earnings were stellar for the three-year period of FY2017 to FY2019 ended Dec 31.

The steady growth of its earnings also whetted investors’ appetite for the counter, lifting its share price during those three years. Thus, it is no surprise that RHB Bank walked away with The Edge Billion Ringgit Club award for highest growth in profit after tax (PAT) over three years (FY2016 to FY2019) and highest returns to shareholders over three years (total return of share price appreciation and dividends).

The banking group’s PAT expanded from RM1.68 billion in FY2016 to RM1.95 billion in FY2017. It then crossed the RM2 billion mark to reach RM2.3 billion in FY2018 and increased further to RM2.48 billion in FY2019. As a result, the bank had a risk-weighted three-year PAT compound annual growth rate of 17.3% — the highest among companies listed under the financial services sector of Bursa Malaysia.

RHB Bank also achieved the highest total return to shareholders over three years in the financial services category at 2.4%. Its adjusted share price of RM4.46 on June 30, 2017, rose to RM4.95 in June 2018 and RM5.26 in June 2019.

Nonetheless, the Covid-19 pandemic has disrupted the banking group’s earnings growth as well as the steady rise in its share price since March 2020. On June 30, 2020, the counter closed at RM4.79, about 9% down from a year ago. Even then, its returns to shareholders outperformed those of its peers in the sector for the period between June 30, 2017, and June 30, 2020.

Most banking analysts recommend buying RHB Bank shares, anchored by its high Common Equity Tier 1 (CET1) ratio of 16.59% and potential in the midst of an uncertain operating environment.

“RHB Bank remains our top sector pick given that it has the highest CET1 of above 16%, which significantly minimises the risk of an equity cash call; sizeable unrealised gains on investment securities that it can capitalise on to help buffer the impact of lower NIMs (net interest margins) and rising provisions; and highest dividend yields (cash) among peers,” UOB Kay Hian Research says in an Aug 13 note, pegging a “buy” call on the stock, with a target price of RM6.04.

Meanwhile, CGS-CIMB Research, in a Sept 18 research note, has an “add” call on the bank with a target price of RM5.40, owing to its fee-income driver factor. “We retain our ‘add’ call on RHB Bank, given its attractive valuation of 8.1 times CY2021F PER (price-earnings ratio), which is below its five-year historical average of 8.8 times. We also expect its new bancatakaful partnership to drive its fee-income growth in 2H2020F and 2021F,” it says.

Like all banks, RHB Bank’s earnings have been hit by the fallout from the Covid-19 pandemic. Its net profit for the second quarter ended June 30 (2QFY2020) fell 34.9% to RM400.77 million from RM615.41 million in the previous corresponding period. This was mainly due to a one-off net modification loss of RM392.39 million as a result of the loan moratorium granted to customers and higher allowances for credit losses on loans. The bank’s quarterly net profit contracted 29.8% from RM570.88 million 1QFY2020.

Excluding the modification loss, RHB Bank’s normalised pre-tax profit in 2QFY2020 was RM906.6 million, which is 20.5% higher than the RM752.3 million reported in the preceding quarter. This was mainly due to higher non-fund-based income, partially offset by higher impairment on loans and financing, lower net interest and fund-based income, higher impairment loss in an associate and higher operating expenses.