KUALA LUMPUR: RHB Bank Bhd’s FY21 loan growth could end strong at 6%, driven by its mortgage and small and medium enterprise (SME) segments, according to Hong Leong Investment Bank Research (HLIB Research ) in a report.
The research firm said that in the future, the bank plans to expand its auto finance franchise and generate more secured loans.
That said, HLIB Research said RHB Bank’s profits were slashed after the lender’s net borrowing costs – costs that banks take into account when pricing their loans – were “underestimated”.
It said it was maintaining a “buy” call on RHB Bank with a lower target price of RM6.60 to RM7 after it cut its profit estimate for the year ending December 31, 2022 (FY22) and FY23 .
While maintaining its FY21 guidance, the research firm said it underestimated the net cost of credit in its FY22 model and reduced FY22 earnings estimates and FY23 from 2% to 6%, respectively, for RHB Bank.
“The target price is based on 0.87 times FY22 price-to-book ratio, versus 0.91 times with the assumptions of 9.7% return on equity and 10.7% cost of equity.
“That’s above its five-year average of 0.81 times, but broadly in line with the industry’s 0.89 times. In our view, the valuation multiple is fair as its return on equity production is similar to the industry average while the premium reflects the abundant liquidity in the market,” he added.
Following HLIB Research’s recent meeting with RHB Bank, he said management shared the net cost of credit for FY21 as close to 40 basis points and trending slightly lower than FY21. 22.
“We note that it is broadly in line with our estimates for the year 21 to 43 basis points, but there could be downside risk as we have charged a 22 basis point lower net cost of credit for the year. fiscal year 22,” he said.
Importantly, RHB Bank’s loan repayment assistance remains relatively unchanged at 30% of the total domestic loan portfolio.
However, HLIB Research noted that the aid is expected to decrease given that most reimbursement aid under the Pemulih program would expire this month.
Additionally, the adoption rate of the financial management and resilience program is slow, with less than 1,000 applications to date and approval of only RM60 million, or 0.03% of total loans.
Regarding the net interest margin, he said it would increase by three basis points for every 25 basis point increase in the overnight rate (OPR).
That said, RHB Bank expects the OPR to increase once or twice in FY22 and FY23.
“We believe the current deposit landscape remains competitive while on the lending side, pricing discipline persists in the market,” said HLIB Research.
He noted that 22% of RHB Bank’s local consumer loan portfolio are B40 borrowers, 17% are M40s and the remaining 61% are T20s.
The research firm said RHB Bank’s Covid-19 vulnerable segment, which includes tourism, hospitality and air travel, accounts for 5% of total lending. “As for any potential provision reversal, it will likely only take place towards the end of 2022 and FY23,” he added.
Regarding dividends, HLIB Research noted that the bank did not commit to a 50% payout ratio in FY21.
However, RHB Bank is working to get back to that level as soon as possible, he said.