RHB Bank: Building up further provision buffers

The group’s asset quality is expected to remain stable with a slight uptick in the worst-case scenario at the end of FY21, says analyst


RHB Bank Bhd expected to make higher provisions to buffer for any potential credit losses due to the six-month moratorium granted by the government.

AmInvestment Bank Bhd (AmInvest) analyst Kelvin Ong said nevertheless, the additional provisions to be set aside will not be as large as the amount booked in for the financial year 2020 (FY20).

“Management is now guiding for a credit cost of 30 basis points (bps) to 40bps (closer to 40bps) for FY21. This compares to the guidance of 30bps earlier at the for the first quarter ended March 31, 2021 (1Q21) results briefing.

“FY21’s credit cost will remain lower than FY20’s 58bps,” he said in a recent note.

He added the group’s asset quality expected to remain stable with a slight uptick in the worst-case scenario at the end of FY21 with reduction in loan repayment, restructure and reschedule that was made available-to-assist borrowers.

“Management sees some stress in asset quality on loans to microenterprises. Nevertheless, we gather that its exposure to microenterprises is small at circa RM200 million.

“Meanwhile, the group is not overly concerned about its corporate loan exposure as we understand that provisions have already been adequately set aside for the vulnerable sectors,” he added.

He expects to to see a moderate improvement in net interest margin for FY21 driven by no surprise Overnight Policy Rate cuts for the rest of the year, robust growth in current account savings with the withdrawals of i-Citra.

“2Q21 is likely to see further monetisation of securities to lock in gains. We see challenges ahead for investment and trading income in the second half of 2021 as yields are unlikely to trend lower looking at market expectations of a gradual economic recovery with no further rate cuts priced in,” he said.

On the latest moratorium, Ong understands that interest will continue to be accrued and charged for all loans and financing while compounded interest and penalty charges will be waived.

“With that, we expect modification loss in 3Q21 to be significantly lower than 2Q20’s RM392 million (net). Recall, for the blanket automatic moratorium in 2020, accrued interest had to be waived for fixed rate hire-purchase and personal loans/financing.

“Through conservative front loading of provisions in FY20 (RM556 million) and top up in preemptive provisions in 1Q21 (RM94 million), total provisions buffers amounted to RM650 million. These buffers remain unutilised and will be able to cushion against the impact of the latest lockdown,” he added.

Despite the moratorium not seeing a deterioration in staging, the group has adopted a prudent stance in provisioning. Provisions set aside for these loans will be as if the loans are in Stage 2.

He added the total repayment assistance (RA) — for group retail banking, group business banking and group wholesale banking — has tapered to RM14.3 billion as of mid-May 2021, constituting 8.5% of the total domestic loans compared to 10.4% as of end-March 2021.

Outstanding RA for retail loans declined slightly to RM8.2 billion (8.5% of total domestic retail loans) as at mid-May 2021, compared to RM8.3 billion as at end-March 2021, 9% of total domestic retail loans.

He said the outstanding RA for business banking and wholesale banking loans stood at RM6.3 billion and RM2.4 billion respectively, representing 12.3% and 3.9% of the group’s total domestic business banking and wholesale banking loans respectively.

“With the continued lockdown and stricter measures in selected areas, particularly Selangor and Kuala Lumpur, we expect upticks in the group’s total RAs. Total RAs are likely to rise from 8.5% of total domestic loans as at mid-May 2021,” he said.

AmInvest maintains its ‘Buy’ recommendation on RHB Bank with an unchanged fair value of RM6.90 a share.

“We peg the stock to FY22 price-to-book value of 0.9 times, supported by a return on equity of 10.3%.

“We lower our FY21 net profit by 5.3% after increasing our credit cost assumption to 40bps from 30bps, ” it said.