KUALA LUMPUR (Oct 20): The decline in RHB Bank Bhd’s loan loss coverage (LLC) indicated that the banking group may have thinner buffers to cover potential bad loans and unexpected credit losses.

This also raised concerns about its ability to cushion any short-term increase in the gross impaired loans (GIL) that may arise due to macroeconomic headwinds and tight monetary policy, said Hong Leong Investment Bank (HLIB) Research in a note Friday.

“We held a meeting with RHB Bank recently and the tone was rather cautious.

“We are slightly worried over its relatively low LLC versus peers. In addition, the bank’s LLC of 83% is on par to pre-pandemic level of circa 85% but peers are instead printing in above this rate (sector average: 124%), which makes us slightly concerned.

“A such, we expect [the bank’s] net credit cost (NCC) to climb upwards for the remaining of FY2023 (guidance: high-teens bp versus our expectations: 18bp),” it said in a note.

According to HLIB, the bank’s GIL ratio continued its upward trend but remained below the pre-Covid-19 level of approximately 2%, standing at 1.64% in the first half of 2023. Meanwhile, there was a concerning rise in delinquency rate, particularly among small and medium-sized enterprises (SMEs), which has now surpassed pre-pandemic levels.

Additionally, RHB Bank is maintaining vigilance in specific segments within industries such as manufacturing, commercial properties, oil and gas and air transportation, said HLIB.

“Overall, we find RHB’s risk-reward to be balanced, as there are no new positive catalysts to spur share price upwards,” said HLIB.

HLIB maintained its “hold” call on RHB Bank with a gordon growth model target price of RM6.

“[This is] based on a 0.81 times FY2024 [ending Dec 31, 2024] price-to-book ratio, with assumptions of a 9.6% return on equity, an 11.1% cost of equity, and a 3% long-term growth rate.  This is largely in line to its 5-year and sector mean of 0.79-0.82 times, we feel the valuation is warranted considering its return on equity (ROE) output is similar to pre-pandemic level and industry average,” said HLIB.

“For the mid cap space, we prefer buying into AMMB (target price: RM4.20) given its inexpensive valuations and its larger dividend payout bandwidth in the near future,” the research house added.

At the time of writing, RHB Bank’s share price slipped three sen or 0.54% to RM5.56, valuing it at RM23.83 billion.