MGS sell-off set to hit RHB's Q3 earnings: HLIB

KUALA LUMPUR: RHB Bank Bhd's near-term earnings are likely to come under pressure from higher Malaysian Government Securities (MGS) yields, said Hong Leong Investment Bank (HLIB) Research.

Analyst Raymond Ng said the recent spike in MGS yields would likely hurt trading income in the third quarter of financial year 2026 (Q3 FY26), with limited time left in the quarter for a recovery.

He said stronger contributions from wealth management, bancassurance/takaful, investment banking, broking and loan-related fees should provide some cushion but are unlikely to fully offset the trading income weakness.

"The impact should be viewed more as foregone trading upside rather than outsized losses, given RHB's relatively small trading book," he said in a note.

Ng said RHB's treasury division had also been tactically unwinding securities positions, crystallising gains where possible while reducing exposure.

However, the bank's management remained more positive on the fourth quarter, with scope to reposition the portfolio and capture opportunities if bond yields stabilise or retreat.

Despite the near-term earnings pressure, management maintained its return on equity (ROE) target of 10.8 per cent to 11 per cent, supported by about six per cent loan growth, cost growth of no more than one per cent and benign credit costs.

Ng said the target remained within reach, although RHB was more likely to end up at the lower end of the range.

Credit costs are tracking at around 13 basis points, at the lower end of management's 13 to 14 basis points guidance, while wealth sales rose 35 per cent year-on-year as of June 2026.

On asset quality, Ng said there were no major red flags, with deterioration in the small and medium enterprise (SME) segment remaining gradual and manageable.

"Gross impaired loan formation continues to stem largely from SME and community banking, although management has not seen a meaningful acceleration in stress," he said.

He added that RHB remained selective in mortgage and SME lending and was not chasing growth through aggressive pricing where risk-adjusted returns were unattractive.

Meanwhile, capital management remains a medium-term catalyst, with management targeting greater clarity on its capital and dividend policy by the first quarter of 2027.

Ng said a potential 100-basis-point uplift in RHB's common equity tier-one ratio following the Basel III reforms in January 2028 could translate into about RM2 billion of additional capital.

However, any excess capital return would depend on the group's growth requirements and ability to maintain its CET1 ratio at around current levels.

HLIB maintained its "Hold" call on RHB with an unchanged target price of RM8, based on an implied 1.0 times the calendar year 2027 price-to-book ratio.

RHB currently offers a projected FY27 dividend yield of more than 6.5 per cent, while a potential increase in the overnight policy rate from 2.75 per cent to three per cent in 2027 could provide another earnings boost.