RHB Capital - Resilience surprise on the upside HOLD

We maintain RHB Capital Bhd (RHB Cap) at HOLD, with a higher fair value of RM8.20/share (vs. RM6.90 previously). This is pegged to a fair P/BV of 1.5x (1.3x previously), based on a higher ROE of 13.2% (12.2% previously) for FY12F. 

RHB Cap’s 4QYF11 net earnings fell 7.4% QoQ (largely due to higher loan loss provision). With this, FY11 net earnings came in at 4.1% below our estimate and 3.0% below consensus forecast of RM1,548mil.

Gross loans growth was at 16.2% in FY11, ahead of its earlier target of 15%. NIM was 2.57% in FY11 compared with 2.74% in FY10, with the compression largely caused by a higher cost of funding due to its heavier reliance on the more expensive fixed deposit segment. Nevertheless, net interest income managed to grow 4.3% overall in FY11. Non-interest income posted a commendable growth of 3.7% YoY, considering that there was an unrealised loss relating to its interest rate swap contracts, which came up to RM76mil in total in FY11, a lot less than originally anticipated. 

More importantly, the company has largely provided for its exposure to one particular CLO, which is positive and should remove one of the lingering concerns over RHB Cap. In addition, credit costs rose to 40bps in 4QFY11 (3QFY11: 13bps), which was due partly to weaknesses in selected SME segments. 

Gross impaired loans were reduced by 3.2% QoQ, the fifth consecutive quarter of QoQ improvement, aided partly by good recoveries. Gross impaired loans ratio was thus reduced to 3.4% in 4QFY11 from 3.7% in 3QFY11. Loan loss cover was relatively steady at 73.8% in 4QFY11 from 75.1% in 3QFY11. 

We consider its asset quality to have surprised on  the upside, and more importantly, we are further reassured that the company has not experienced any major deterioration in asset quality over the past three months. Based on this, we have revised upwards our earnings by 13% for FY12F. This is based on a lower credit costs assumption of 61bps (vs. 80bps previously). The company indicated that credit costs will likely be better than FY11’s 36bps. 

The company also indicated that its planned acquisition of Bank Mestika is now scheduled for completion by mid-2012. We have not yet reflected this in our forecasts. The company’s new ROE guidance for FY12F is 14%, including Bank Mestika. We maintain RHB Cap at HOLD.     

Source: AmeSecurities