RHB Capital - Double leverage ratio expected to remain benign BUY

- The press reported that a rating agency, Moody’s Investment Services (Moody’s), has highlighted that RHB Capital’s (RHB Cap) acquisition of OSK Investment Banking group (OSKIB) may lead to an increase in the group’s double leverage ratio. We foresee otherwise, based on our key assumptions that the acquisition will be funded largely with new shares and not cash. 

- RHB Cap’s current double leverage ratio (estimated based on investments in subsidiaries of RM8.7bil divided by shareholders’ funds of RM5.8bil, at the company level) was 149.2% as at FY11.

- Using our current assumption that RHB Cap will be issuing entirely new shares to fund the acquisition of OSKIB, we estimate that RHB Cap’s double leverage ratio to drop to 136%.

- Based on the press report, Moody’s said that it assumed the acquisition will be funded via a combination of cash and shares (no further breakdown was provided in the press report). Assuming this, Moody’s said the double leverage will increase to 159% from 149% currently.  Moody’s further said that if the acquisition is funded entirely with cash, then the double leverage will go up to 195%. 

- Thus, the main difference is in the assumption for funding structure of the acquisition. Based on our estimates, if we assume 50% cash and 50% new shares, we estimate double leverage to rise to 157%, from the current 149%. If assuming funding with entirely cash, we estimate double leverage will increase to 184%. 

- We believe the acquisition will be funded largely through new shares. Thus, we expect double leverage ratio to remain benign. There is no cap or limit set on double leverage by BASEL 3. There is also no firm guideline on which level of double leverage is considered high, as this depends on the individual banks. We believe final details of the acquisition will be announced next week, likely to be followed by an analysts’ briefing.  

- We remain positive on RHB Cap and affirm our Buy rating with a fair value of RM8.50/share. We continue to believe RHB Cap is now at a compelling positive turning point. We foresee the following rerating catalysts for RHB Cap:- (a) stabilisation in gross impaired loans; (b) better-than-expected loan loss provisions; (c) higher fee income from its investment bank, which will provide evidence of revenue synergies for its proposed OSK acquisition. 

Source: AmeSecurities