RHB Capital - Likely better 2Q Buy

-  We maintain our BUY rating on RHB Capital Bhd (RHB Cap), with an unchanged fair value of RM8.50/share. This is pegged to a fair P/BV of 1.45x based on an ROE of 12.9% FY12F.

-  We believe RHB Cap’s loans approval rates has picked up significantly since May 2012, with April 2012 likely to have been the trough. The company is maintaining its overall loans growth target of 12% for FY12F. We understand that there have also been no major concerns in terms of impaired loans in recent months, which is reassuring. This is despite the ongoing external uncertainty. The company is now guiding for overall credit costs of 30bps in FY12F, vs. the previous guidance of 30bps to 50bps (our forecast FY12F: 49bps). 

-  We believe there may be some misperception in relation to MBSB’s operations, should it be acquired by RHB Cap. One concern may be whether there is any impact  from the Responsible Lending Guidelines on MBSB.

-  We also do not believe that there will be any specific measures that will be targeted at MBSB’s personal loan segment, if MBSB is to be acquired by RHB Cap. Firstly, there is no specific cap outlined in terms of debt-toservice ratio under the Responsible Lending Guidelines.

-  Secondly, even if there is to be a cap, we believe the loan repayment portion as percentage of salaries (or debt service ratio), will be maintained at 60% for government civil servants’ loans. This is because, although the household segment as a whole (which includes the private sector)’s debt service ratio had been reported as 48.1% at 2011, we believe this is based on gross pay basis. Thus, on net pay basis (net of EPF and tax) we estimate that the debt service ratio at 60.9%. Which means that, the debt service ratio for the public sector cap of 60% now, is on par with the private sector’s and should therefore not be a basis to argue that the public sector’s cap should be lowered.  

-  Thirdly, as an indication, the operation of Bank Rakyat is governed under the DAFIA (and therefore falls under Bank Negara). As far as we understand, Bank Rakyat’s ceiling on debt-service ratio had been maintained at 60%, for repayment of loans by government civil servants without any changes. Thus, personal financing loans for Bank Rakyat had grown from RM20bil in FY06 to RM64bil in FY11. For comparison, MBSB’s personal loan financing is smaller at RM11bil. 

-  We foresee the following rerating catalysts for RHB Cap:- (a) better-than-expected loan loss provision; (b) higher non-interest income from its investment bank; (d) possible merger with MBSB.

Source: AmeSecurities