RHB Capital - Solid rebound in 2Q Buy

BUY
Fair Value RM8.50

Investment Highlights 

• 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 1.5x based on an ROE of 12.9% for FY12F. 
• RHB Cap’s annualised net earnings for 2QFY12 turned out to be 6.7% above our forecast and 8.1% above the consensus estimate of RM1,662mil. The 1HFY12 earnings made up 52.8% of our and 53.5% of consensus full-year forecasts for FY12F. The better earnings were due to lower-than-expected credit costs, while top line revenue growth in 2QFY12 made up for the slow 1QFY12.
• Gross loans rebounded to an 8.9% QoQ growth in 2QFY12, versus the 1.8% QoQ contraction in 1QFY12 – with growth mainly from the corporate segment. Annualised loans growth is at 13.8%, above the company’s targeted 12% for FY12F. NIM was stable at 2.40% in 2QFY12 (1QFY12: 2.41%). The stable NIM came from efforts to lower cost of funds, in line with the company’s strategic withdrawal from the more expensive fixed deposit segment. 
• Total non-interest income was 2.2% lower on QoQ basis but this was on account mainly of large investment and trading income base in 1QFY12. More encouragingly, feebased income jumped substantially by 46.8% QoQ to RM193mil in 2QFY12 from RM138.1mil in 1QFY12, attributed to loan related activities. 
• The overall gross impaired loans balance was flat with only a 0.9% QoQ increase to RM3.5bil, which included about RM434mil of loans which were considered as performing but is now reclassified as impaired. Gross impaired loans ratio was still better at 3.3% in 2QFY12, against 3.6% in 1QFY12. Loan loss cover recorded a marginal improvement to 69.4% in 2QFY12, from 68.8% in 1QFY12. The company hinted that so far, there had been no major significant worrying signs in terms of impaired loans. Credit cost is low, estimated at only 15bps in 2QFY12 (1QFY12: 19bps) versus the earlier guidance of 30bps. 
• RHB Cap has staged a strong rebound in loans growth, while non-interest income has been resilient, gauging by the 2QFY12 numbers. Impaired loans have turned out to be more stable than we had expected, despite a slightly negative impact from the reclassification of selected performing loans into impaired status. 
• We foresee the following rerating catalysts for RHB Cap:- (a) stabilisation in gross impaired loans; (b) better-thanexpected loan loss provisions; (c) higher fee income from its investment bank, which will provide evidence of revenue synergies for its proposed OSK acquisition; (d) possible merger with MBSB.

Source: AmResearch