RHB Capital - Loosening up the knotty issues

-  We maintain our BUY rating on RHB Capital Bhd (RHB Cap). We are now rolling forward our base year to FY13, with our fair value now upgraded to RM8.60/share (from RM8.50/share FY12F previously). This is based on FY13F ROE of 12.3% (vs. 12.9% FY12F previously), and a fair P/BV of 1.3x FY13F (from 1.4x FY12F). 

-  RHB Cap has completed its proposed acquisition of OSK Investment Bank (OSKIB), with the issuance and listing of the 245mil new RHB Cap shares priced at RM7.36/share as part of the consideration for the deal. 

-  Thus, there is now no longer a psychological cap to RHB Cap’s share price, in our view. Previously, if RHB Cap’s share price moves above RM7.95 before completion of the deal, then the acquirer (RHB  Cap) is compensated by a revision in the number of new shares to the vendor. This had thus implied a cap to share price performance before the deal was completed. 

-  In addition, the group is likely to be more able to share further details on the management line-up for its merged investment banking operations. We believe this will likely assuage ongoing concerns over leadership vacuums in its investment banking operations, especially since the resignation of the managing director of the investment bank since April 2011.

-  The other possible dampener to RHB Cap’s share price is whether there may possibly be a requirement to raise additional capital under Bank Negara’s Concept Paper. Recall that RHB Cap reports only bank capital ratios, and not group capital ratios, whereas the focus will likely be on group capital ratios under BASEL 3. 

-  However, RHB Cap has already indicated at recent briefings that its group common equity ratio would be at slightly more than 7%, if based on Bank Negara’s concept paper, and at the high 8% level if based on Basel 3’s definition, as at end-June 2012. This is before including OSKIB. From this, we guesstimate that, if including OSIKB, group common equity ratio would be 7.2%, which is still in line with the minimum required currently of 7.0% by 2019 under Bank Negara’s and BASEL’s requirement. 

-  With one concern (i.e. removal of price band upon completion of the OSK deal) removed, we expect other knotty concerns to be addressed over time. 

-  Thus, we anticipate the following new 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 in the OSK acquisition; (d) reassurance on capital; and (e) newsflow on management team; (f) finalisation of rights issue for Bank Mestika.    

Source: AmeSecurities