Thursday, 14 March 2013

RHB Capital - Credit costs likely to remain within normalised level

-  We maintain our BUY rating on RHB Capital Bhd (RHB Cap), with an unchanged fair value of RM8.90/share. This is based on an FY13F ROE of 12.3%, and a fair P/BV of 1.4x.

-  Listed Malaysia Pacific Corporation (MPCORP) has announced that it had on 8 March 2013 received a letter from the advocates and solicitors acting on behalf of RHB Bank Bhd (RHB) that MPCORP had defaulted in repayment of principal sums and interest in respect of certain banking facilities. These loans total RM97mil.

-  MPCORP had stopped servicing its interest payments for past 5 months. MPCORP had offered to negotiate for a full settlement pending talks for a suitable joint-venture partner for its commercial building or sale of it, which has taken longer than expected.

-  Online news portals reported that MPCORP’s main asset is its commercial building Wisma MPL, which has reportedly been pledged to RHB for RM80mil. MPCORP disclosed that Wisma MPL’s valuation is RM300mil based on its latest revaluation date on 20 August 2010.

-  Our take is there is no impact on reported gross impaired loans, as we expect the amount to have already been classified as such, given that there had been no payment of interest instalments over the last few months.

-  In addition, there is no additional loan loss provision required. Assuming the office building has been pledged, the reported valuation amount of RM300mil is much higher than the debt value of RM80mil. Thus, there is no requirement for any additional loan loss provisioning, under FRS139.

-  Recall the company has guided earlier that credit cost will likely be at a more normalised level of 25bps to 30bps for FY13. Our credit cost assumption is 31bps for FY13F (FY12 was exceptionally low due to good recoveries, at 14bps).

-  This means a loan loss provisioning level of RM362mil for FY13 (FY12: RM148mil). We remain comfortable with our credit cost and loan loss provision assumptions, despite this news of default by MPCORP.

-  We remain positive on RHB Cap and maintain BUY. Finally, based on MPCORP’s announcement and the latest annual report, there does not seem to any other bank involved.

Source: AmeSecurities

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