RHB Capital - Limited downside given cheap valuation HOLD

- From our recent company visit, we believe loan applications for RHB Capital have remained stable in recent months. However, we understand loans approvals to have declined substantially. 

- We understand the main reason for this is due to increased documentation required to support proof of income under the new lending guidelines which came into effect from 1 January 2012.  This is likely to have affected residential mortgage and auto loans, which make up a large portion (21% and 12%, respectively) of its loan book. 

- We do not expect financing for Amanah Saham Bumi (ASB) unit trust to be affected, as these loans are considered as secured. Personal loans, on the other hand, are likely to have stiffer documentation requirements. Total assets financed through EASY stand at 3.4% of total loans, or at about RM3.3bil as at 4QFY11. Of this, 75% is related to ASB financing, while 25% is related to personal financing.  

- Despite likely softer consumer loans, we expect RHB Cap to maintain its loans growth target at 12% for FY12F, as the group is likely to benefit from the government’s Economic Transformation Programme (ETP). We are not changing our forecasts, given that our loans growth projection at 9.5% is already lower than RHB Cap’s target. For the SME segment (12% of total loan), RHB Cap maintained its shift in focus on asset-based (eg shop-house) financing rather than the working capital segment.

- RHB Cap is likely to be implementing full FRS139 as well. This is likely to lead to a small write-back from its collective assessment balance, and decline in loan loss cover. More importantly, the loan loss provisioning for smaller non-performing loans (NPL) will now likely be estimated using the actual probability of default (PD) and loss given default (LGD) experience on historical five-year data, rather than on the previous time-based provisioning basis under the old GP3 accounting basis. 

- Further, we understand that there has been no significant new SME impaired loans in recent months, while the earlier selected SME in the manufacturing and exports segment which had turned into impaired loan status in the beginning of the year has stabilised. This is positive for loan loss provisioning. The company alluded credit costs will likely be lower than earlier targeted of 30bps to 50bps FY12F (our forecast: 64bps). We are maintaining our HOLD on RHB Cap, with fair value of RM8.20/share. We believe there is limited downside given RHB Cap’s cheap P/BV valuation of 1.4x. 

Source: AmeSecurities