-  We maintain our BUY rating on RHB Capital Bhd (RHB Cap), with a higher fair value of RM9.50/share. This is based on upgraded FY13F ROE of 12.8% (from 12.3% previously), and a higher fair P/BV of 1.44x (from 1.36x).

-  RHB Cap’s 1Q net earnings if annualised was 29.0% and 27.7% below ours and consensus estimate. The 1Q earnings made 17.8% and 18.1% of ours and consensus forecasts respectively.

-  Earnings were below expectations due to unexpectedly higher loan loss provision, attributed to one particular fresh manufacturing related loan of about RM100mil which led to individual impairment of RM76mil. This was attributed to generally delayed cash flow environment in 1Q, which has improved since April 2013. Otherwise, gross impaired loans ratio remains stable and unchanged at 3.0% in 1QFY13. We do not expect asset quality to be a major concern given the hinted improvement in April.

-  Annualised loans growth came in at 7.4% in 1QFY13F, below the earlier indicated target of 12% FY13F. However, the softer loans growth is likely in line with expectations, given indications earlier that the corporate and commercial segments had been soft due to prevailing cautious sentiments prior to the general election. The company indicated that the loans pipeline looks stronger ahead. Total non-interest income was sustained at RM450.1mil in 1QFY13, compared to RM452.2mil in 4QFY12 despite the lack of capital market activities.

-  Despite the headline numbers coming in below expectations, the 1Q quarter was unexpectedly strong in terms of two main areas - stockbroking and fund management division. In addition, RHB Cap had earlier indicated a much stronger pipeline ahead for its investment banking division. Given stronger 2H as well as better stockbroking and fund management divisions, we have upgraded our non-interest income by 34% to RM2,304mil (previously RM1,693mil) for FY13F. We now forecast fee income ratio of 37.6% (previously 31.5% FY13F). This is ahead of the company’s target of 30% to 31%. We believe non-interest income is likely to surprise on the upside in 2H.

-  Our net earnings is uplifted by 4% overall as we have also revised our overhead expense assumptions. The 1Q is positive as earnings profile is now much more leveraged to a buoyant capital market.

-  We expect 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.

Source: AmeSecurities