-  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).

-  The press reported that RHB Cap is expected to be affected by Malaysian AE Models Holdings Bhd (Maemode)’s default on its RM96mil term loan with two local banks, Malayan Banking Bhd (Maybank) and RHB Cap.

-  Maemode has announced that it failed to service the monthly fixed repayment amounting to RM16mil as at 31 May 2013 in respect of the Facility Agreement (Syndicated Term Loan Facility of up to RM100.0mil). The event of default has triggered demand from financiers for the full outstanding amount of RM96.1mil as at 31st May 2013.

-  We believe the Maemode loan has been classified as an impaired loan in 1QFY13. We believe this is likely related to the group of companies, which included the corporate manufacturing loan, which was classified with the impaired loan status in 1QFY13 and 4QFY12.

-  Recall that in 1QFY13, there was a corporate manufacturing loan of RM100mil in which the related individual assessment allowance made in 1QFY13, had come up to RM76mil (see charts in following page). Earlier at the briefing, RHB Cap had indicated that recovery is unlikely in 2Q or 3Q, although it is currently monitoring the loan. The fresh impaired loan status came about due to generally slower and delayed cash flow environment up to March 2013. In 4QFY12, there was also a new corporate manufacturing impaired loan of RM100mil.

-  With the latest news, we estimate there may be additional loan loss provisioning required ahead in 2QFY13, as there are likely to be other related trade facilities that are affected and not provided for in 1QFY13.

-  However, we estimate the loan loss provision required is likely around RM60mil, less than the RM76mil made in 1QFY13. We believe the additional RM60mil would be the last of the loan loss provisioning required for these impaired loans.

-  We are reassured by the latest updates. We are not adjusting our forecasts as we have already reflected a high loan loss provision of RM412mil in FY13F, or a more normalised credit costs of 35bps for FY13F. To recap, RHB Cap enjoyed low credit costs in FY12 due to one-off good recoveries. We believe the company deserves to score well for its better transparency.

Source: AmeSecurities