- We downgrade our rating on RHB Capital Bhd (RHB Cap) to HOLD from BUY, with a lower fair value of RM8.30 (from RM9.50). This is based on FY13F ROE of 11.6% (from 12.8% previously) and a lower fair P/BV of 1.2x (from 1.4x). This is our first rating downgrade since May 2012.

- Based on our company visit, we believe RHB Cap had secured a substantial mandate under its merged investment banking platform. However, we believe about 25% of these mandates will likely be recognised only in FY14F.

- In addition, we expect some losses from its securities portfolio but these would be largely related to its securities available-for-sale positions, which are posted in its balance sheet. Nevertheless, we estimate some portion to come from its securities held-for-trading position,although impact is likely to be less than the AFS position.

- In terms of non-interest income, we have downgraded our forecast by RM250mil or 11.0% to RM2.0bil (from RM2.3bil) FY13F to account for securities marked-to-market position and slower recognition of mandates.

- For asset quality, we remain assured as RHB Cap alluded that the new impaired loans are related to a specific account’s related trade facilities. As mentioned before, these will likely lead to an additional RM60mil in loan loss provision in 2QFY13, following the RM74mil specific loan loss provision in 1QFY13 (related to a RM100mil impaired loan). We remain positive as RHB Cap is already providing substantially for the specific gross impaired loans.

- There had been further progress on RHB Cap’s proposed acquisition of Bank Mestika as we understand the Malaysian regulators have given the verbal go-ahead. As such, RHB Cap is now proceeding to obtain approvals from Indonesia’s regulators. To recap, we have reflected in Bank Mestika’s earnings in our forecasts earlier, but we are now adjusting this to a later timeline in FY14F, instead of FY13F.

- The recommencement of Bank Mestika talks means that RHB Cap will still need to undertake a rights issue for the acquisition. We have maintained our assumption of a possible rights issue, on a 1 right-for-18 shares basis, at RM5.60/share, with the total amount to be raised atRM761.6mil. All in all, our net earnings have been reduced by 6.3%, leading to new ROE of 12.0% from 12.8% previously. The company has a ROE target of 13.0% for FY13F. The major new information from our visit is the likely delayed recognition of investment banking mandates, some losses on MGS positions, ongoing potential Mestika acquisition and rights issue.
 

Source: AmeSecurities