-  We maintain our HOLD rating on RHB Capital Bhd (RHB Cap), with a lower fair value of RM7.30/share (from RM8.30/share previously). This is based on a lower ROE of 10.9% (from 11.6% earlier) for FY13F, and revised fair P/BV of 1.1x (vs. 1.2x). Our net earnings are downgraded by 5.9% FY13F, to take into account possible higher loan loss provisions ahead.

-  RHB Cap’s annualised 2QFY13 net earnings fell short of our forecasts by 15.8% and consensus by 14.5%. The 1H earnings made 40.7% and 41.3% of ours and consensus estimates respectively. Earnings were below our expectations due mainly to higher loan loss provision.

-  Annualised loans growth was stronger at 10.4% in 2QFY13 (1QFY13: annualised 7.4%). These were driven mainly by the retail segments. NIM was well sustained with only a -1bps QoQ movement, which means this would be the fourth consecutive quarter of stable NIM.

-  Gross impaired loans balance recorded an upward rise of 10.3% in 2QFY13, attributed mainly to two specific corporate accounts. Gross impaired loans ratio recorded a marginal uptick to 3.2% in 2Q from 3.0% in 1Q. Credit costs came in at an estimated 50bps in 2Q, higher than the earlier indicated target of 35bps to 40bps.

-  Total non-interest income expanded by 7.9% QoQ to a higher level of RM485.5mil in 2QFY13, from RM450.1mil in 1QFY13. Total fee-based income growth of non-interest income was robust at 14.4% QoQ to RM316.3mil, aided by strong capital market activities and contribution from the merged OSK operations.

-  The marked-to-market position for its securities availablefor-sale remained healthy at RM136.1mil in 2QFY13 from RM245.7mil in 1QFY13, indicating a considerable buffer ahead. The company hinted there is unlikely to be any major marked-to-market losses for its securities held-fortrading book ahead, despite recent volatility in the market. We are more positive on its treasury operations given the latest indications.

-  Despite net earnings being lower than expectations, we are positive on indications of the treasury operations so far. Loans growth and NIM had also held up well. 2QFY13’s results also affirm a strong execution from its OSK merger, with a more leveraged exposure to capital markets. This means that RHB Cap is now positioned for an eventual upturn in the capital markets. We expect interest to return to RHB Cap with confirmation of:- (a) stabilisation in gross impaired loans; (b) better-thanexpected loan loss provisions; (c) and higher fee income from its investment bank.

Source: AmeSecurities