-  Recall that RHB Cap had recently indicated higher fresh impaired loans of RM409mil in the working capital segment in its latest 2Q results. This is considered legacy loans related to the steel sector, in which there has been no individual assessment loan loss provision made yet in 2Q given that it was mostly collateralised. We believe that these are fully collateralised against plants, buildings and cash flow of the operations.

-  Following the latest indications, we believe there may be some level of loan loss provisioning required in relation to the fresh impaired loans of RM409mil. In terms of provisioning, we believe the portion may be relatively small given that the bulk of the collaterals are in the form of buildings.

-  In addition, we believe there is a related medium term note (MTN) which is likely to be restructured and reclassified as loan, and will likely be considered as impaired as well. The quantum is relatively small though, estimated at around 10% of the total fresh impaired loans.

-  On top of that, there is also another MTN note, but it is considered as fully collateralised. We estimate RHB Cap’s portion to be another 12% of the total loan of RM409mil currently.

-  All in all, we are more positive given the latest indications, as these provide some level of quantifiable impact of the fresh impaired loans. We estimate the total amount to be about RM500mil for these specific accounts, including both the loan and MTN portions, or about 3% or 20 sen of the current book value of RM6.35 as at end-June 2013.

-  Other than these, there are no major indications of concern in terms of overall asset quality trend. The other major steel loan exposure, i.e. to another group, is considered to be performing, given that these are restructured loans. What is positive is that RHB Cap has already provided for some of the loans over the years.

-  As for the loan loss provision expense in 2Q, we have further clarified that an additional RM58mil was made in relation to the adjustment to the loss given default (LGD) for selected large impaired loans. This is considered to be one-off in nature. The latest positive new information is the additional MTN related to the specific accounts, which is quantifiable at this point. The only uncertainty to ascertain in the medium term is the other loan exposure to the steel sector. Thus, we expect RHB Cap’s share price to stabilise at the current level.

Source: AmeSecurities