- We maintain our HOLD rating on RHB Capital Bhd (RHB Cap). We are lowering our fair value to RM7.50/share (from RM8.20/share previously). This is based on a lower ROE of 10.7% (from 11.2% previously) for FY14F and a new fair P/BV of 1.1x (vs. 1.2x previously).

- There was an announcement by Lion Corporation (Lion Corp) on 25 October 2013 of it being classified under PN17. According to Lion Corp’s latest annual report FY12, its principal bankers include RHB Bank Bhd and RHB Investment Bank Bhd.

- The total loans outstanding by Lion Corp was RM1,047.9mil as at end-June 2013. On top of this, there is a total bond outstanding of RM744.4mil as at end-June 2013.

- We estimate RHB Caps’ total loans and bonds exposure at around 28% of these loans and bonds outstanding. We estimate that about half of these are related to bonds, which have already been fully impaired and provided for.

- We estimate the other half to be loans, which have already been classified as impaired loans. Thus, there should be no major increase in RHB Cap’s gross impaired loans ahead.

- We estimate that the loans to be more than fully collaterised against land, plant, machinery and charged over certain investment in subsidiaries.

- To be conservative, we have revised upwards our loan loss provision by RM125mil – or about 50% of our estimated loan related to the group – for FY14F. This increases our loan loss provision assumption to RM583mil FY14F, from RM458mil previously.

- Our new credit cost assumption is now at 45bps (vs. 35bps previously) for FY14F.

- To recap, we have also forecasted higher credit costs of 65bps for FY13F to be conservative. This is mainly to reflect a working capital loan that was reclassified as impaired loan in 2QFY13, but was not provided for as it was deemed to be fully collaterised. The legacy loan is related to the steel sector. We estimate total exposure at RM450mil.

- To sum up, we are positive on the latest indicators, as these exposures are quantifiable, likely to be fully collaterised and were already reclassified as impaired loans.

- We expect upgrades to our FY14F forecasts if the collateral can be realised. The current share price is close to our fair value and probably already reflects the latest asset quality trend. 

Source: AmeSecurities