- We maintain our HOLD rating on RHB Capital Bhd (RHB Cap) with an unchanged fair value of RM7.50/share. This is based on an unchanged ROE of 10.7% for FY14F and a fair P/BV of 1.1x.

- RHB Cap’s annualised 3QFY13 net earnings were way above our earlier downgraded forecast by 25%, and were above consensus estimates by 7.8%. The 9M earnings made 87.9% and 75.8% of ours and consensus forecast respectively. Earnings were above our estimate due to lower-than-expected loan loss provisioning in 3Q, unrealised forex gain, as well as a one-off gain in relation to a lawsuit.

- Stripping off the one-off items which contributed to the large 14.2% QoQ rise in non-interest income, the fee income was resilient (flat QoQ) considering the subdued capital markets in 3Q.

- In addition, the treasury division did well with a higher unrealised marked-to-market gain for its longer-term securities available-for-sale, at RM177.0mil in 3QFY13 (2QFY13: RM136.1mil), which is a positive surprise. This is commendable considering the volatile treasury market in 3Q. This places RHB Cap as one of two banks with ability to chalk up gains for its longer-term securities despite the more challenging market environment.

- Gross impaired loans balance improved, based on the -4.1% QoQ downward trend in total impaired loans in 3QFY13, against an earlier spike of 10.3% QoQ in 2QFY13. Gross impaired loans ratio was thus reduced to 2.9% in 3QFY13, from 3.2% QoQ in 2QFY13.

- Credit costs were much lower at 10bps in 3Q, as collaterals were deemed to be sufficient for specific impaired accounts. This lowered loan loss cover to 59.6% in 3QFY13 from 60.2% in 2QFY13, which is below the 60.0% level.

- Positive indicators from 3Q results are stronger lending operations in terms of better loans growth and NIM, resilient underlying trend in terms of fee income and treasury operations, as well as ongoing transparency in terms of asset quality provisioning. The 3Q earnings affirm our belief that RHB Cap is now well-positioned to take advantage of an eventual upturn in the capital markets.

- We expect rerating catalysts to be:- (a) stabilisation in asset quality; (b) improved loan loss cover; and (c) better than-expected non-interest income. 

Source: AmeSecurities