- We maintain our HOLD rating on RHB Capital Bhd (RHB Cap) with a lower fair value of RM7.40/share (from RM7.50). This is based on a revised ROE of 10.5% (vs. 10.7% earlier) for FY14F and an unchanged fair P/BV of 1.1x.

- RHB Cap’s FY13 earnings were ahead of our forecast by 21.4%, and above consensus full-year estimates by 4.4%. Earnings came in above our expectations as we had assumed a much higher loan loss provision in 4Q, based on newsflow of selected large impaired loans in the earlier quarters.

- Total dividend for FY13 was 16.3 sen, below our forecast of 22.09 sen and consensus forecast of 23.0 sen. Dividend payout ratio is estimated at 22.7% for FY13 (FY12: 30.9%), which is below the company’s earlier guidance of a minimum payout ratio of 30%.

- The company hinted that this is due to ongoing deliberations to reduce the group’s double leverage ratio further from 134% as at end-FY13 (end-FY12: 136%) to around 120%. This is new to us. We believe that this is in relation to the financial holding company’s capital ratio guidelines which are not finalised yet.

- Total non-interest income expanded at a healthy rate of 6.5% QoQ in 4QFY13 (3QFY13: 14.2% QoQ), mainly due to the good performance of the fee income line.

- Loan loss provision was higher in 4QFY13 at RM118.7mil, compared to the unusually low RM29.9mil in 3QFY13. The higher loan loss provision came from working capital loan for a specific group involved in the steel sector.

- The main surprise for us though, is the higher total credit exposure of RM600mil, instead of our earlier estimated RM449mil (out of which the loan portion is RM409mil while the bonds portion is RM40mil). The additional credit exposure is due to inclusion of loan exposure in the investment banking operations.

- The key new information from the 4Q earnings for us, is the larger amount of impaired loans of RM600mil, instead of RM449mil, in relation to the legacy steel sector loans.

- The other new information would be the possible monitoring of the double leverage ratio, which implies that dividend payout ratio may have to be reduced to below 30% in order to manage the double leverage ratio.

- Otherwise, the 4Q results indicate an ongoing strong momentum for its investment banking operations. 

Source: AmeSecurities