-  We maintain our HOLD rating on RHB Capital Bhd (RHB Cap) with a higher fair value of RM9.18/share (from RM7.40/share previously).

-  Our new fair value is based on a possible merger scenario of RHB Cap taking over CIMB in the proposed mega bank merger (see our earlier report on CIMB dated 25 August 2014), and RHB Cap’s book value being potentially and substantially uplifted to RM9.18/share.

-  To recap, we peg the fair P/BV at a base valuation of 1x for the enlarged RHB Cap entity under this scenario, as we believe that the bigger cap and highly liquid banking entity will command a minimum P/BV of 1x, irrespective of Gordon Growth methodology.

-  RHB Cap posted unexpectedly strong net earnings for 2QFY14, which if annualised came in 11.6% above our forecast and 6.1% above consensus forecast of RM1,998mil for FY14F.

-  Annualised loans growth was strong at 17.6% (1QFY14: 14.9%), well above the targeted loans growth of 12% for FY14F. Growth was supported by both retail and corporate, with main drivers being the residential property, non-residential mortgage, purchase of securities, construction, mergers and acquisition, and working capital segments.

-  NIM held up well with only a marginal 4bps QoQ drop, despite ongoing deposit pricing pressure and larger contribution from but lower-yielding new corporate loans.

-  Deposit also posted a robust annualised growth rate of 17.2% in 2QFY14, based mainly on CASA deposits’ annualised growth of 17.2%. The CASA growth is thus ahead of the company’s targeted CASA growth of 15% for FY14F. We estimate that NIM was stable on a QoQ basis.

-  The 2QFY14 indicated an accelerated pace of improvement in its targeted segments, with strong loans growth in its new targeted segments, minimal decline in NIM, robust growth in CASA deposits and stable asset quality.

-  We expect share price to sustain, even without a possible merger, given the accelerated traction in its new targeted segments. The key risks ahead is ongoing distraction from the merger, which could derail the good pick-up in its momentum in 2QFY14.

-  Maintain HOLD. 

Source: AmeSecurities