- We maintain HOLD on RHB Capital Bhd (RHB Cap), with a lower fair value of RM7.70/share (from RM8.30/share previously). Our fair value is based on an lower ROE of 11.2% (previously 11.5%) for the new RHB Bank which will take over RHB Cap’s listing status. This leads to an unchanged fair P/BV of 1.2x (from 1.3x previously), and a lower fair value of RM6.00/RHB Bank share (from RM6.40/share previously).

- Recall that we had earlier estimated that each RHB Cap share is entitled to 1.29 RHB Bank share following the proposed restructuring. Thus, apportioning our fair value accordingly for RHB Bank has led to a lower fair value of RM7.70/share (from RM8.30/share previously) for every RHB Cap share held currently.

- We are adjusting our credit costs assumption for RHB Cap ahead of our upcoming company visit, due to the latest industry indications that credit costs is likely to normalise at a higher level of 40bps next year, from 30bps this year.

- RHB Cap did particularly well in terms of credit costs in its latest quarter, registering credit costs of only 14bps in 1QFY15. This was ahead of its targeted credit costs of 20bps for FY15F.

- The company had alluded that there were four new SME accounts that were newly classified as impaired in 1QFY15. There were also some newly impaired personal loans. These are impaired without loss basis, implying sufficient collaterals for these new impaired loans. Thus, loan loss cover had continued to drop, to 60.7% in 1QFY15, from an already relatively low level of 61.1% in 4QFY14 (3QFY14: 66.6%).

- Taking this into account, and based on the industry’s indications, we are now adjusting upwards our credit costs assumptions for RHB Cap to 37bps (previous: 30bps) for FY15F, and 40bps (previous: 29bps) for FY16F.

- Our earnings have been downgraded by 3% for FY15F and 10% for FY16F.

- Separately, the company had recently announced that Bank Negara Malaysia (BNM) had vide its letter dated 23 July 2015, informed the company that the Minister of Finance and/or BNM (as the case may be) have granted their approval for the Proposed Rights Issue, Proposed Internal Reorganisation and the Proposed Distribution and Capital Repayment under the Financial Services Act, 2013. The approval timeline is within expectations.

Source: AmeSecurities Research - 27 Jul 2015