- We maintain HOLD on RHB Capital Bhd (RHB Cap), with a lower fair value of RM6.00/share (previously RM7.40/share), as we roll-forward our base year to FY16F from FY15F.

- Our fair value is based on a new ROE of 9.2% for FY16F (previously 10.7% for FY15F), for the new RHB Bank which will take over RHB Cap’s listing status. This leads to a lower fair P/BV of 0.8x (from 1.1x), and a lower fair value of RM4.50/RHB Bank share (previously RM5.65/share).

- Recall that we had earlier estimated that each RHB Cap share is entitled to 1.31 RHB Bank share following the proposed restructuring. Thus, apportioning our fair value accordingly for RHB Bank means a new fair value of RM6.00/share FY16F (previously RM7.40/share FY15F) for every RHB Cap share held currently.

- RHB Cap’s 2QFY15 annualised net earnings fell short of our forecast by 2.6%, but was in line with consensus forecast of RM2,048mil for FY15. The variance to our forecast was mainly in the softer-than-expected noninterest income line.

- Net earnings were boosted by a positive write-back in the loan loss provision line of RM40.8mil in 2QFY15 (1QFY15: loan loss of –RM50.2mil).

- The 1H made up 47.5% of our estimate and 48.9% of consensus forecast for FY15.

- There was a marginal rise in gross impaired loans balance, by 1.8 % QoQ. These came mainly from the nonresidential, fixed assets, personal use, credit card, construction, working capital and other purposes segments.

- Looking ahead into FY16F, we have now assumed higher credit costs of 50bps (from 41bps previously) – in line with our assumptions for other banks under our coverage.

- This is to reflect potential knock-on contagion effects from macro uncertainty. Recall RHB Cap recorded credit costs of 83bps in FY08 and 87bps in FY09, before easing to 54bps in FY10. This translates to a 5% downgrade in FY16F net earnings. Maintain HOLD.

Source: AmeSecurities Research - 1 Sep 2015