Highlights

We gathered 4Q loan base was affected by a large repayment, excluding this, loans growth is in line with KPI of 12%. Coupled with sustained non-interest income, preprovision operating profit (PPOP) momentum is intact. Note that its PPOP registered 7.5% and 10.3% qoq growth in 2Q and 3Q respectively, post legal day-1 with OSK on Apr 13.

However, there will be further provision for the RM409m steel related corporate impaired loan. It had already provided RM43m in 3Q. Amount of additional provision is uncertain but more than half of the RM409m is collateralized. Thus, despite the setback, FY13 earnings are expected to meet HLIB and consensus lowered forecasts.

Moving into 2014, the momentum in underlying trends is expected to continue albeit we expect slower loans growth due to the various subsidy removals and prudential measures (especially on the property sector).

More importantly, the synergistic benefits from OSK are expected to gain traction. As at Dec 13, actual synergistic benefits are already ahead of its target of RM62m by 2.5x. There are still a lot of potential extraction like cross selling products to OSK clients and cost rationalization. On IB revenue, despite challenging environment, pipeline is circa double the level in 2013. We believe this is due to the enlarged entity and absence of integration distraction.

Comment

We are positive on additional provision in 4Q as it will finally alleviate doubts and move into 2014 with a clean slate.

While overall sector outlook may not be exciting, we believe RHB Cap is different as it is in a position that is clear of lumpy provisions (which should normalized) as well as ready to extract more synergistic benefits. These will help to anchor earnings growth.

Thus, the lackluster share price performance in 2013 and YTD is an opportunity as we believe the valuation gap with peers will narrow once the dust on lumpy provision is settled and synergistic benefits gather momentum.

Risks

Unexpected jump in impaired loans and lower than expected loan growth as well as impact from Basel III.

Forecasts

Unchanged, pending release of FY13 results.

Rating

BUY

Positives - Valuations still lagging behind especially after recent selloff; transformation bearing fruits, reflected in strong loan growth and improving asset quality; “Easy” contributing to higher market share in retail segment; and tie-up with Pos M’sia.

Negatives - Lack of liquidity, short term dilution from acquisition of OSK and sentiment towards lumpy provision.

Valuation

Target price maintained at RM9.59 based on Gordon Growth with ROE of 12% and WACC of 10.7%.

Source: Hong Leong Investment Bank Research- 13 Feb 2014