• RHB Cap announced the completion of internal reorganisation, which involves the transfer of its operating assets and liabilities to RHB Bank Bhd for RM3.61bn. RHB Cap also injected RM2.49bn (proceeds from rights issue exercise and redemption of its investment in RHB Rupiah Liquid Fund, as well as cash available to date) in exchange for 447.8m new RHB Bank shares.

• Pending for approval (also, completion) for capital distribution and repayment) and shareholders’ approval, the listing of RHB Bank is expected by end-Jul 16.

• Based on management’s guidance, every 1 RHB Cap share will be converted to 1.3 RHB Bank shares. Financial impact

• We maintain our positive stance on the abovementioned internal restructuring exercise, as the exercise will result in: (1) Accretive earnings and ROE arising from interest expense savings (of circa RM150m); and (2) Improved capital ratios (post exercise, CET-1 and total capital ratios will improve to 12.5% and 17.2% from 12% and 16.5% respectively at end-FY15).

Catalysts

• Gaining more traction in cost rationalization;

• Completion of internal reorganization (which will result in interest expense savings and improved capital ratios).

Risks

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

Forecasts

• Maintain for now, pending completion of the exercise.

Rating

BUY

Positives

• Valuations still lagging behind; OSK merger and IGNITE 2017 transformation already bearing fruits; Bank@ Work; Rights issue and reorganization will enhance tax efficiency, eliminate goodwill, enhance interest savings as well as higher ROE and capital ratios; new reframed strategy to focus on performance and profitability.

Negatives

• Low liquidity, ROE at lower end among peers and EPS dilution from rights issue.

Valuation

• Target price maintained at RM6.96 (Gordon Growth with ROE of 8.8% and WACC of 9.4%) for now, pending completion of the exercise. Maintain BUY, given its inexpensive valuations, which lag peers and below book.

Source: Hong Leong Investment Bank Research - 15 Apr 2016