We are mostly neutral on RHBCAP’s new Bancassurance agreement with Tokio Marine, and the replacement of the Base Lending Rate (BLR) with the Base Rate (BR). However, we lean slightly cautious on 2015 outlook following our meeting with management. As such, we have tweaked downwards our FY14 and FY15 earnings estimates by 5.2-5.4%. Consequently, our Target Price (TP) is now lower at RM9.35 (from RM9.45), with our recommendation held at MARKET PERFORM. However, if the proposed CIMB-RHBCAP-MBSB Merger and Acquisition (M&A) were to fall through as reported yesterday, our recommendation could revert to OUTPERFORM.

CIMB-RHBCAP-MBSB deal off? Yesterday, media reported that the proposed M&A may be called off. According to the report, an official announcement is expected by the end of the week. We have been holding RHBCAP at MARKET PERFORM since the M&A was announced despite the value being ascribed to RHBCAP of RM10.03 being in line with our then OUTPERFORM target price of RM10.00. The rationale for our call is that the value ascribed was for transactional purposes only, and should the M&A go through, there will be a long gestation period before synergies from the M&A emerges. Hence, our recommendation on RHBCAP should revert to OUTPERFORM if the M&A were to fall through. Nevertheless, pending official announcement, we are maintaining MARKET PERFORM for now.

Sweeter Bancassurance terms with Tokio Marine to have minimal impact. Effective 1 Jan 2015, RHBCAP’s wholly owned subsidiary, RHB Bank Berhad, had replaced its former Bancassurance agreement with Tokio Marine (originally from 1 July 2010 - 30 June 2020) with a new 10-year Bancasurrance agreement ending 31 Dec 2024. We understand that the new Bancassurance agreement may offer better commissions, incentives and bonuses. Furthermore, the facilitation fee this time around is a higher RM210m (former Bancassurance agreement: RM100m), which will be amortised over a period of 10 years. Nevertheless, given our understanding that contribution from the Bancassurance business to the Group’s consolidated earnings is still small, we are mostly neutral on this development.

New reference rate in effect. Effective 2 Jan 2015, the BR replaced the BLR as the main reference rate for new retail floating rate loans and the refinancing of existing loans. The BR essentially strips the reference rate down to cost of funds and the statutory reserve requirement (currently at 4% of eligible liabilities). Nevertheless, banks (including RHBCAP) are still holding effective lending rates (ELR) at prior-BR levels, suggesting that the switch should neither impact on profitability nor on the cost to borrowers (at least for now). However, based on the spread between the ELR and the BR, it seems that RHBCAP may have limitation in lowering its interest margin for stronger loan growth. This is because the spread of 0.65% is below the industry average of 0.74%.

Source: Kenanga