- We maintain our HOLD rating on RHB Capital Bhd (RHB Cap). We are now rolling forward our base year to FY14F, leading to higher fair value of RM8.20/share (from RM7.30/share for FY13F previously). This is based on a new ROE of 11.2% for FY14F (from 10.9% FY13F earlier), and a new fair P/BV of 1.2x (vs. 1.1x).

- Recall that RHB Cap had recently indicated higher fresh impaired loans of RM409mil for the working capital segment in its latest 2Q results. This is considered legacy loans related to the steel sector. Further to this, we estimate that there is some related medium-term notes (MTN) exposure as well but these are relatively small. The total exposure to these specific accounts (including both the loan and MTN portion) would thus be about RM450mil.

- Based on the latest indications, there may be some loan loss provisioning required due to some of the collaterals being backed by cash flow of the operations of the specific accounts.

- Thus, the main uncertainty ahead is the quantum and timing of loan loss provision. We believe that the portion related to the cash flow of the operations to be small, implying that the loan loss provision required ahead may be relatively minor.

- However, a low loan loss provision does not provide much comfort, in our view, as RHB Cap’s loan loss cover has now dropped to 60.2% in end-June 2013 from 68.7% in end-March 2013. Thus, loan loss cover is at the lowest level since 2008.

- If the loan loss provision is merely 20% of the specific impaired loans, we estimate that loan loss cover will still remain low at 61.7%, which is not much of an improvement from the current 60.2%.

- However, if the loan loss provision is up to 50% of the specific impaired loans, we estimate loan loss cover to improve to 65.0%. Thus, we believe that the company may need to provide at least 50% in provision for the legacy impaired loan, in order to raise back the loan loss cover.

- In terms of the timing of loan loss provisioning, we estimate that it is better to be done by FY13F. We have therefore revised our loan loss provision upwards by RM205mil for FY13F, leading to a downward revision in our net earnings by 15% for FY13F. However, if the bulk of the loan loss provision is delayed to FY14F, there may be downgrades for our net earnings for FY14F, and consequently our fair value. We expect the main turning point in the near term to be a higher loan loss cover, which would provide reassurance on sufficient loan loss provisioning. 

Source: AmeSecurities