RHBCap could see a slow start

Business & Markets 2013
Written by Maybank IB Research
Friday, 10 May 2013 10:51
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RHB CAPITAL BHD []
(May 9, RM8.76)
Maintain buy at RM8.74 with a target price of RM9.80: Earnings may
get off to a slow start in the first quarter ended March of financial year
2013 (1QFY13) but we see momentum picking up once revenue
contributions from investment bank (IB) deals start to flow through and
as corporate lending picks up momentum. RHBCap remains one of our
top picks in the banking space for its attractive valuations and its liquid
balance sheet offers growth potential, while the ability to secure Bank
Mestika will likely be a rerating catalyst. Our earnings forecasts and
target price of RM9.80 (2013 price-to-book value [P/BV] of 1.5 times)
are unchanged, supported by an FY13 return on equity of 12.5%.
While the IB deal pipeline has been encouraging, revenue will only flow
through in the subsequent quarters. Corporate lending is likely to have
been subdued too while integration costs will continue to feature,
contributing to negative Jaws (Jaws ratio = income growth rate minus
expense growth rate) in 1Q. All in, we expect a slow start to earnings,
but with a pick-up in the subsequent quarters as revenue contributions
flow through from the IB mandates in 1Q.
Fundamentally, what is positive is that RHBCap’s valuations are attractive, with the stock trading at a prospective FY13 priceearnings
ratio of just 11.2 times (industry 12.8 times), making it one of the cheapest banking stocks in our Malaysian portfolio.
Moreover, with a loan-to-deposit ratio of just 79% as at end-FY12 against a large-cap average of 86%, the group’s balance
sheet is liquid, providing room to not only expand its asset base at an above industry pace (2013 target loan growth of more
than 12% against the industry’s 10% to 11%), particularly with the resumption of growth on the consumer front, but also
space to manoeuvre net interest margins.
The target is to derive 30% of revenue from offshore operations by 2017 from just 6% in 2012, 40% by 2020. With OSK IB,
the group now has presence in seven out of 10 Asean countries. It will soon open branches in Laos and Vietnam, while in the
Philippines management is still evaluating its options. In Thailand, RHBCap currently has one branch and will look to open two
more. Management is still hopeful of a reply from Bank Indonesia re Bank Mestika by June. — Maybank IB Research, May 9