RHB Capital Bhd
(Jan 14, RM7.65)
Maintain market perform with a lower target price (TP) of RM9.35: We are mostly “neutral” on RHB Capital’s (RHBCap’s) new bancassurance agreement with Tokio Marine Insurance (M) Bhd, and the replacement of the base lending rate (BLR) with the base rate (BR).

However, we lean slightly cautious about the 2015 outlook following our meeting with the management. As such, we have tweaked downwards our financial year 2014 (FY14) and FY15 earnings estimates by 5.2% to 5.4%.

Consequently, our TP is now lower at RM9.35 from RM9.45, with our recommendation held at “market perform”.

However, if the proposed CIMB Group Holdings Bhd/RHB Cap Bhd (RHBCap)/Malaysia Building Society Bhd (MBSB) mergers and acquisitions (M&A) were to fall through as reported yesterday, our recommendation could revert to “outperform”.

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” TP of RM10.

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.

Effective Jan 1, 2015, RHBCap’s wholly-owned subsidiary, RHB Bank Bhd, had replaced its former bancassurance agreement with Tokio Marine (originally from July 1, 2010 to June 30, 2020) with a new 10-year bancasurrance agreement ending Dec 31, 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 RM210 million (former bancassurance agreement: RM100 million), 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.

Effective Jan 2, 2015, the BR replaced the BLR as the main reference rate for the 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 have an 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 a 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%. — Kenanga Investment Bank Bhd, Jan 14

This article first appeared in The Edge Financial Daily, on January 15, 2015.