RHB Capital Bhd (RHBCap)
(April 13, RM5.95)
Maintain buy at RM5.98, target price raised to RM7.30: RHBCap is a beneficiary of interest rate hikes given its higher proportion of variable rate loans. We have imputed a 50 basis points (bps) rise in interest rates in our estimates, and every additional 25bps rise in the overnight policy rate (OPR) would expand RHBCap's net interest margin (NIM) by 10bps and raise earnings by 6%-7%.
Largely a domestic-based bank, RHBCap is targeting higher contribution from its international business over the next three years. Overseas contribution is currently from its seven-branch Singapore operation, at 3% of group earnings. The inclusion of Bank Mestika (expected to be completed by 2H10) would add another 4% to full-year pre-tax profit.
RHBCap introduced a new and simplified banking concept with a unique selling proposition called "Easy by RHB" in July 2009. The unique selling proposition for "Easy by RHB" is that it offers products that are relevant and attractive, while making customers' banking experience simple and convenient.
"Easy" outlets are situated closer to the community and operate during "non-traditional" banking hours for easy access. As of March 2010, there are 45 "Easy" outlets, and RHBCap targets to open another 35-40 outlets by end-2010.
The outlets will be developed with partners like Tesco and Pos Malaysia or as stand-alone kiosks. Due to the simple infrastructure and concept of the outlets, the investment cost is lower than setting up a full-fledged banking branch.
Although the income contribution is small now, the concept is highly scalable and expected to tap into new demographic markets, expand customer base and raise net interest income.
Recovering capital market activities could add to non-interest income. RHBCap could benefit from the recovery in capital market activities given that it is one of the top 10 underwriters in debt and equity issues.
RHBCap was ranked third in Bloomberg's league table for debt and took 13.2% market share in 2009. It was ranked fifth with a 5.6% market share in 1Q10. In equities, RHBCap's market shares were decent at 2.1% and 3.1% for the respective periods. We believe RHBCap is a strong contender for potential listings, advisory and fund-raising transactions in 2010.
We expect capital market activities to pick up strongly in 2010, with more fund-raising and merger and acquisition (M&A) activities, in line with the recovering economy. As such, we expect more underwriting and arrangement fees, and corporate advisory fees, as part of non-interest income. Currently, RHBCap's fee-based income forms around 55% of total non-interest income; we forecast this segment to grow 10% year-on-year in FY10-FY12F.
RHBCap is a laggard relative to its peers and stands out as a value proposition in terms of its price-to-book value (PBV) and return on equity (ROE) metrics. It is trading at 1.2 times FY11F PBV, a 32% discount to the sector average of 1.9 times, while its ROE profile is respectable at 14%-15%. It is also trading at its 10-year historical mean, while most Malaysia banks are trading above mean or one time standard deviation.
We raised our target price to RM7.30 after shifting valuation base to FY11F (indicative target price ex-rights is RM6.80). RHBCap is the cheapest stock in our Malaysia large-cap universe at only eight times forward price earnings (PE). - Hwang-DBS Vickers Research, April 13
This article appeared in The Edge Financial Daily, April 14, 2010.
(April 13, RM5.95)
Maintain buy at RM5.98, target price raised to RM7.30: RHBCap is a beneficiary of interest rate hikes given its higher proportion of variable rate loans. We have imputed a 50 basis points (bps) rise in interest rates in our estimates, and every additional 25bps rise in the overnight policy rate (OPR) would expand RHBCap's net interest margin (NIM) by 10bps and raise earnings by 6%-7%.
Largely a domestic-based bank, RHBCap is targeting higher contribution from its international business over the next three years. Overseas contribution is currently from its seven-branch Singapore operation, at 3% of group earnings. The inclusion of Bank Mestika (expected to be completed by 2H10) would add another 4% to full-year pre-tax profit.
RHBCap introduced a new and simplified banking concept with a unique selling proposition called "Easy by RHB" in July 2009. The unique selling proposition for "Easy by RHB" is that it offers products that are relevant and attractive, while making customers' banking experience simple and convenient.
"Easy" outlets are situated closer to the community and operate during "non-traditional" banking hours for easy access. As of March 2010, there are 45 "Easy" outlets, and RHBCap targets to open another 35-40 outlets by end-2010.
The outlets will be developed with partners like Tesco and Pos Malaysia or as stand-alone kiosks. Due to the simple infrastructure and concept of the outlets, the investment cost is lower than setting up a full-fledged banking branch.
Although the income contribution is small now, the concept is highly scalable and expected to tap into new demographic markets, expand customer base and raise net interest income.
Recovering capital market activities could add to non-interest income. RHBCap could benefit from the recovery in capital market activities given that it is one of the top 10 underwriters in debt and equity issues.
RHBCap was ranked third in Bloomberg's league table for debt and took 13.2% market share in 2009. It was ranked fifth with a 5.6% market share in 1Q10. In equities, RHBCap's market shares were decent at 2.1% and 3.1% for the respective periods. We believe RHBCap is a strong contender for potential listings, advisory and fund-raising transactions in 2010.
We expect capital market activities to pick up strongly in 2010, with more fund-raising and merger and acquisition (M&A) activities, in line with the recovering economy. As such, we expect more underwriting and arrangement fees, and corporate advisory fees, as part of non-interest income. Currently, RHBCap's fee-based income forms around 55% of total non-interest income; we forecast this segment to grow 10% year-on-year in FY10-FY12F.
RHBCap is a laggard relative to its peers and stands out as a value proposition in terms of its price-to-book value (PBV) and return on equity (ROE) metrics. It is trading at 1.2 times FY11F PBV, a 32% discount to the sector average of 1.9 times, while its ROE profile is respectable at 14%-15%. It is also trading at its 10-year historical mean, while most Malaysia banks are trading above mean or one time standard deviation.
We raised our target price to RM7.30 after shifting valuation base to FY11F (indicative target price ex-rights is RM6.80). RHBCap is the cheapest stock in our Malaysia large-cap universe at only eight times forward price earnings (PE). - Hwang-DBS Vickers Research, April 13
This article appeared in The Edge Financial Daily, April 14, 2010.
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