June 5, 2010

RHBCAP - Strong showing from banks in April

Stock Name: RHBCAP
Company Name: RHB CAPITAL BHD
Research House: AMMB

Banking sector
Downgrade to neutral (from overweight)
: Industry loans growth stable at 10% year-on-year (y-o-y) in April 2010, broadly unchanged from March 2010's +9.8% y-o-y.
Again, most of the growth was derived from the household segment, which reported growth of 12.2% y-o-y in April (March: 11.8% y-o-y). Business segment's loans growth slowed down somewhat to 4% in April from March 2010's 4.3% y-o-y.

Loans applications turned in a healthy growth rate of 26.8% y-o-y in April, comparable to the 23% growth recorded in March.

As for loans approved, the growth rate picked up again to a robust 26.7% y-o-y increase in April, which is certainly much higher than the 12.9% y-o-y and 11.8% y-o-y growth rates seen in March and February 2010, respectively.

Both the loan application and approval growth rates are surprisingly strong, and we had expected these to start to normalise given that the low base effect of 1Q09 will now be replaced by a more regularised base from March 2009.

The business segments are the main drivers in April 2010, with business applications growth rate strengthening to 40.2% y-o-y (March: +16.8% y-o-y), and business loans approved growth accelerating to +32.4% y-o-y (March: +4.8% y-o-y).

We understand the industry non-performing loans (NPL) figures would be somewhat of a hybrid, given that some banks are now reporting impaired loans based on FRS139, while others have yet to cross over to FRS139.

Nevertheless, as a gauge, April 2010's gross non-performing loans/impaired loans nudged up by RM357 million month-on-month (m-o-m), from a previous reduction of RM1.7 billion m-o-m in March 2010.

Gross NPL/impaired loan ratio is still somewhat stable at 3.5% in April (March: 3.5%), given higher loan base. Net NPL ratio is unchanged as well at 1.8% in April (March: 1.8%). Loan loss cover strengthened though to 97.8% in April, if compared to 95.9% in March.

April 2010's banking industry data indicates that loan growth is likely to remain healthy. However, we expect these to be largely discounted in our forecasts, as we now project 9.8% (previous 8%) calendarised loan growth for the seven banks under our coverage.

Looking ahead, we expect asset quality trends to be skewed by changes to accounting basis, when the other banks (AFG, HLBB, Maybank) adopt FRS139. Thus, a more relevant comparison will likely be possible only from the September 2010 banking statistics.

We are downgrading our sector rating to neutral from overweight. This is mainly due to our earlier downgrade on CIMB to hold from buy previously. Our sector top pick is still RHB Capital and HLBB. RHBCap in our view is still a laggard, trading at P/BV (price-to-book value) of only 1.4 times. We maintain our fair value on RHBCap at RM7.20 per share.

We remain positive on HLBB as we expect higher value extraction should its merger with EONCap goes through. We maintain buy on HLBB with unchanged fair value of RM10.90 per share. ' AmResearch, June 3


This article appeared in The Edge Financial Daily, June 4, 2010.


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