BANKING RHB CAPITAL (RHBC MK, RHBC.KL) 5 July 212 Making sense of a possible MBSB merger Company report Rachel Huang huang-teng-siang@ambankgroup.com +63 236 2293 Rationale for report: Company Update BUY (Maintained) Price Fair Value 52-week High/Low Key Changes Fair value EPS RM7.36 RM8.5 RM9.22/RM6.53 Unchanged Unchanged YE to Dec FY11 FY12F FY13F FY14F Total income (RMmil) 4,37.8 4,61.7 4,881.7 5,2.3 Core net profit (RMmil) 1,51.5 1,691.4 1,759.1 1,871.4 Core EPS (Sen) 68.1 67.4 68.2 7.6 EPS growth (%) 3.3 n/a 1.2 3.5 Consensus EPS (Sen) n/a 7.8 73.7 81.7 DPS (Sen) 25.4 2.6 22.6 22.6 BV/share (RM) 5.19 5.9 6.37 6.85 PE (x) 1.8 1.9 1.8 1.4 Div yield (%) 3.3 2.6 2.9 2.9 P/BV (x) 1.4 1.2 1.2 1.1 ROE (%) 14. 12.9 11.3 1.8 Stock and Financial Data Shares Outstanding (million) 2,24.8 Market Cap (RMmil) 16,227.5 Book value (RM/share) 5.19 P/BV (x) 1.4 ROE (%) 14. Major Shareholders Employees Provident Fund (45.%) Aabar Investments PJS (25.%) Free Float (%) 46. Avg Daily Value (RMmil) 11.9 Price performance 3mth 6mth 12mth Absolute (%) -4.5 1. -17.5 Relative (%) -5.7-5.3-19.1 1. 8. ) M 6. (R 4. 2. M a y - 6 N o v - 6 M a y - 7 N o v - 7 M a y - 8 RHB Cap PP 12247/6/213 (3238) N o v - 8 M a y - 9 FBM KLCI N o v - 9 M a y -1 N o v -1 1,653 1,458 1,262 1,67 M 871 a y -1 1 In d e x P o in ts Investment Highlights We maintain our BUY rating on RHB Capital Bhd (RHB Cap), with an unchanged fair value of RM8.5/share. This is pegged to a fair P/BV of 1.45x based on an ROE of 12.9% FY12F. In this report, we outline the impact from RHB Cap possibly considering taking over Malaysia Building Society Bhd (MBSB). We have walked through several scenarios in which RHB Cap may fund for the acquisition either entirely through cash, or shares, or a combination of both (8% cash and 2% new shares). Assuming an acquisition price for MBSB at RM2.8/share, we find that the most optimal structure will likely be a funding combination of cash and shares. This leads to RHB Cap s fair value rising to RM1.1/share from our current estimated RM8.5/share. The merger with MBSB, if it happens, will open up one of the most lucrative segments of lending, given MBSB s exposure to the government civil servants personal financing segment. As a gauge, Bank Rakyat s personal loan size is about RM65bil (or 77% of its total loan book), while MBSB s is RM11bil. Bank Rakyat reported net earnings of RM2bil, while MBSB s was RM325mil, in FY11. In fact, a simplistic comparison between RHB Cap and Bank Rakyat indicates that the latter s gross loans of RM84bil is slightly less than RHB Cap s RM97bil, but Bank Rakyat s net earnings of RM2bil has already exceeded RHB Cap s RM1.5bil, in FY11. We do not foresee any major gaps in terms of possible capital or SRR requirements. For RHB Cap, the next possible acquisition may be Bank Mestika first, before MBSB. However, we estimate that a possible acquisition of Bank Mestika would be neutral to RHB Cap with fair value being revised to RM8.4/share, from RM8.5/share currently. So in a nutshell, we do not expect any further downside to RHB Cap. A merger with MBSB merger will likely be positive, given that this opens up a new and more profitable segment of lending for RHB Cap. A possible hindrance may be the perception that RHB Cap is allowed into this segment, while other commercial banks would not be able to tap into this, but we believe this would be easily countered by the fact that the major shareholder of both RHB Cap and MBSB is the Employees Provident Fund, which represents the bulk of the retirement funds of the workforce in Malaysia. Thus, in essence, the public s interests is best aligned to both RHB Cap, and MBSB.
THE INVESTMENT CASE FOR POSSIBLE MERGER WITH MBSB In this report, we outline the investment case for RHB Capital s (RHB Cap) possible acquisition of Malaysia Building Society Bhd (MBSB), which had earlier been speculated to be at a price of RM2.8/share. Sensitivity analysis indicate immediate value enhancement, depending on the funding structure We have walked through several scenarios in which RHB Cap may fund for the acquisition, either entirely through cash, or shares, or a combination of both. We have assumed an acquisition price for MBSB to be at RM2.8/share. Our sensitivity analysis for the three scenarios (all cash, all shares or 8% cash and 2% shares) is shown in Table 1 in the following two pages. Major enhancement to net earnings in either three funding scenarios For FY12F, we estimate MBSB s earnings at RM398mil, and RHB Cap s at RM1.69bil. We estimate there would be a major enhancement to RHB Cap s net earnings, under any one of the three scenarios, even if we are to take into account the opportunity cost of acquisition under an all-cash scenario. Earnings for the merged group will likely rise by 17% to 26%. ROE is mixed, depending on whether it is cash or share issuance Impact on ROE is mixed, depending on whether the consideration is an entirely cash or via share issuance. Assuming entirely cash, ROE may be enhanced by 2ppts to 2.2ppts. Assuming the acquisition is done via entirely shares, we estimate ROE dilution of.5ppt to 1ppt. A mixed combination of funding with 8% cash and 2% new shares will lead to an estimated ROE enhancement of 1.2ppt to 1.5ppt. at end-211 to 164% (under all cash-funding scenario), or decline to 1% (under the all shares-funding scenario) or remain broadly unchanged at 145% (under a combination of cash and shares funding scenario). Assuming though, that MBSB is absorbed directly under the bank, an all-cash funding will likely lead to a lower core capital equity ratio of 5.1%, compared with 1.1% currently. Assuming an all-shares or a cash-and-sharesfunding combination, the core equity ratio remains comfortable at 7.3% to 12.4%. Fair value significantly enhanced under two scenarios The impact to fair value depends on the funding structure, with an all-cash scenario likely to give rise to a higher fair value of RM1.9/share vs. the current RM8.5/share. On the other hand, an all-share funding structure will lead to fair value coming off to an estimated RM7.5/share. A combination of cash and shares is positive, with a fair value rising to RM1.1/share under this scenario. We believe the funding structure will thus very likely be a combination of cash and shares We thus believe the most optimal structure will likely be a combination of cash and new shares. Under this scenario, capital looks adequate, and at the same time, fair value would be significantly enhanced. Major shareholder s stake in RHB Cap rises only marginally The Employees Provident Fund (EPF) is the major shareholder of both RHB Cap (4.4% stake post OSK) and MBSB (66% stake) However, even under an all-share-funding scenario, we estimate that EPF s stake in RHB Cap goes up only marginally, to 44% to 46%, from the current 4.4%. Assuming a combination of cash and share funding, we estimate EPF s stake at 41% to 42%. Impact to capital depends on which level MBSB will be merged into Also, in terms of impact to capital ratios, this depends on which level that MBSB will likely be absorbed into. We believe MBSB will likely be held as a separate unit, rather than being merged entirely under the RHB Cap s non-listed 1%-owned bank subsidiary RHB Bank. We believe that this will ensure that MBSB s direct deduction code will likely remain intact under this scenario. Assuming this to be the case, then we believe MBSB will likely be taken over at RHB Cap s level rather than at the bank level. In this case, the double leverage for RHB Cap will likely rise, from the current estimated 141% as AmResearch Sdn Bhd 2
TABLE 1: SENSITIVITY ANALYSIS RHB Cap acquire target with 1% cash 1% shares 2% shares, 8% cash Dec FY FY12F FY13F FY12F FY13F FY12F FY13F MBSB Assumed acquisition price/mbsb share (RM/share) 2.8 2.8 2.8 2.8 2.8 2.8 Book value (31 Mar 212) (RMmil) 1,226.4 1,226.4 1,226.4 1,226.4 1,226.4 1,226.4 Book value (31 Mar 212) (RM/share) 1. 1. 1. 1. 1. 1. Acquisition P/BV (x) based on current book value (x) 2.8 2.8 2.8 2.8 2.8 2.8 Estimated fully diluted book value assuming warrants are fully converted: Assumed fully diluted book value (31 Mar 212) (RMmil) 1,732.9 1,732.9 1,732.9 1,732.9 1,732.9 1,732.9 Fully diluted book value/share (31 Mar 212) (RM/share) 1. 1. 1. 1. 1. 1. Fully diluted issued shares (mil) 1,732.9 1,732.9 1,732.9 1,732.9 1,732.9 1,732.9 Assumed acquisition P/BV (x) on fully diluted basis 2.8 2.8 2.8 2.8 2.8 2.8 Total cost of 1% stake (RMmil) 4,852. 4,852. 4,852. 4,852. 4,852. 4,852. MBSB's net earnings for FY12F (RMmil) 398.3 478.7 398.3 478.7 398.3 478.7 Acquisition P/E (x) 12.2 1.1 12.2 1.1 12.2 1.1 RHB Cap: Share price (RM/share) 7.4 7.4 7.4 7.4 7.4 7.4 Assumed funding from new share issue - - 4,852. 4,852. 97.4 97.4 Assumed issue price of shares 7.4 7.4 7.4 7.4 7.4 7.4 Possible new share issue (m) - - 655.7 655.7 131.1 131.1 Assumed issued shares (m) 2,57.9 2,578.4 2,57.9 2,578.4 2,57.9 2,578.4 Potential issued shares (m) 2,57.9 2,578.4 3,163.6 3,234. 2,639.1 2,79.5 Increase (%) in issued share capital.%.% 26.1% 25.4% 5.2% 5.1% Impact on RHB Cap's net earnings RHB Cap's current forecast net earnings (RM mil) 1,684.7 1,82.3 1,684.7 1,82.3 1,684.7 1,82.3 add: MBSB's net earnings (RM mil) 398.3 478.7 398.3 478.7 398.3 478.7 less interest foregone (RMmil) (19.2) (19.2) - - (87.3) (87.3) add estimated synergies - - - - - - Potential net earnings (RM mil) 1,973.8 2,171.8 2,83. 2,281. 1,995.7 2,193.6 Increase / (decrease) (%) 17.2 2.5 23.6 26.6 18.5 21.7 Impact on RHB Cap's EPS Current EPS (sen) 67.2 69.9 67.2 69.9 67.2 69.9 Potential EPS (sen) 78.7 84.2 65.8 7.5 75.6 81. Increase / (decrease) (%) 17.2 2.5 (2.).9 12.6 15.8 Current PE (x) 11. 1.6 11. 1.6 11. 1.6 Potential PE (x) 9.4 8.8 11.2 1.5 9.8 9.1 Impact on RHB Cap's book value Current forecast shareholders funds (RMmil) 14,785.3 16,462.8 14,785.3 16,462.8 14,785.3 16,462.8 Potential shareholders funds (RMmil) 15,74.4 16,832.4 2,35.6 21,793.5 16,66.6 17,824.6 Increase / (decrease) (%) 2. 2.2 35.5 32.4 8.7 8.3 Current book value (RM/share) 5.9 6.39 5.9 6.39 5.9 6.39 Potential book value (RM/share) 6.1 6.53 6.33 6.74 6.9 6.58 Increase / (decrease) (%) 2. 2.2 7.4 5.5 3.3 3. Curent P/BV (x) 1.3 1.2 1.3 1.2 1.3 1.2 Potential P/BV (x) 1.2 1.1 1.2 1.1 1.2 1.1 6 AmResearch Sdn Bhd 3
TABLE 1: SENSITIVITY ANALYSIS (CON T) 1% cash 1% shares 2% shares, 8% cash Impact on RHB Cap's ROE FY12F FY13F FY12F FY13F FY12F FY13F Current ROE (%) 12.8 11.5 12.8 11.5 12.8 11.5 Potential ROE (%) 14.9 13.7 11.5 11. 14. 13.1 ROE changes (ppt) 2. 2.2 (1.4) (.5) 1.2 1.5 Potential new fair value (RM/share) 1.91-7.52-1.7 - Current fair value 8.5 8.5 8.5 Potential change new fair value (RM/share) 2.41 (.98) 1.57 Capital ratios for Bank level -if acquired at Bank level FY12F FY13F FY12F FY13F FY12F FY13F Breakdown of capital: Curent Tier 1 (%) 11.5 11.5 11.5 11.5 11.5 11.5 Current Tier 1 (RMmil) 9,337.35 9,337.35 1,55.98 11,77.79 1,55.98 11,77.79 Add new Tier 1 funding (RMmil) - - 4,852. 4,852. 97.4 97.4 Less goodwill arising from acq (RMmil) (3,625.6) (3,625.6) (3,625.6) (3,625.6) (3,625.6) (3,625.6) Potential new Tier 1 (RMmil) 5,711.8 5,711.8 11,777.4 12,997.2 7,895.8 9,115.6 Potential RWA for expanded group (RMmil) 1,289.7 1,289.7 1,289.7 1,289.7 1,289.7 1,289.7 Potential Tier 1 ratio (%) 5.7 5.7 11.7 13. 7.9 9.1 Estimated core equity ratio (%) 1.1 1.1 1.1 1.1 1.1 1.1 less existing hybrid capital (RMmil) 597.5 597.5 597.5 597.5 597.5 597.5 less new hybrid capital issued (RMmil) - - - - - - Core Equity Ratio (%) 5.1 5.1 11.1 12.4 7.3 8.5 Current total CAR (%) 14.6 14.6 14.6 14.6 14.6 14.6 Current total CAR (RMmil) 11,74.9 11,74.9 11,74.9 11,74.9 11,74.9 11,74.9 Add new Tier 1 / Tier 2 (RMmil) - - 4,852. 4,852. 97.4 97.4 Less goodwill from acquisition (RMmil) (3,625.6) (3,625.6) (3,119.1) (3,119.1) (3,119.1) (3,119.1) Potential CAR (RMmil) 8,79.4 8,79.4 13,437.8 13,437.8 9,556.2 9,556.2 Potential total CAR (%) 8.1 8.1 13.4 13.4 9.5 9.5 Double leverage @ 31 Mar 212 (Company level) Investments in subsidiaries 8,691.6 8,691.6 8,691.6 8,691.6 8,691.6 8,691.6 Shareholders' funds 5,787.1 5,787.1 5,787.1 5,787.1 5,787.1 5,787.1 Double leverage before OSK acquisition 15.2 15.2 15.2 15.2 15.2 15.2 Investments in subsidiaries after OSK acquisition 1,681.6 1,681.6 1,681.6 1,681.6 1,681.6 1,681.6 Shareholders' funds after acquisition 7,59.3 7,59.3 7,59.3 7,59.3 7,59.3 7,59.3 Double leverage after OSK acquisition 14.7 14.7 14.7 14.7 14.7 14.7 Investments in subsidiaries after MBSB acquisition 12,442.3 12,442.3 12,442.3 12,442.3 12,442.3 12,442.3 Shareholders' funds after acquisition 7,59.3 7,59.3 12,442.3 12,442.3 8,56.7 8,56.7 Double leverage after MBSB acquisition 163.9 163.9 1. 1. 145.3 145.3 Major shareholders' stakes (%) Share swap ratio: No of RHB cap share: 1 MBSB share.38.38.8.8 EPF's current stake in RHB Cap 4.4 39.3 4.4 4.4 4.4 4.4 EPF's potential stake in RHB Cap post merger 4.4 39.3 45.7 44.7 41.7 4.6 Abaar's current stake in RHB Cap 21.8 21.2 21.8 21.8 21.8 21.8 Abaar''s potential stake in RHB Cap post merger 21.8 21.2 17.3 16.9 2.7 2.1 AmResearch Sdn Bhd 4
GAPS IN TERMS OF ADDITIONAL CAPITAL AND SRR REQUIREMENTS ARE NOT SIGNIFICANT At the moment, MBSB does not fall under BAFIA requirements, given its status as an exempt finance company. The main differences between an exempt finance company and a commercial bank are shown in Table 2 below: 1) An exempt finance company is regulated by the Minister of Finance and does not fall under the supervision of the central bank, unlike commercial banks in Malaysia. 3) MBSB is also not allowed to participate in the interbank market. 4) There is no statutory reserve requirement (SRR) imposed on MBSB, unlike banking institutions. 5) There is no official minimum capital ratio, although we understand MBSB intends to maintain a minimum level that is similar to the banks. Thus, the two major new regulatory rulings that MBSB may need to adhere to are in terms of capital and SRR. We attempt to address these two issues in the following page. 2) In addition, due to MBSB s background as a finance company, it is not allowed to take in demand deposits (current accounts). TABLE 2: DIFERENCES BETWEEN AN EXEMPT FINANCE COMPANY AND COMMERCIAL BANK Differences Exempt finance company Commercial bank Regulated by Minister of Finance Bank Negara Malaysia BAFIA Does not fall under the Banking and Financial Institution Act (BAFIA) Falls under Banking and Financial Institution Act (BAFIA) Deposit-taking restriction Limited to only savings and and fixed deposits. Not allowed to take in demand deposits (current accounts) All kinds of deposits Interbank market Not able to participate in interbank market Able to participate in interbank market Deposit insurance Deposits are not guaranteed by PIDM Deposits are guaranteed by PIDM Statutory reserve requirement None. SRR ratio of 4% Capital ratios No official limit Bank Negara sets the minimum Tier 1 capital ratio at 4% and Total Risk-Weighted Capital Ratio or Capital Adequacy Ratio (RWCR or CAR) at 8%. Under BASEL 3, the minimum Tier 1 capital ratio is to be raised to 6% by 219 from 4.5% 213. Total CAR is set at 8%. In addition, the minimum common equity ratio is to be raised to 7% by 219 from 3.5% 213.. Note: PIDM: Permodalan Insurans Deposit Malaysia AmResearch Sdn Bhd 5
We estimate no requirement for additional capital MBSB hinted its current Tier 1 ratio is currently at 7% to 8%, while the total capital adequacy ratio (CAR) is 12% to 13%. This is based on an assigned risk-weight of 75% for its personal loans segment. We believe this is lower than 1% due to lesser risk associated with its direct deduction code. To estimate any possible additional capital requirement, the first relevant figure would be MBSB s total gross loan base, which stands at RM21bil currently. This forms the bulk of its risk-weighted assets, given there is very little other asset classes (see Table 3 below). TABLE 3: ESTIMATED CAPITAL RATIOS Mar 12 MBSB's latest gross loan base (1) 2,282.7 Assumed risk weightage of 75% for personal loan 8,341.3 Assumed risk weightage of 75% for mortgage loan 4,199.9 Assumed risk weightage of 1% for corporate loan 3,561.1 Estimated RWA (RMmil) (1) 16,12.2 MBSB's shareholders' funds @ 31 March 12 (RMmil) (2) 1,226.4 Core equity ratio (%) (3) = ((2) / (1)) x 1 7.6% New shareholder' funds with conversion of outstanding warrants at RM1. exercise price (RMmil) (4) 56.4 Shareholders fund with warrants converted (5) = (2) + (1) 1,732.8 Core equity ratio fter warrants conversion (%) (6) = ( (5) / (1) ) x 1 1.8% Collective assessment balance (RMmil) (7) 748.5 Total capital base before warrants conversion (RMmil) (8) = (2) + (7) 1,974.9 Estimated total CAR ratio before warrants conversion (%) (9) = ( (8) / (1) ) x 1 12.3% Total capital base after warrants conversion (RMmil) (1) = (8) + (4) 2,481.3 Estimated total CAR ratio after warrants conversion (%) (9) = ( (1) / (1) ) x 1 15.4% Further, we assume that its mortgage portfolio s riskweightage is 75%. (Note that this would be the most stringent risk-weightage assigned under current BASEL 2. Under BASEL 2, the risk-weight for mortgage loans with average LTV of 9% or above is 75%, for average LTV of 8% to 9% at 5%, and for average LTV of less than 5% at 35%). We finally assume a risk-weight of 1% for its corporate loans. Thus, in total, we estimate risk-weighted asset of RM16,12mil. The implied core equity ratio currently is therefore 7.6%. Shareholders funds are clean with no hybrid capital. Total shareholders funds totalled RM1.2bil as at 31 March 212, but this has not yet included full conversion of its outstanding warrants (see Table 3 above). However, if we are to assume full conversion of the warrants (which would be the case under a takeover scenario), this would be an additional shareholders fund of RM56mil. From this, the implied core equity ratio would be boosted to 1.8%, from 7.6%. Thus, essentially there is no immediate gap that would need to be plugged in terms of the common equity capital ratio (minimum common equity ratio requirement is 7.% which comprise of core equity ratio of 4.5%, and capital conservation buffer ratio of 2.5%). In terms of total capital adequacy ratio (CAR) or riskweighted asset ratio (RWCR), we estimate that, adding collective assessment balance, the current total CAR ratio is 12.3%. This is in line with commonly perceived minimum CAR of 12.% for organic growth. (Note that the minimum CAR requirement under BASEL 3 is 8%, but with the capital conservation buffer of 2.5%, the minimum would be 1.5%). And, if we are to include funding from full conversion of the outstanding warrants, total CAR would be at a comfortable 15.4%. In summary, we do not foresee any gap in capital, even if MBSB is to be absorbed as a separate entity under RHB Cap. SRR impact is also minimal The Statutory Reserve Requirement (SRR) is imposed on eligible liabilities of banking institutions. Eligible liabilities base is defined as Ringgit denominated deposits and non-deposit liabilities, net of interbank assets and placements with BNM. Essentially, the bulk of the eligible liabilities largely comprises customer deposits. The minimum SRR ratio is now at 4%. We estimate that the additional SRR ratio of 4% will lead to MBSB having to set aside RM712mil as deposit with BNM (see Table 4 below). TABLE 4 : ESTIMATED SRR IMPACT (RM mil) Mar 12 MBSB's total customer deposits 15,151.3 Recourse obligation to loans sold to Cagamas 1,914.7 Bank borrowings 626.6 Provision for taxation & zakat 88.5 Deferred taxation 21.8 Total estimated eligible liabilites (MBSB) 17,82.9 SRR ratio (%) 4% New statutory reserve requirement for MBSB (RMmil) 712.1 Interest income foregone @ 3% less corporate tax 25% (RMmil) 16. Impact to MBSB's net earnings FY12F (%) 4.% Impact to merged RHB Cap-MBSB group's net earnings (%).8% AmResearch Sdn Bhd 6
CHART 1: RANKING BY ASSET SIZE (RM mil) 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, 463,264 31,122 254,75 194,595 Maybank CIMB PBB RHB Cap- MBSB 156,712 154,829 111,855 39,63 17,365 HLBB RHB Cap AMMB AFG MBSB Interest income foregone on this portion of funds, which could have been lent out, is estimated at RM16mil (net of tax) or about.8% of the merged group s net earnings. So again, impact to net earnings arising from additional SRR requirement will not be significant. RHB CAP WILL HAVE EXPOSURE TO ONE OF THE MOST ATTRACTIVE SEGMENTS OF LENDING Reclaiming the fourth spot in ranking by asset size Just by looking at ranking by asset size, the possible combination of RHB Cap-MBSB will lead to a significant rise in RHB Cap s current asset size of RM155bil currently, to RM195bil (see Chart 1 above). merger a year ago. But more importantly, the potential earnings for RHB Cap is significantly enhanced However, more importantly, the merger with MBSB will open up one of the most profitable and lucrative segments of lending, given MBSB s exposure to the government civil servants' personal financing segment. As a gauge, the size of MBSB s main rival Bank Rakyat s personal loan financing currently stands at RM64bil, while MBSB s is currently at RM9bil, as at end- FY11 (1QFY12: RM11bil) (see Chart 2 below). We estimate personal financing made up 77% of Bank Rakyat s total gross loans currently, whereas MBSB s 49% as at end-fy11 and 55% as at 1QFY12 (see Chart 2 below) This will allow RHB Cap to move back up to fourth placing from fifth currently, a placing that was dislodged with the Hong Leong Bank Bhd (HLBB) and EON Bank CHART 2: PERSONAL LOAN COMPARISON BETWEEN BANK RAKYAT AND MBSB Bank Rakyat's personal financing loan (RM mil) 7, 6, 5, 4, 3, 2, 1, 19,835 22,354 32,69 43,373 134 234 342 1,362 MBSB's personal financing loan 57,662 3,982 64,469 8,718 FY6 FY7 FY8 FY9 FY1 FY11 (%) 9 8 7 6 5 4 3 2 1 - Personal financing as % of total loan Bank Rakyat MBSB 76 77 66 7 68 62 49 28 12 2 2 3 FY6 FY7 FY8 FY9 FY1 FY11 Source: AmResearch Company / AmResearch Sdn Bhd 7
CHART 3: COMPARISON BETWEEN BANK RAKYAT AND MBSB S NET EARNINGS (RM mil) Bank Raky at's net earnings MBSB's net earnings 2,5 2,24 2, 1,5 1, 5 1,35 1,97 1,134 562 679 325 4 53 33 57 146 FY6 FY7 FY8 FY9 FY1 FY11 Bank Rakyat s net earnings of RM2bil has already surpassed that of RHB Cap s RM1.5bil in FY11, indicating the upside potential for RHB Cap-MBSB For an FY11 comparison, Bank Rakyat recorded net earnings of RM2bil, which is six-fold that of MBSB s RM325mil (see Chart 2 above). But, despite Bank Rakyat s smaller loan size, Bank Rakyat s net earnings of RM2bil has already surpassed that of RHB Cap s RM1.5bil. This indicates the potential upside to RHB Cap should it manage to acquire MBSB (see Chart 4 below). We understand the two main competitors in the personal financing segment is now Bank Rakyat and MBSB. In fact, a simplistic comparison between RHB Cap and Bank Rakyat in terms of FY11 gross loans indicates that Bank Rakyat s gross loans of RM84bil is less than RHB Cap s current gross loans of RM97bil (see Chart 4 below). CHART 4: COMPARISON BETWEEN BANK RAKYAT AND RHB CAP GROSS LOANS AND NET EARNINGS Gross loans Net earnings (RM mil) 12, 1, 8, 6, 4, 2, 3,57 56,125 36,234 56,814 Bank Rakyat 48,247 63,161 RHB Cap 61,636 69,635 76,295 83,71 83,425 97,295 (RM mil) Bank Rakyat RHB Cap 2,5 2, 1,5 1, 5 562 438 679 713 1,97 1,49 1,134 1,21 1,35 1,42 2,24 1,52 FY6 FY7 FY8 FY9 FY1 FY11 FY6 FY7 FY8 FY9 FY1 FY11 AmResearch Sdn Bhd 8
CHART 5: NIM COMPARISON (%) MBSB's NIM RHB Cap's NIM RHB Cap-MBSB 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5%.% 2.91% 3.38% 4.23% 3.83% 3.58% 3.61% 2.66% 2.6% 2.43% 2.6% 2.16% 2.35% 2.14% 2.32% 2.13% 2.33% FY9 FY1 FY11 FY12F FY13F FY14F Merger is positive for RHB Cap s NIM Further, with MBSB s high NIM business, we estimate this will help to plug the fall in RHB Cap s NIM. MBSB s NIM was estimated at 4.22% FY11, and sustained at 4.26% in 1QFY12. Its latest personal loan product with a fixed rate of 3.99% implies an effective interest rate of 7.3%, which is way above the current average banking industry lending rate of 4.77% currently. The merged group s NIM will be at circa 2.3%, or a 2obps improvement p.a., compared with our current estimate for RHB Cap s NIM of circa 2.1% for FY12F to FY14F (see Chart 5 above). Gross impaired loans is not significantly higher for the merged group In terms of asset quality ratios for FY11, MBSB s gross impaired loans ratio is higher at 17.6% compared to RHB Cap s 3.4% (see Chart 6 below). However, we estimate that on a pro-forma basis, the merged group s gross impaired loans ratio is still reasonable at 5.6% FY11. Looking ahead, RHB Cap s gross impaired loans ratio will still range at between 4.2% and 5.3% for FY12F to FY14F (see Chart 6 below). But loan loss cover will look better MBSB s loan loss cover of 83.5% is currently higher than RHB Cap s 73.8% for FY11. Thus, the merged entity s loan loss cover of 78.5% will still be higher than RHB Cap s current 73.8%. Going forward, we expect the merged group s loan loss cover to be at 78% to 9%, better than RHB Cap s standalone loan loss cover of 67% to 87% (see Chart 6 below). CHART 6: COMPARISON OF ASSET QUALITY (%) 5. 4. 43.5 Gross impaired loans ratio 33.9 MBSB RHB Cap RHB Cap-MBSB (%) 1. 8. 71.7 83.4 Loan loss cover MBSB RHB Cap RHB Cap-MBSB 89.7 91.1 91.8 83.5 87.2 89.7 82.5 77.2 78.5 73.8 77.5 74. 67.6 67.2 3. 6. 2. 17.6 15. 13.9 13.2 4. 1. 4.7 4.4 5.6 5.3 3.4 3.5 4.8 3. 4.2 2.4 2. - - FY9 FY1 FY11 FY12F FY13F FY14F FY9 FY1 FY11 FY12F FY13F FY14F AmResearch Sdn Bhd 9
CHART 7: PERSONAL LOAN CONTRIBUTION TO TOTAL LOAN (%) RHB Cap RHB Cap - MBSB 14 12 12 1 8 8 6 4 3 4 3 4 3 3 3 4 4 5 2 - FY6 FY7 FY8 FY9 FY1 FY11 Loan profile is not altered significantly with acquisition A merger with MBSB will lead to personal loans contribution climbing up to an estimated 12% on a proforma basis, from 5% currently (see Chart 7 above). However, the largest contributor to RHB Cap s loan book would still be residential mortgages at 23%, from 22% currently. LDR rate would be at manageable level of 87% And finally the loan-to-deposit ratio ((LDR) for the merged group will still be at a manageable level of 87%, compared with MBSB s current LDR ratio of 133.9% and RHB Cap s 81.5% (see Chart 8 below). CHART 8: LDR RATIO (%) 16 14 133.9 12 1 8 6 4 2 81.5 87.4 MBSB RHB Cap RHB Cap-MBSB AmResearch Sdn Bhd 1
CHART 9: NUMBER OF DISTRIBUTION OUTLETS 35 319 3 25 2 15 1 245 19 134 5 35 MBSB EASY outlets RHB Cap's traditional branches Pos Malay sia outlets w ith tie-up w ith RHB Cap Bank Raky at Unlikely to see much improvement yet in MBSB s cost of funds MBSB s cost of funds of 3.77% was higher than RHB Cap s 2.17%, as at FY11. However, we expect MBSB to be acquired as a separate unit, rather than directly under the bank, if at all. Thus, we do not anticipate a significant improvement in MBSB s cost of funds in the near term as we expect both to be operating as separate entities under the listed company. Possible synergies in distribution reach However, in terms of distribution reach, we envisage that MBSB would be able to leverage on RHB Cap s expanded network. MBSB currently has an estimated 35 branches nationwide, which is a lot fewer than Bank Rakyat s current number of 134 branches (see Chart 9 above). On the other hand, RHB Cap has 19 traditional branches and on top of that, a much wider reach of 245 EASY outlets currently. Besides this, RHB Cap has a tieup with 319 Pos Malaysia outlets for selected banking transactions. We believe a co-sharing agreement between the entities would be possible. With this, we envisage a far wider capability for MBSB s sales reach. Currently, MBSB adopts a mobile sales team model to counter the limitations on its branches. POSSIBLE GO-AHEAD WITH ACQUISITION OF BANK MESTIKA BUT IMPACT LIKELY TO BE NEUTRAL The other acquisition, which had been pending, is that of Bank Mestika, which RHB Cap had earlier announced in October 29. The acquisition price announced at that time was RM1.3bil for an 8% stake, or at a P/BV of 3.5x based on book value as at the date of announcement then. In addition, RHB Cap had announced it intended to fund the acquisition with a rights issue. Based on the pro-forma illustration then, RHB Cap had indicated that the rights issue would be priced at a 2% to 3% discount to the theoretical ex-rights price, with a total rights share of 361mil or indicative rights price then of RM3.6/share. This was based on RHB Cap s share price then which was around RM5.7/share. Assuming this to be the case, the rights issue basis would be a one-for-6.8 share basis. However, we expect some changes should the acquisition go ahead: 1) Assuming that the acquisition goes ahead, we anticipate that the rights issue would be less dilutive given that RHB Cap s share price had appreciated since then. Thus, we have earlier worked out that the potential issue will only be 248.9mil shares instead of the earlier indicated 361mil shares, assuming the rights price of RM5.2/share or onefor-9.8 share basis.. 2) But we expect the stake that RHB Cap will now likely acquire to be at 4% instead of 8%, given the new foreign shareholding cap that is currently being mulled over by the Indonesian authorities 3) Given that the stake would be halved, this would mean that the possible rights issue would be reduced by half of our projected 248.9mil rights shares, i.e. 124mil shares. This brings the ratio to now close to one-for-2 share basis, assuming the new rights price of RM5.2. 4) RHB Cap s estimated ROE is thus 12.8%, instead of our current forecast of 12.9% FY12F. This leads to a possible fair value of RM8.4/share, not much AmResearch Sdn Bhd 11
lower than our current fair value of RM8.5/share for RHB Cap. NO FURTHER DOWNSIDE RISKS? RHB Cap s share price has bumped along the bottom for the past eight months, having retraced from the recent high of RM8.3 in March 212. Recent low was circa RM7.. However, we do not foresee much of a downside risk from here onwards. We have already included a high credit cost assumption of 49bps for FY12 or loan loss provision of RM492mil for FY12F. The previous slowdown in 28 led to a peak loan loss provision of RM579mil in FY9 or credit cost of 87bps. Secondly, the acquisition of Bank Mestika would likely be neutral, as shown above. Third, we believe newsflow on the possible MBSB merger will likely be positive as the acquisition makes sense from both the financial perspective as well as operational enhancement with RHB Cap being able to tap into a potentially new and more profitable segment of lending. A possible hindrance may be the perception that RHB Cap is allowed into this segment while other commercial banks would not be able to tap into this, but we believe this would be easily countered by the fact that the major shareholder of RHB Cap is the Employees Provident Fund, which represents the bulk of the retirement funds of the workforce in Malaysia. Thus, in essence, the public s interests is best aligned to both RHB Cap, and MBSB. We maintain our BUY rating on RHB Cap, with an unchanged fair value of RM8.5/share. This is pegged to a fair P/BV of 1.45x based on an ROE of 12.9% FY12F. We foresee the following rerating catalysts for RHB Cap (a) stabilisation in gross impaired loans; (b) better-thanexpected loan loss provision; (c) higher fee income from its investment bank, which will provide evidence of revenue synergies for its proposed OSK acquisition; (d) possible merger with MBSB. CHART 1: P/BV VS ROE (x) Prospective P/BV (LHS) ROE (RHS) (%) 2. 16 14 12 1 1. 8 6 4 2. Dec Jun 3 Dec 5 Jun 8 Dec 1 Source: Company / Bloomberg / AmResearch AmResearch Sdn Bhd 12
CHART 11 : P/BV (X) (x) Prospective P/BV (LHS) ROE (RHS) (%) 2. 16 14 12 1 1. 8 6 4 2. Dec Jun 3 Dec 5 Jun 8 Dec 1 Source: Company / Bloomberg / AmResearch CHART 12 : PE (x) 5. 4. 3. 2. 1. +1SD = 19.7 Mean = 13.5-1SD = 7.3. Dec 99 Nov 2 Sep 5 Aug 8 Jul 11 Source: Company / Bloomberg / AmResearch AmResearch Sdn Bhd 13
TABLE 5 : FINANCIAL DATA Income Statement (RMmil, YE 31 Dec) 21 211 212F 213F 214F Net interest income 2,673.2 2,787.3 2,782.4 3,21.5 3,285. Non-interest income 1,43.3 1,81.5 1,358.7 1,357.7 1,377.6 Islamic banking income 333.8 438.9 469.6 52.5 537.7 Total income 4,5.3 4,37.8 4,61.7 4,881.7 5,2.3 Overhead expenses (1,639.6) (1,93.3) (1,865.5) (1,989.8) (2,129.) Pre-provision profit 2,41.6 2,44.5 2,745.3 2,891.8 3,71.3 Loan loss provisions (415.6) (327.5) (492.3) (548.5) (578.3) Impairment & others (96.6) (77.3)... Associates.8.4 5. 5. 5. Pretax profit 1,899.3 2,.1 2,258. 2,348.3 2,498. Tax (47.7) (496.5) (564.5) (587.1) (624.5) Minority interests (8.3) (2.1) (2.1) (2.1) (2.1) Net profit 1,42.3 1,51.5 1,691.4 1,759.1 1,871.4 Core net profit 1,42.3 1,51.5 1,691.4 1,759.1 1,871.4 Balance Sheet (RMmil, YE 31 Dec) 21 211 212F 213F 214F Cash & deposits with FIs 14,754.5 2,358.5 27,298.9 32,473.4 38,5.5 Marketable securities 26,627.5 27,815.6 27,97.4 28,147.2 28,346.9 Total current assets 41,382. 48,174.1 55,269.3 6,62.6 66,397.5 Net loans & advances 81,228.1 94,823.5 12,414.2 111,48.3 12,461.2 Statutory deposits..... Long-term investments 459.6 3,282.6 5,78.7 6,185.9 6,75.8 Fixed assets 1,23.2 1,16.5 1,117.6 1,128.7 1,14. Intangible assets 3,86.9 3,86.9 4,694.7 4,694.7 4,694.7 Other long-term assets 1,425.8 1,2.2 1,223.8 1,247.9 1,272.5 Total LT assets 87,943.5 14,219.6 115,158.9 124,35.6 134,274.2 Total assets 129,325.5 152,393.7 17,428.3 184,926.2 2,671.7 Customer deposits 94,433.8 115,86.6 129,796.4 141,468.5 154,191. Deposits of other FIs 1,66.2 1,31.4 1,833.9 11,7.6 12,636.6 Subordinated debts 7,929. 7,719.6 7,33.6 7,251.7 7,2.4 Hybrid capital securities 4,68.3 5,174.2 5,422.9 5,684.1 5,958.1 Other liabilities 2,315.2 2,157.6 2,265.5 2,378.8 2,497.7 Total liabilities 119,352.5 14,943.4 155,622.3 168,483.7 182,483.9 Shareholders funds 9,962.2 11,438.4 14,791.9 16,426.3 18,169.5 Minority interests 1.8 11.9 14. 16.2 18.3 Key Ratios (YE 31 Dec) 21 211 212F 213F 214F Total income growth (%) 1.5 6.4 7. 5.9 6.5 Pre-provision profit growth (%) 14.8 n/a 14.2 5.3 6.2 Core net profit growth (%) 18.2 5.7 12.6 4. 6.4 Net interest margin (%) 2.6 2.4 2.2 2.1 2.1 Cost-to-income ratio (%) 4.5 44.2 4.5 4.8 4.9 Effective tax rate (%) 24.8 24.8 25. 25. 25. Net dividend payout (%) 28.8 3. 3.5 33.1 32. Key Assumptions (YE 31 Dec) 21 211 212F 213F 214F Loan growth (%) 2.2 16.2 7.8 8.3 8.4 Deposit growth (%) 11.3 22.7 12. 9. 9. Loan-deposit ratio (%) 88.6 84. 8.8 8.3 79.8 Gross NPL (%) 4.4 3.4 3.5 3. 2.4 Credit charge-off rate (%) (.5) (.4) (.5) (.5) (.5) Loan loss reserve (%) 67.6 73.8 67.2 74.8 88.9 RWCR (%) 13.8 15.8 18.3 18.3 18.3 Core (%) 1.5 12.3 12.9 13.2 13.5 Source: Company, AmResearch estimates AmResearch Sdn Bhd 14
Published by AmResearch Sdn Bhd (33515-P) (A member of the AmInvestment Bank Group) 15th Floor Bangunan AmBank Group 55 Jalan Raja Chulan 52 Kuala Lumpur Tel: (3)236-2633 (general) (3)272-1866/99 (dealing) (3)27-2444 (research) Fax: (3)278-3162 The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd Benny Chew Managing Director AmResearch Sdn Bhd 15