RHB Capital has proposed to buy an 80% stake in Indonesia’s PT Bank Mestika Dharma (Bank Mestika) for about RM1.16bn, with the option to acquire an additional 9% stake exercisable between the third and seventh year of the execution of the sale and purchase agreement. The group expects to finance the acquisition via a Rights Issue, from which it will raise RM1.3bn. Although we are generally positive on the acquisition, we believe that any meaningful upside from it would only be achieved over the longer term (4-5 years) given its relatively small asset size vs RHB Capital’s asset base. As such, we have reduced our TP from RM6.30 to RM6.00 on factoring in the dilutive impact, which trims our ROE expectations from 12.5% to 11.5%. Future catalysts includes stronger than expected upside from value synergies and acquisition opportunities.
Small step forward. With an asset size of just RM1.9bn, representing 2% of RHB Capital’s current group asset base, Bank Mestika is considered a mid- to small-sized bank. Its
lending is focused on the SME and retail segment in North Sumatra. Its annualized 1HFY09 net profit of RM64m is also small compared to RHBCap’s FY08 net profit of RM1.04bn. Nonetheless, we believe that this is a positive step for RHB group as it reflects the group’s longer term aspirations of regionalizing its operations. Upon completion of the acquisition, we expect the group’s overseas earnings contribution to double from 4% to 8%, while the overseas loan contribution will increase from 6% to 8% of the group’s total loans base. The small acquisition reduces the group’s risk profile while providing a steady growth. Strong asset quality and capital position. We believe that Bank Mestika is a rather conservative and well run bank, judging from its strong core capital position of 27% and relatively low gross NPL ratio of 1.4%. Its NPL has also been declining, whereby its gross NPL ratio declined from 4% in 2007 to 1.4% currently in spite of the global macroeconomic meltdown. The strong collateralized position of its loan assets, relatively low average loans to value ratio of just 60% and lending to the relatively stable agriculture-based industries and secured retail lending, have been instrumental in sustaining its asset quality.
Conservative lending practices. We note that the bank has been expanding its loan base at a more conservative 15.4% p.a over the past 4 years vs the Indonesian banking industry average growth rate of 32% p.a. Its overall business model is relatively focused on the basic and secure core retail lending segments where retail loans account for nearly 70% of its total loans base. Loans assets represent nearly 75% of the group’s assets, with the bank having no exposure to the derivative instruments, from which its larger peers have suffered losses on forex and commodity-related instruments.
Small step forward. With an asset size of just RM1.9bn, representing 2% of RHB Capital’s current group asset base, Bank Mestika is considered a mid- to small-sized bank. Its
lending is focused on the SME and retail segment in North Sumatra. Its annualized 1HFY09 net profit of RM64m is also small compared to RHBCap’s FY08 net profit of RM1.04bn. Nonetheless, we believe that this is a positive step for RHB group as it reflects the group’s longer term aspirations of regionalizing its operations. Upon completion of the acquisition, we expect the group’s overseas earnings contribution to double from 4% to 8%, while the overseas loan contribution will increase from 6% to 8% of the group’s total loans base. The small acquisition reduces the group’s risk profile while providing a steady growth. Strong asset quality and capital position. We believe that Bank Mestika is a rather conservative and well run bank, judging from its strong core capital position of 27% and relatively low gross NPL ratio of 1.4%. Its NPL has also been declining, whereby its gross NPL ratio declined from 4% in 2007 to 1.4% currently in spite of the global macroeconomic meltdown. The strong collateralized position of its loan assets, relatively low average loans to value ratio of just 60% and lending to the relatively stable agriculture-based industries and secured retail lending, have been instrumental in sustaining its asset quality.
Conservative lending practices. We note that the bank has been expanding its loan base at a more conservative 15.4% p.a over the past 4 years vs the Indonesian banking industry average growth rate of 32% p.a. Its overall business model is relatively focused on the basic and secure core retail lending segments where retail loans account for nearly 70% of its total loans base. Loans assets represent nearly 75% of the group’s assets, with the bank having no exposure to the derivative instruments, from which its larger peers have suffered losses on forex and commodity-related instruments.