Thanachart Capital

Thanachart Capital Plc (TCAP)
 

Investment thesis: We are optimistic about TCAP’s outlook, as the HP-for-cars business has recovered since the flooding ended. We anticipate that the firm will post FY12 earnings growth of 12% to Bt5.6bn, driven by lending, sharply lower integration costs and a reduced effective corporate tax rate. TCAP trades at a low YE12 PBV of 0.8x (against a sectoral mean of 1.4x). We maintain our TRADING BUY rating.
TCAP guides for 10% FY12 loan growth: Manage-ment targets FY12 lending expansion of 10%, driven by the HP and SME categories, following l5% loan growth last year. New car sales will recover fairly swiftly, now that most of the main automobile makers have resumed production, while the govt’s first-time car-buyer tax refund scheme should boost vehicle sales and demand for HP finance. However, our FY12 loan growth projection is a more modest 7%—we expect TCAP’s corporate lending portfolio to contract in the face of heightened competition from other banks for business (note that many of the lending managers from SCIB have been recruited by other banks).   
NIM range set at 2.6-2.8%: TCAP plans to raise the proportion of current & saving accounts in its funding mix to 35% from 27% at YE11. It will reduce issuance of Bills of Exchange (B/E) and switch to debentures and fixed deposits.
Heavier Loan loss provisioning: The bank holding company will set heavy loan loss provisions of Bt2.8bn-Bt3.5bn for FY12, up from Bt2.1bn last year. TCAP expects its NPLs/loans ratio to decline to 4% at YE12 from 5.9% at YE11.
Synergy-building should yield results in FY12: Operational integration with SCIB is now almost complete. Acquisition costs will decline in FY12 and profitability will rise. Thus, we see scope for upside to our current FY12 earnings forecast as a result of synergy-building between the two merged banks. At the very least, OPEX as a percentage of revenue should decline significantly. TCAP guides for a cost/income ratio of 55%, down from 61% last year.
Outlook
Better FY12 loan growth of 10%: TCAP guides for FY12 lending expansion of 10% (we model for 7%), based on a 2012 GDP growth assumption of 4-4.5%. Note that at YE11, HP loans comprised 45% of its total portfolio, followed by corporate & SME at 35%, home mortgages at 12% and personal loans at 9%. Management anticipates that retail loans will comprise 70% of total lending within three years.
Interest spread will face competition: We anticipate that TBANK/TCAP will post a NIM of 2.53% for FY12, down from last year’s NIM of 2.75%. The squeeze is expected because of changes to the funding mix—use of B/Es will decline, while fixed deposits and debenture issuance (which are more expensive sources of funds) will increase. At YE11, the funding mix comprised term deposits 67%, current & saving deposits (CASA) 27% and B/Es 33%. TCAP plans to raise the CASA proportion (the cheapest funding source) of funding to 35%. We, however, think funding migration will be only insignificant unless TBANK offers significantly higher saving deposit rates than other banks. Management guides for an FY12 NIM range of 2.6-2.8%.
TBANK’s SME and corporate lending portfolio (which is mostly quoted at floating lending rates) comprised 35% of total loans at YE11 (the portfolio came with the takeover of SCIB). At the end of last year, TCAP’s floating rate loans made up 41% (mostly SME & corporate) of total loans, while fixed rate loans (mostly HP) comprised 59%. The implication is that TBANK will enjoy NIM expansion brought about by a declining interest rate environment (the BOT cut its policy interest rate in Dec 2011 and Jan 2012).
Bigger loan loss provisions: Management plans to set loan loss provisions equal to 0.40-0.50% of total lending in FY12, up from 0.3% last year. That implies heavy provisions of Bt2.8-3.5bn this year in order to comply with new qualitative measures. Management anticipates that TBANK’s loan loss coverage ratio will reach 86% by YE12, up from 67% at YE11. TCAP plans to cut its NPLs/loans ratio to about 4% by YE12 from 5.9% at the end of last year by accelerating debt restructuring and loan write-offs. Note that our loan loss provisioning assumptions are Bt3.0bn for FY12, in line with TCAP guidance.