Tisco Financial Group

Tisco Financial Group Plc (TISCO)

TISCO continues to be faced with funding cost headwinds in 2H12. Beyond that, competition and a larger asset base could force the bank to increasingly venture outside its focus segments to sustain profits. With inferior earnings and ROE growth vs. its peers, we keep the stock an Underperform. Our target price is still pegged to 1.5x FY12 P/BV (GGM assuming 14% long-term ROE, 11.7% COE and 7% growth). 
What Happened
Management met with analysts post
the bank’s 2Q12 results.
Its loan book expanded 13% in 1H12.
Full-year growth could reach 20%
(also our forecast). Its retail book
(+11% in 1H12) should continue to
grow on car-related lending and the
wholesale portfolio (+28% in 1H12)
should expand on financing for car
dealers’ inventory and utility projects
(mainly power).
To boost portfolio yields, the bank
aims to shift its retail loan mix away
from new car hire purchase (4-5%
yield) to used car and car pledge
financing (9-10%). This could mean
higher credit risk.
Half of its funding base is still in the
form of bills of exchange, which will
gradually be replaced with deposits.
This migration will add 15bp to its
overall funding cost in 2H12.
Management aims to minimise the
impact.
Its loan to steelmaker SSI is still
classified as normal. The grace period
for principal payments will end in
1H13. If required, its excess reserve is
enough for loan loss provisioning.
What We Think
We should continue to see solid
volume growth at TISCO on the back
of record car sales. However, profit
growth will be much more limited
given the funding cost pressures.
TISCO lent about THB4bn to SSI.
Assuming 60% collateral value, the
required provision if SSI turns into
NPL is THB1.6bn. This can still be
covered by the bank’s current excess
reserve of THB2.2bn although there
could be upward pressure on future
credit cost to re-build the reserves.
What You Should Do
We expect TISCO’s share price to go
nowhere and prefer peers such as
BAY, KBANK, SCB and TCAP.
Below-peer earnings and ROE growth
will drag its share price.