TMB Bank

TMB Bank Plc (TMB)

Investment thesis: Strong SME-fueled loan growth and BOT soft funding totaling Bt40bn prompted us to revise up our TMB FY12 and FY13 lending forecasts to 12% and 10%, respectively from 10% and 8%. Because of our expanded expectations for loan growth, we raised our earnings projections by 3% to Bt5.2bn for FY12 and by 4% to Bt6.5bn for FY13. Thus, we have upgraded our TMB YE12 target price to Bt1.72 from Bt1.60 and changed our call to TRADING BUY from HOLD.
Strong loan growth to continue in 2H12, led by SME: TMB guides for lending expansion of 20% across its SME and retail portfolios and a 10% rise in corporate business, making for aggregate growth of 15% for FY12. We have revised up our FY12 projection from 10% to 12% (TMB booked 9.5% in FY11 and 6.1% YTD for 1H12). We expect SME loans to comprise more than 30% of the aggregate portfolio by YE12, up from 27% at YE11. TMB plans to focus on SME and retail business growth, as the two categories pay higher yields than corporate lending.
NIM is improving: Management views that high-yield lending growth will sustain NIM as funding costs rise. Competition for deposit mobilization is intensifying, especially from special financial institutions (SFIs). TMB expects to sustain its 2H12 NIM at about 2.4-2.5% (its 1H12 level). We assume an FY12 NIM of 2.44%.
Better efficiency: The cost/income ratio will decline from 65% in FY11 to 62% this year in tandem with loan growth and lower extra expenses (restructuring costs), according to TMB. We have no argument with the guidance, given an improved loan growth performance and a well-managed NIM.
2H12 LLPs will decline slightly: TMB plans to continue provisioning heavily order to build its loan loss coverage ratio from 79% to nearer the sectoral mean of 115% next year. The bank also plans to bring down its NPLs/loans ratio further to 4.0% at YE12 from 5.6% at end-June. We, thus, expect the bank to set LLPs of Bt3.9bn for FY12, up 26% YoY.
Outlook
New FY12 loan growth forecast of 12%: Given the promising outlook for 2H12 and its good 1H12 lending performance, we have revised up our TMB FY12 and FY13 loan growth assumptions to 12% and 10%, respectively from 10% and 8%. Our expectation is somewhat more subdued than management’s FY12 loan growth target of 15% (20% across its SME and retail portfolios and a 10% rise in corporate business). TMB posted portfolio expansion of 6.1% YTD for 1H12 and 9.5% for FY11. During 1H12, its SME loans grew 12.3% YTD, followed by corporate at 3.7% YTD and retail at 2.7% YTD.
Management guides that 2H12 lending growth will be stronger than in 1H12, due to higher economic growth and rising consumption. Furthermore, the bank has Bt40bn in BOT soft funding to allocate to clients affected by the 4Q11 flooding. It intends to expand the SME proportion of its aggregate portfolio to 30% by YE12.
TMB’s capital adequacy ratio was the highest in the sector at 18.7% (Tier-1: 11.5%) at end-June, more than sufficient to accommodate business expansion for the next couple of years without need for capital-raising.  
Interest spread is well managed— emphasis on high-yield loans: 2Q12 net interest income (NIM) grew to 2.51% from 2.40% in 1Q12. The improved NIM was attributable to a stronger focus on SME business, which provides higher yields than corporate loans. The SME proportion of the total portfolio rose from 28.6% at YE11 to 30.3% at end-June, while corporate proportion declined from 51.9% at YE11 to 50.8% at end-June. We do not expect any significant HoH increase in NIM compared in 2H12—competition for deposit mobilization is intensifying. Our FY12 NIM projection remains 2.44%.
Loan loss provisions will decline slightly in 2H12: TMB set heavy loan loss provisions of Bt2.2bn in 1H12, up 138% YoY from Bt913 in 1H11. The bank intends to increase its loan loss coverage ratio to close to the sectoral mean of 115% by YE12. However, management guides that 2H12 LLPs will decline slightly HoH after the bank raised its loan loss coverage ratio to 79% at end-June 2012 from 73% at YE11. Its NPLs/loans ratio slipped to 5.58% from 5.8% at end-March. TMB plans to reduce the ratio to 4% by YE12 through debt restructuring. We project that its FY12 LLPs at Bt3.9bn, up 26% YoY
Lower cost/income ratio = higher profitability: Management has an ambitious FY14 ROE target of 14%. The bank plans to enhance efficiency by expanding both its deposit base and lending, as well as upgrading its core banking system. TMB’s cost/income ratio has declined from 93% in FY09 to 58% in 1H12. We expect the ratio to be 61.8% in FY12 and 59.4% in FY13, down from 66% in FY11. Likewise, its earnings are forecast to grow by 28.5% to Bt5.2bn in FY12 and 26.2% to Bt6.5bn in FY13.
TMB’s pre-provision operating profit (PPOP) has recovered from a trough of Bt1.4bn in FY09 to Bt7.0bn in FY11 (see Figure 4). We expect this trend to continue, as 1H12 lending growth was strong and NIM improved with the shift in focus to high-yield business. We forecast that FY12 PPOP will grow 27% YoY to Bt9bn.
Recommendation and valuation
TRADING BUY (upgraded): Given strong SME-fueled loan growth and BOT soft funding totaling Bt40bn, we have revised up our TMB FY12 and FY13 lending forecasts to 12% and 10%, respectively from 10% and 8%. Our expanded expectations for loan growth prompted us to raise our earnings projections by 3% to Bt5.2bn for FY12 and by 4% to Bt6.5bn for FY13. Thus, we have upgraded our TMB YE12 target price to Bt1.72 from Bt1.60, pegged to a justified PBV at 1.35x (the stock’s long-term mean).
Furthermore, TMB could be an acquisition target for another foreign bank (the most likely suitor would be ING, which currently holds 25%). The stock trades at an inexpensive YE12 PBV of 1.17x; the sectoral mean is 1.54x and its last peak PBV was 2.36x in 2010.  Given the minimal downside risk and scope for both earnings and share price upside, we have raised TMB rating from HOLD to TRADING BUY.