TMB Bank

TMB Bank Plc (TMB) 

We applaud management’s efforts in making TMB a better bank. The operational improvements are gaining traction while in financial terms, the PPOP growth has been eye-catching. That said, the market has also been overly-generous in pricing in these improvements. The global macro risks and resumed tax payments from FY13 are among the headwinds. We reiterate our Underperform call with an unchanged target price set to 1.2x FY12 P/BV (GGM; 12.5% ROE, 11.7% COE, 6.2% growth). Without any progress in M&As, the stock will likely move within a tight range.

What Happened

TMB’s CEO and CFO hosted an analysts briefing post 2Q12 results.Management reiterates its 2014 ROE target of 14%. It is confident the bank is on the right track. Pre-provision operating profit grew strongly in 1H12 (+39% yoy) thanks to solid loan growth (6% YTD), a wider NIM (+6bp
YTD) and a lower cost-to-income ratio (60% vs. 1H11’s 67%). These positive developments were however masked by an elevated credit cost as the bank looked to boost its loan loss coverage ratio to 100% (now 79%). Management is optimistic on the bank’s NIM outlook given its success,
at least thus far, in chopping an interest cost of the savings accounts designated for the clients’transactional purposes. There is also ample room to push up LDR (now 87%). The cost ratio should continue to decline, while loan loss provisions should be steadier.
What We Think
While we admire the CEO for having made a difference at TMB, his 14% ROE target seems a tall order.

What You Should Do
The stock will likely remain dead money unless an M&A of the bank transpires. A better bet is to be found elsewhere.
To realise this ambition, we estimate the bank must achieve 13% p.a. loan growth (vs. 10% in FY11), 2.5% NIM (vs. 2.4%), 5% p.a. opex growth (vs.20%) and 80bp p.a. credit cost (maintained at the FY11 level). TMB might get there, but only if the Thai economy is immune to the global
slowdown, loan demand continues to soar, and competition is kinder. These are big Ifs. After all, the share price already implies an ROE close to 13% (vs. our FY12F’s 8%).