TISCO Financial Group

TISCO Financial Group Plc (TISCO)

Investment thesis: We remain bullish on TISCO’s lending growth prospects, given that its 8M12 net loan growth has been stronger than expected at 21% YTD. Our earlier FY12 and FY13 loan growth projections were 25% and 14%. In order to fine-tune for the strong YTD lending performance, we have revised up our FY12 and FY13 assumptions to 28% and 17%, respectively. Thus, our FY12 and FY13 earnings forecasts rise by 2% and 4%, respectively, to Bt3.77bn and Bt4.60bn. The higher profit projections prompted us to raise our YE13 target price by 6% to Bt58, pegged to a justified YE13 PBV of 2x. Our BUY rating stands.
3Q12 will be better QoQ: We expect the bank holding company to post 3Q12 lending expansion of 9% QoQ, led by HP loans, boosted by the first-time car buyer tax rebate scheme. As such, it should deliver earnings for the quarter of Bt970m, up by 8% YoY and 5% QoQ. The expected QoQ rise is due to lending growth, a sustained NIM and lower loan loss provisioning.
LLPs remain high: We assume that TISCO will set 3Q12 LLPs of Bt520m, up 72% YoY but down 12% QoQ. We anticipate the heavy provisions because of the risk of losses from its share of a syndicated loan to Sahaviriya Steel Industries Plc (SSI) to finance the acquisition of a billet plant in the UK. SSI isn’t scheduled to start making repayments on the loan till next year, so it is technically still performing, according to management. The firm is in the process of capital-raising US$440m, which should be completed in 4Q12. If the deal is successful, SSI’s default risk will diminish.
Note that the bank holding company’s exposure to the SSI loan is Bt3.9bn (the total syndicated loan is Bt30bn). We calculate that if the SSI debt were to turn sour, TISCO’s loan loss coverage ratio would drop from 171% at end-June of total NPLs to 138%, which would still be high, given that the Bank sector mean coverage ratio was 115% at end-June. 
Outlook
Raised FY12-13 loan growth forecasts to 28% and 17%: TISCO’s strong 8M12 net loan growth of 21% YTD has prompted us to revise up our FY12 and FY13 lending expansion projections to 28% and 17%, respectively, from 25% and 14%. 2H12 loan growth will be sustained, driven by the HP and corporate categories. Note that TISCO’s retail portfolio represents 72% of total lending. Because of our lending growth revisions, we have upgraded our FY12 and FY13 bottom-line projections by 2% and 4%, respectively, to Bt3.77bn and Bt4.6bn.
Good 3Q12 earnings: We expect a 3Q12 profit of Bt970m, up by 8% YoY and 5% QoQ, led by lending growth of 9% QoQ, a sustained NIM of 3% and lower loan loss provisions. 3Q12 loan loss provisions should drop 12% QoQ (but jump 72% YoY) to Bt520m. We also expect 3Q12 fee income to rise by 2% QoQ and 30% YoY to Bt943m. 
LLPs remain high: We assume that TISCO will set 3Q12 LLPs of Bt520m, up 72% YoY but down 12% QoQ. We anticipate the heavy provisions because of the risk of losses from its share of a syndicated loan to Sahaviriya Steel Industries (SSI) to finance the acquisition of a billet plant in the UK. SSI isn’t scheduled to start making repayments on the loan till next year, so it is technically still performing, according to management. The firm is in the process of capital-raising US$440m (Bt13.2bn)—$400m in private placements to Valnomet Co Ltd, Sahaviriya Group Co Ltd and Sahaviriva Inter Steel Holding Co Ltd and another $40m rights offering at a ratio of 10 existing shares for one new share at a price of $0.68/share. The deal is due to be completed in 4Q12. If it is successful, SSI’s default risk will diminish.
Note that the bank holding company’s exposure to the SSI loan is Bt3.9bn (the total syndicated loan is Bt30bn). We calculate that if the SSI debt were to turn sour, TISCO’s loan loss coverage ratio would drop from 171% at end-June of total NPLs to 138%, which would still be high, given that the Bank sector mean coverage ratio was 115% at end-June.