Thanachart Capital

Thanachart Capital Plc (TCAP)

Investment thesis
TCAP’s share price has lagged the Bank sector. We reiterate our BUY rating, premised on: 1) earnings growth, fueled by ongoing lending and good OPEX management, 2) a Bt4bn gain from selling TLIFE in 2Q13, 3) the share buyback program (10% of its paid-up capital) and 4) the cheapest YE13 PBV in the Thai Bank sector of 1.0x; the regional mean is 2.0x.
Moderate loan growth with a good NIM
Management guides for 1Q13 loan growth of about 2% QoQ. HP and other retail sub-categories were the main drivers during the quarter. TCAP/TBANK is focused on building high-yield business this year, such as HP, P-Loans, unsecured loans and micro finance. It also plans to raise the current and saving account (CASA) proportion of its funding (the cheapest source of funding) from 35% at YE12 to 40% by YE13. Given ongoing loan growth and good funding cost management, we expect its 1Q13 NIM to inch up to 2.83% from 2.79% the previous quarter. 
LLPs pegged to 0.6% of loans for 1Q13 
TCAP plans to set 1Q13 loan loss provisions equal to 60 bps of gross loans. As such, we calculate LLPs of Bt1bn for the quarter, up by 141% YoY and 11% QoQ. Its end-March NPLs should be flat QoQ, according to management. TCAP aims to build its loan loss coverage ratio to 90% at end-June 2013 from 73% at YE12. We forecast that TCAP will set FY13 LLPs of Bt4.5bn, up 55% YoY. 
To book gain from sale of TLIFE in 2Q13; loan loss reserve to rise
On April 2, 2013, the Office of the Insurance Commission (OIC) approved TBANK’s sale of Thanachart Life Assurance to Prudential Life Assurance (Thailand). We estimate that TBANK will book a before-tax investment gain of Bt13-14bn in 2Q13, based on a sales price of Bt18bn.TCAP and Scotiabank could then recognize before-tax extra gains of about Bt5.5bn each. Note that TCAP plans to use at least some of this extraordinary gain to boost its loan loss reserve in 2Q13.
Expect 17% profit growth for 1Q13; good prospects for 2Q13
Given loan expansion of 20% YoY (and 2% QoQ), a fatter NIM, good OPEX management and fee income growth of 10% YoY, TCAP is expected to deliver 1Q13 earnings of Bt1.4bn, up by 17% YoY and 5% QoQ. We model for a cost/income ratio of 61%, down from 67% in in 1Q12 and 62% in 4Q12. Its 1Q13 pre-provision operating profit is estimated at Bt3.9bn, up by 38% YoY and 10% QoQ. We also expect strong earnings growth momentum in 2Q13, led by ongoing lending, good NIM management and a massive extra gain from its sale of TLIFE to Prudential Life Assurance.