Thanachart Capital

Thanachart Capital Plc (TCAP)
Downside risk from used car loans. Used car loans continue to face asset quality risk. Auto lease operators such as TBANK (TCAP holds 51%) have been seeing a rise in used car NPLs as a result of a sharp 30-40% fall in used car price, which they blame on the tax incentive for first-car buyers. This made it much more difficult to sell repossessed vehicles, brought a rise in NPL write-offs and rising new NPLs. TCAP believes prices for used cars have bottomed but is unsure when prices will return to normal. Further, prices for some larger new cars have also come down ~30%, giving rise to a risk that clients will simply abandon their current vehicles and thus the loans. We believe asset quality risk on used car loans will continue through 2H13 – and that the best the company can hope for is that the NPL situation for used car loans is contained and will not expand to new car loans. As the #1 player in used car hire-purchase, TCAP is most exposed to this risk: at 2Q13, its used car loans amounted to Bt98bn, 12% of total loans, and loan loss reserve provided 4.81% coverage (vs. 0.95% for new car loans).  
NPLs from corporate loans. Mainly stemming from two large corporate loans, NPL amount rose an alarming Bt3bn or 9% QoQ in 2Q13, bringing NPL ratio up to 4.6% from 4.35% at 1Q13. One of the new NPLs was Saha Farm, and this loan is expected to go into rehabilitation. At the same time, the extra provisions of Bt5.4bn in 2Q13 (lifting LLR coverage to 83% from 75% at 1Q13) were more than sufficient to cover the Saha Farm loan, which, according to press reports, is ~Bt2bn.
Cut 2013-15F loan growth. We cut 2013F loan growth to 9% from 11% (vs. 4.4% 1H13) to factor in the more cautious attitude toward auto loans and potential lower GDP growth in 2013 than forecast. TCAP expects 2013F loan growth to end at ~10%, anticipating rising demand for SME and corporate loans to make up for the softening demand for auto loans for 2H13. We also cut 2014F-15F loan growth to 8% from 10%. 
Maintain Neutral. We maintain Neutral on TCAP and further cut target price to Bt40 (1x average 2013F and 2014F BVPS) from Bt43 as result of our downward revision of 2013F-2015F loan growth. Although TCAP is trading at an undervalued position, this is justified in view of its asset quality risk, particularly from used car loans.