TISCO Financial Group

TISCO Financial Group Plc (TISCO)
Investment thesis
We maintain our BUY rating on TISCO, premised on: 1) moderate lending growth, 2) rising fee income (from both the capital market and loan-related fees), 3) excellent asset quality management and 4) an adequate CAR of 13.9% (9.5% Tier-1), so no need for capital-raising like last year (when the bank holding company issued TSRs). We expect core earnings to rise substantially QoQ in 4Q13 onward. Besides, its dividend yield is generous at 5.9% for FY13 and 6.7% for FY14.   
TISCO targets FY14 loan growth of 10-15%
Given strong 9M13 lending expansion of 15% YTD and 25% YoY, TISCO should achieve its FY13 target of 20%. 4Q13 lending will be driven by retail (chiefly HP for new cars) and corporate business and should be stronger than the expansion rate in 3Q13. Management guides for FY14 loan growth of 10-15%, driven by corporate lending (15-20%). Retail categories—consumer loans (10-15%) and HP for new cars (10%)—will rise as slower rates.
Quarterly LLPs will be slightly lower in 4Q13 and beyond
TISCO said that the heavy 3Q13 loan loss provisions will be followed by slightly lighter LLPs, now that losses on repossessions on used cars are in decline. Note that TISCO set credit costs of 1.5% of gross loans for 1Q13, 1.2% for 2Q13 and 1.1% for 3Q13. Management expects a credit cost not exceeding 1.1% for 4Q13.
Note that the bank holding company has an extra loan loss cushion of Bt2.1bn to cope with economic uncertainty. We remain confident in its asset quality management. Sahaviriya Steel Industries Plc (SSI) recently completed capital-raising and rescheduled its debt repayment obligations with creditors. Its performances have been improving in both Thailand and the UK (Teeside Cast Products). TISCO set a loan loss provision for SSI equal to 9% of its Bt4bn stake in the syndicated loan to the firm. We don’t anticipate serious operating problems this year or next.
Cost/income ratio will be maintained at 40-42% 
Management guides that the 4Q13 cost/income ratio will decline slightly from the 40.1% set for 3Q13, driven by ongoing loan growth, a stable NIM and slightly lower LLPs. That should enable its earnings to set a new record for 4Q13, we believe. TISCO also guides for an FY14 cost/income ratio in the range of 40-42%, basically the level we assume for FY13. The ROE target for next year is a minimum of 20%. Note that TISCO’s 9M13 ROE was 23%. The dividend payout policy is set at not less than 50%.