Thanachart Capital

Thanachart Capital Plc (TCAP) 

Investment thesis

We maintain our FY14 profit forecast unchanged at Bt5.8bn, down 37.2% YoY. However, TCAP’s end-June loan loss coverage ratio of 82% was far below the sectoral mean of 135%. Our FY14 LLP assumption is Bt7.6bn (in line with management’s new guidance). There is some risk to TCAP’s earnings profile from the possibility of lower loan growth than modeled, due to the prevailing weak consumption environment. But the stock trades at the cheapest YE14 PBV of our Bank coverage of 0.8x; the sectoral mean is 1.51x. We expect dividend yields of 4.3% for FY14 and 4.6% in FY15. HOLD!

Loan loss provisions are targeted to fall in 2H14

TCAP says it will gradually build its loan loss coverage ratio through debt restructuring and ongoing LLP-setting. Management raised its FY14 loan-loss provisioning peg to 0.85% of gross loans from 0.6% (we expect FY14 LLPs of Bt7.6bn, a credit cost of 86 bps). Note that its 1H14 LLPs equaled 92 bps of loans. It also targets reducing its YE14 NPLs/loans ratio to 4.0% from 4.6% at end-June 2014.

Management guides that impairments on HP-for-used cars and losses on the liquidation of recalcitrant credit card accounts will ease in 2H14—the recovery rate on repossessed cars should also improve. TCAP targets reducing LLPs to Bt1.6bn-1.7bn/quarter in 2H14 from a peak of Bt2.1bn in 2Q14, making for HoH earnings growth. We would like to see proof of this before adjusting our model.

Slash FY14 loan growth to 1-3% from old 6%

TCAP admits that its earlier FY14 loan growth target of 6% was too optimistic. HP lending will be flattish YoY. In contrast, corporate and SME loans are both targeted for growth of 8-10%. We forecast TCAP’s FY14 loan growth at 3%. Management expects an FY14 NIM in the 2.5-2.7% range. The CASA proportion of the funding mix was 33% at end-June, down from 35% at YE13. TCAP aims to raise the CASA proportion back to 35% of total funding by YE14. We assume a NIM of 2.73% for FY14, basically flat YoY.

Gradual recovery in 2H14 on lighter LLP-setting

3Q14 profit should recover modestly QoQ because LLP-setting will decline from Bt2.1bn to Bt1.6bn and fee income should rise (especially bancassurance sales and capital markets business). Note that we expect Thai domestic new car sales to dive about 30% YoY in 2014 to below 1m units, so the HP lending growth outlook is weak. Yet, lighter LLPs in 2H14 should mitigate the downside factors. We assume FY14 LLPs of Bt7.6bn, down 34% YoY. Also, consumption spending should start to recover in 4Q14, which would boost the HP and credit card businesses.