Thanachart Capital

Easing provisions bringing earnings recovery 

Delinquencies and provisions simmering down. Since 3Q14 asset quality has been improving with NPLs and provisions stepping down in tandem with the stabilization of used car prices plus sale of NPLs. TCAP expects further improvement in asset quality in 4Q14 and 2015 on the back of more NPL sales, proactive debt restructuring and continued improvement in used car prices from the 20-30% price drop from the first-car buyer scheme over 2012-2013. The bank’s credit cost eased from the peak of 1.1% in 2Q14 to 0.93% in 3Q14 and we expect this to continue to come down, to 0.91% in 4Q14F (0.95% in 2014F) and 0.85% in 2015F (more conservative than the bank’s guidance of 0.8% normalized provisions).  

Small SME loans to compensate for mediocre HP loan growth. TCAP expects loan growth to be flat at best in 2014F (-2.4% in 9M14) and then recover to 5% in 2015. Due to the country’s high household debt and high repayments of loans extended in 2012 and 2013, TCAP expects auto loan growth to be essentially flat in 2015.To compensate for the mediocre auto loan growth, it will become more active in the small SME segment in 2015 after installation of a new business platform and IT system in 2014. It has begun already with an ad to attract small SMEs, looking for those with a business history of no larger than Bt10mn/account. We cut loan growth forecast to -1% from 0% in 2014 and to 3% from 5% in 2015.  

Lower funding costs returning in 4Q14. TCAP raised long-term deposits to increase deposit duration in preparation for policy rate hikes in 2015. However, it is now seeing less pressure for rate hikes and has gone back to raising S-T deposits (current & savings deposits) in order to ease cost of funds in 4Q14. It expects to be able to keep its net interest margin (NIM) stable in 4Q14. We forecast a 2 bps slip in NIM in 2015F, assuming a 50 bps hike in the policy rate in 2H15.   

4Q14 guidance. In 4Q14, business will be affected by lower agricultural product prices. Loan growth will come from corporate & SME and housing loans. Spread is expected to be maintained. Non-interest income outlook is getting better. Opex may increase in line with business volume. Provisions are expected to decline. We forecast an 8% fall in 4Q14 earnings YoY but a rise of 18% QoQ to Bt1.4bn. 

Maintain Buy. We view TCAP as undervalued at 0.8x 2015F PBV and 8x 2015F PER. We believe that easing provisions and a gradual recovery in loan growth will lead to earnings recovery from 4Q14 onward. We prefer TISCO to the other two banks that focus on auto loans, seeing its valuation as more attractive; it also has lowest exposure to used car loans.