TISCO Financial Group
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Recovery coming, valuation cheap BUY
TISCO Financial Group Plc (TISCO)
Reducing provisions, key earnings driver for 2015. Earnings will be driven by lower
credit cost (provisions/total loans) from 4Q14 through 2016 as provisions get back to
normal with the normalization of the used car market and used car loans. Market
prices for used cars stabilized in 2014 after plunging 30-40% in 2012-2013. We note that
nearly all used car NPLs came from loans extended in 2012 and 1H13, which means
that borrowers have reached the “point of no return”, with more than half the loans
paid off. TISCO expects a slight reduction in credit cost to 1.5-1.6% in 4Q14 (1.53% SCBS
forecast) from 1.67% for 3Q14 and a material fall in credit cost in 2015 to below 1.5%,
but does not yet anticipate a return to a normal level of 1.2% (1.45% SCBS forecast).
Gradual loan growth recovery. Loan growth returned to a small positive of 0.2%
MoM in November, backed by corporate and SME loans (mainly for auto dealers to
finance inventories for the Motor Show). In November, corporate loans grew 2.1% MoM
and SME loans 2.6% MoM but retail loans (mainly auto) contracted 0.9% MoM. This was
not enough to pull loan growth out of the negatives YTD (-6.8%) or QTD (-0.95%). TISCO
has set its initial 2015 loan growth target in the mid single digit range, in line with our
forecast of 5%. In view of the country’s high household debt and high repayments of
loans extended in 2012-2013, auto loan growth is expected to be modest in 2015.
Good NIM sustainable. With inflation tamed and the economy needing stimulus, an
interest rate cut – good news for HP banks - now seems more likely than an interest
rate rise, distancing the threat to NIM from rate hikes. An interest rate cut aids HP
banks like TISCO as the duration of their liabilities is shorter than their assets. We
expect the good NIM of 3.1% in 3Q14 to be sustained in 4Q14 and 2015. In fact, TISCO
expects NIM to expand 5-10 bps QoQ in 4Q14 upon a further fall in cost of funds.
4Q14F preview: Earnings recovery starting. Although loan growth is expected to
remain negative in 4Q14, we expect NIM to improve. A pick-up in non-interest income
and easing provisions are expected to boost 4Q14F earnings by 48% YoY and 10% QoQ
to Bt1.2bn. We expect a QoQ improvement in net interest margin (NIM) in 4Q14, driven
by easing cost of funds. Outlook for non-interest income is better, mainly from fees
related to the capital market, i.e. brokerage income and asset management fees.
Provisions are expected to decline on improving asset quality. Opex is expected to
increase QoQ, mainly from marketing expenses.
Valuation over-penalized. We maintain Buy on TISCO. It is trading at a deep discount
at 7x PER and 1.2x PBV relative to 18% ROE, reflecting the market’s over-penalization
for the deterioration in the auto hire-purchase business, which is beginning to get
back on its feet after a poor 2014.
