Thai Military Bank

Profit base back to before 1997 crisis BUY

Thai Military Bank Plc (TMB)

- 4Q14 profit grows against peers, pushing ROE to 17.4%

TMB posted 4Q14 net profit at B2.98bn or the growth of 24.6%qoq and

65.4%yoy, 23% better than projected. Net interest income and NIM

substantially exceeded our projection, while there was also a reversal of

income tax of approximately B362bn in this quarter from a reversal of the

bank’s tax expense for NPL impairment provisioning booked in previous

quarters (provision for NPL impairment is not counted as a tax expense, so it

has to be included back in the profit before tax for income tax calculation, but

when the NPLs are sold or restructured, the bank can bring the provisioning

expense to reduce tax). NPL decreased as much as B2.93bn or 14.0%qoq

(consolidated financial statement) and B1.51bn or 7.7%qoq (separate

financial statement) as a result of NPL selling and restructuring in this

quarter. The aforementioned positive factors helped alleviate an impact from

higher-than-expected operating expenses and provisioning for doubtful debt.

Overall, FY2014 net profit grew 66.3%yoy to B9.54bn, which is equivalent to

the profit base before the economic crisis in 1997. ROE at end-2014 is 14.5%,

versus the target of 14%.

- Slightly cut forecast. NIM increases, provisioning decreases

We revise down our earnings forecast for FY2015-2016 by 3.4% and 3.0%,

respectively, mostly by reducing net loan growth forecast that we had

overestimated and increasing cost to income ratio because a decrease in

operating expense or an increase in overall income base has been slower than

expected. However, after the forecast revision, slight net profit growth of

4.3%yoy is still anticipated in 2015 (mainly from lower extraordinary income)

while remarkable growth of 18.3%yoy is projected in 2016 due to the bank’s

better net loan growth (from its strategy of focusing on high-yield loans),

NIM, fee income, and asset quality.

- Top pick of medium-sized banks

We recommend BUY for TMB. New 2015 fair value after the forecast revision

is B3.60 (GGM, based on PBV of 2.08x, ROE forecast of 13.70%, and LT

growth of 9%). The current share price provides total return of over 20%

(dividend yield included).