Thai Military Bank
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Profit base back to before 1977 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).
- 4Q14 profit grows against peers
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.
- 4Q14 net interest income grew 4.7%qoq but decline 3.4%yoy - better
than expected. Net loan growth was 0.8%qoq and 6.2%yoy in this quarter, lower
than expected, mostly from medium-sized SME loans (+5.1%qoq and
+18.9%yoy) and retail loans, especially housing. On the other hand, SME loans
for small-sized businesses have remained sluggish as a result of the bank’s
stricter policy amidst the incomplete economic recovery. Funding cost decreased
significantly by 8.4%qoq and 11.8%yoy; deposit base at end-2014 increased at a
bit slower rate than loan, or around 0.6%qoq and 7.9%yoy, so loan to deposit
ratio increased slightly from 92.52% at end-3Q14 to 92.78%.
- 4Q14 NIM rose 11bp to 3.15% - better than expected and marking a
historical high since the economic crisis in 1997, because average funding
cost has decreased gradually until it got below 2% over the past three years and
a half as TMB has not focused on increasing deposits aggressively like in the past.
In addition, the bank has increased the proportion of CASA deposits (No-Fixed
and ME) from 67.3% at end-3Q14 and 62.5% at end-2013 to 69% of total
deposits at the end of 2014. Nevertheless, NIM in FY2014 dropped 10bp to
2.97%, still better than expected, due to a decrease of loan yield because the
bank had booked substantial interest income from debt restructuring in 4Q13.
Funding cost has also been more favorable when compared with 2013.
- 4Q14 fee income grew 6.5%qoq and 16.6%yoy - slightly better than
expected, thanks to fee income from bancassurance and deposit and credit card
transactions. However, fee income growth in FY2014 was only 2.8%yoy, still
lower than our full-year forecast of 13%yoy.
- 4Q14 operating expenses increased 14.4%qoq and 2.9%yoy - more than
expected, mainly higher-than-projected marketing expenses in the high season.
As a result, cost to income ratio rose from 50.25% in 3Q14 to 54.06% in this
quarter, while FY2014 cost to income ratio increased to 52.66%, still higher than
the bank’s target to lower its full-year cost to income ratio near 50%.
- 4Q14 debt provisioning increased 38.4%qoq but decreased 34.5%yoy –
higher than projected, because of the bank’s counter cyclical provisioning.
Overall, asset quality in this quarter has remained strong from the prior quarter,
reflected from the above-mentioned significantly decreasing NPL. NPL coverage
ratio at end-2014 is very strong, standing at 157.5%, up from 145.3% at end-
3Q14 and still higher than the sector’s average of 128% at end-3Q14.
- To boost ROE to 15% in 2015
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. Although the bank does not have a solid goal in 2015,
it will adhere to its long-term plan by using deposits as a spearhead to boosting
the business growth in the long run, expanding its customer base and penetrating
into a higher-yield market. In addition, the bank will improve its transactional
banking service to enhance its competitiveness in the long run. All these factors
would boost ROE in 2015 to the target of 15%.
