TISCO Financial Group

TISCO Financial Group Plc 

 

TISCO’s earnings are recovering as provisioning on auto loans steps down - plus the lower cost of funds is giving it a better NIM. We see no catalyst from loan growth until 2017, but at the same time, its SSI overhang is fully priced in and it is trading deeply discounted to valuation. We continue to Buy with a target price of Bt45.  

Easing NPLs and provisions for auto loans. At its 3Q15 wrap-up meeting, TISCO confirmed reduction in normalized credit cost to 1.3-1.4% of total loans in 2016 vs. 1.5% (2.46% including provisions for SSI loans) in 9M15. NPLs rose by Bt704mn (10% QoQ) in 3Q15 solely from reclassifying its Bt821mn loan to SSI Thailand. If this is removed, NPLs actually shrink 2% QoQ, mainly on auto loans, and normalized provisions would be 1.3-1.4% of total loans, lower than the 1.5% in 1H15. LLR coverage against NPLs fell to 74% at 3Q15 from 107% at 2Q15 as a result of the reclassification of Bt4.4bn SSI loans (Bt3.6bn for SSI UK and Bt821mn for SSI Thailand) as NPLs and a write off of the SSI UK loans. Although TISCO says its 153% LLR coverage against NPLs net of collateral is sufficient and it has no need to boost LLR coverage, we conservatively forecast credit cost at 1.5% in 4Q15F and 2016F as we believe it will gradually rebuild LLR coverage.     

NIM to peak in 4Q15. Thanks to lower cost of funds, TISCO expects net interest margin (NIM) to improve another ~10 bps QoQ in 4Q15, following an impressive +34 bps QoQ in 3Q15 and +17 bps QoQ in 2Q15. The reduction in cost of funds comes primarily from stepping back from its savings deposit campaign (“diamond savings”). However, TISCO sees no room to bring cost of funds down any further in 2016 and expects to hold NIM at the 4Q15 peak in 2016. We thus expect a stable NIM in 2016. 

Material loan growth to resume in 2017. TISCO expects loans to be flat in 2016 before returning to material growth in 2017 when loans extended in the 2012-2013 peak are paid off. In 9M15, loans contracted by 10% (or Bt23bn) vs. our full year forecast of -11%. Corporate loans fell 19% or Bt10bn YTD, half of which came from prepayment of one large corporate loan as the client shifted to the bond market to take advantage of low bond yield. Its SME loans fell 14% or Bt3.3bn YTD and retail loans contracted 7% or Bt12bn YTD, mainly auto loans. TISCO expects the contraction in auto loans to slow in 4Q15 as its captive brands become more active. We maintain our loan growth forecast of -11% in 2015F, 0% in 2016F and 5% in 2017F. 

Opex to return to normal in 4Q15 and 2016. TISCO confirmed that its opex will return to normal in 4Q15 and 2016 after cutting this by 35% QoQ in 3Q15 in order to soften the impact of SSI provisions. TISCO reversed accrued bonus in 3Q15, bringing its cost to income ratio down to 23% in 3Q15 vs. the normal rate of 37%. We expect its cost to income ratio to rise to 40% in 2016F from 34% in 2015F. 

Valuation over-penalized. We Buy TISCO. It is trading at a deep discount to valuation at 7x PER despite the fact that earnings are recovering in tandem with easing provisioning needs for auto loans, plus NIM is improving from lower cost of funds.