Thanachart Capital

Thanachart Capital Plc (TCAP) 

 

TCAP has made it to our family of top picks in recognition of its probable outperformance in terms of asset quality. It will be boosting LLR coverage and ROE via the huge tax loss carried forward from the liquidation of its investment in SCIB, a further plus. The rise in LLR coverage may trigger a valuation re-rating. The stock has outdone its sector over the past three months and we expect this to continue into 2016, particularly given market concerns over the sector’s asset quality.  

 

Only bank with no clouds over asset quality. TCAP has been proactive in NPL resolution via debt restructuring, sale of NPLs and write-offs of bad debts. Concurrent with this, NPL formation from auto loans, mainly used car loans, has been easing as used car prices get back to normal. TCAP has low exposure to the vulnerable SME segment at only 10% of total loans, implying limited downside to asset quality. In contrast to the sector overall, TCAP’s NPLs have actually subsided for five consecutive quarters. TCAP expects its NPL ratio to fall below 3% in 2016 from 3.54% (its own calculation) at 3Q15. TCAP is the only bank we cover for which NPLs decreased (by 21% or Bt7.2bn) in 9M15, mainly via the sale of Bt7.4bn in NPLs.   

 

Big plus from tax loss benefit. TCAP’s effective tax rate for 9M15 was merely 1% as a result of realization by TBANK (50.96% owned by TCAP) of a tax loss carried forward arising from the liquidation of its investment in SCIB. TCAP disclosed that TBANK had tax losses totaling Bt27bn as of 3Q15. We calculate this will bring TCAP’s consolidated effective tax rate down to 3% in 2015F, 3% in 2016F and 4% in 2017F before it returns to the normal 20% rate in 2018.     

 

Lifting LLR coverage. TCAP plans to use the benefit from the tax loss to bring up LLR coverage and profitability. It aims at LLR coverage equivalent to the sector average of ~130% via both extra provisioning and proactive NPL resolution. Its determination to achieve this is seen in the substantial rise in LLR coverage to 109% at 3Q15from 84% at 4Q14. We expect this to rise to 130% by YE2016 under our forecast of a 10% reduction in NPL amount in 2016 and a decline in credit cost to 1% for 2016F from 1.25% for 2015F.   

 

Upside to our 2015F-2016F loan growth forecast. TCAP said in its analyst meeting that it expects to see QoQ loan growth return to positive in 4Q15 and expects its 2016 loan growth to be in line with GDP growth. Achievement of this goal will provide upside to our loan growth forecast of -8% for 2015F (vs. -6.2% 10M15) and 0% for 2016F. Hire-purchase loan repayments are expected to ease in 2016 and 2017 as the record-high loans extended in 2012-2013 mature. We expect new loans to come back gradually, but not to where they generate loan growth until 2017. 

 

Add TCAP to top pick list. We add TCAP to the sector’s top pick list as we expect it to outperform its sector in terms of asset quality in 4Q15 and 2016, plus it will use the huge tax loss carried forward from the liquidation of its investment in SCIB to enhance its LLR coverage and ROE.