Thanachart Capital

Thanachart Capital Plc (TCAP) 

  

TCAP is doing better in terms of asset quality and the use of its tax benefit to bulk up its LLR coverage. It expects some small loan growth this year with a shift in focus to SME loans, though we forecast zero growth. TCAP is our top pick in its sector and we BUY with an unchanged target price of Bt42. 

 

Continued improvement in asset quality. TCAP is seeing a continued improvement in asset quality both in terms of probability of default (PD) and loss given default (LGD) thanks to the ongoing recovery in the used car market. Its NPLs have fallen for six consecutive quarters, with its reported NPL ratio down to 2.8% in 1Q16 from 2.96% in 4Q15, beating its YE2016 target of 2.8-2.9%. LLR coverage ratio rose to 119% in 1Q16 from 116% in 4Q15, close to achieving its YE2016 target of >120%. We maintain our forecast of an easing in provisions to 1% of total loans in 2016F (vs. 1% for 1Q16) from 1.2% in 2015, and this will be the chief factor behind the 2016F earnings recovery of 9%.   Tax benefit to shore up LLR coverage. TCAP’s effective tax rate in 2015 was merely 2% as a result of TBANK’s Bt29bn tax loss carried forward arising from the liquidation of its investment in SCIB. This will continue through this year and into 2017 with an effective tax rate of 2% and 4% respectively before returning to the normal 20% in 2018. TCAP plans to use half of this tax breather to enhance its LLR coverage. We expect LLR coverage to rise to 130% by YE2016 on par with the sector average, allowing a further easing in credit cost in 2017-2018, which will support a continued earnings recovery. 

 

Flattish loans in 2016. Despite a shrinkage of 2% in loans in 1Q16, TCAP maintains its 2016 loan growth target at 1-3% vs. -5% for 2015. It plans to shift its focus toward SME loans, which is expected to gain momentum over the rest of the year. We maintain our 2016F loan growth at 0%, expecting a continued shrinkage in auto loans to be offset by expansion in other kinds of loans (corporate, SME and housing loans). We expect the bank to return to material growth of 4% in 2017 when loans extended in the 2012-2013 peak are paid off.   

 

Still no finalization of Scotiabank sale of TBANK. Scotiabank, its co-partner in TBANK (which TCAP holds 50.96%), is negotiating to sell its 48.99% stake in TBANK to a large, financially strong and reputable international financial institution. In July, 2007, Scotiabank paid Bt16.37/share, equivalent to 1.6x 2006 BVPS. TBANK’s BVPS was Bt18.5 at 1Q16. There is a good chance of selling TBANK at a premium to its BVPS. Should it be able to do so, it could trigger a revaluation of TCAP’s stake in TBANK and thus its valuation. The new partner could also bring with it more synergy for TBANK.  

 

Put TCAP as the sector’s top pick as we expect it to outperform its sector in terms of asset quality, 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.