Tisco Financial Group

Tisco Financial Group Plc (TISCO)

Investment thesis: We have upgraded our TISCO FY12-13 earnings projections by 3% and 10%, respectively, to Bt3.7bn and Bt4.4bn in anticipation that the firm will deliver FY12 lending growth of over 25% (we earlier expected 18%). However, we have raised our FY12 LLP assumption by 12% to Bt1.4bn, which reflects write-offs related to 4Q11 flooding and provisioning against the possibility of the SSI loan failing to perform. Due to our FY12-13 earnings forecast upgrades, we have raised our YE12 target price by 7% to Bt46, pegged to a justified PBV of 1.84x, and changed our call from HOLD to BUY.
FY12 loan growth targets raised: Management upped its FY12 loan growth guidance to 20% from 15%, due to strong 13.5% YTD lending expansion in 1H12. Thus, we have raised our FY12 loan growth projection to 25% from 18% formerly.
LLP setting will normalize in 2H12: Given strong lending growth and one-time write-offs related to the 4Q11 flooding, TISCO set heavy loan loss provisions of Bt857m for 1H12 (equal to 0.90% of total loans). Management said it will cut LLPs to a level equal to 0.7-0.80% of total loans in 2H12 (Bt280m-350m/quarter). We, however, have raised our FY12 LLP assumption to 12% to Bt1.4bn to fine-tune the bigger LLPs in 2Q12.  
TISCO is prepared for an SSI worst-case scenario: TISCO’s exposure to SSI is Bt4bn (its portion of a syndicated loan that financed SSI’s purchase of a billet plant in the UK). Under the worst-case scenario in which SSI failed to start repaying the loan, management said the loan loss cushion ratio would drop to 130-140% from 171% currently.
3Q12 earnings should rise QoQ: Strong lending growth and good funding cost management will enable TISCO to sustain its 3Q12 NIM stable QoQ (it was 3.19% in 2Q12). Note that B/Es comprised only 50% of its funding mix at end-June, down from 75% at YE11. As such, we expect TISCO to deliver strong 3Q12 earnings. Besides, it plans to set normal loan loss provisions in 3Q12.
Outlook
We have raised our FY12 loan growth forecast to 25%: Management upped its FY12 loan growth guidance to 20% from 15%, due to strong 13.5% YTD lending expansion in 1H12. Thus, we have raised our FY12 loan growth projection to 25% from 18% formerly. Lending growth will sustain momentum into 2H12, led by the corporate and SME portfolios. Retail loans (72% of total loans at end-June) will continue to rise in tandem with new car sales growth. Toyota Motor (Thailand) forecasts that new car sales will jump 38.5% to 1m units this year.
Note that TISCO’s 2Q12 corporate lending expanded 24% QoQ, whereas its SME and retail portfolios grew by 24% QoQ and 6% QoQ, respectively. Because our expectations for loan growth have increased, we have raised our FY12-13 earnings projections by 3% and 10%, respectively to Bt3.7bn and Bt4.4bn.
LLP setting will normalize in 2H12: Because of strong lending growth and one-time write-offs related to the 4Q11 flooding, TISCO set heavy loan loss provisions of Bt857m for 1H12 (equal to 0.90% of total loans). Management said it will cut LLPs to a level equal to 0.7-0.80% of total loans in 2H12 (Bt280m-350m/quarter). We, however, have raised our FY12 LLP assumption to 12% to Bt1.4bn to fine-tune the heavier LLPs in 2Q12. Note that its NPLs/loans ratio was the lowest in the sector at end-March at 1.3% with a big loan loss cushion ratio of 171% (the second-largest in the sector after BBL’s 193%). We maintain our FY13 LLP assumption at Bt1.65bn.
TISCO is prepared for an SSI worst-case scenario: TISCO’s exposure to SSI is Bt4bn (its portion of a syndicated loan that financed SSI’s purchase of a billet plant in the UK). The first repayment on the loan isn’t scheduled till mid next year, so it is technically still performing, according to management. Under the worst-case scenario in which SSI failed to start repaying the loan, management said the loan loss cushion ratio would drop to 130-140% from 171% currently. Note that TISCO has an excess loan loss reserve of Bt2bn, which should be sufficient to handle SSI debt restructuring.
NIM should be sustained through 2H12: The bank holding company aims to cut the B/E proportion of its funding mix from 75% at YE11 to 20% at YE12 (it is currently 50%) and lend aggressively in 2H12, which it guides, would enable its to sustain its NIM at about 3.19%. We, conservatively, maintain our NIM assumptions at 3.12% for FY12 and 3.16% for FY13. 
3Q12 earnings remains improving QoQ: Lending growth, a sustained NIM and lower loan loss provisioning should enable TISCO to deliver stronger QoQ earnings for 3Q12. We expect a cost/income ratio of 45% for 3Q12, flat QoQ. Note that its 1H12 cost/income ratio was 49%, due to NIM squeeze in 1Q12. We forecast an FY12 cost/income ratio of 46%.  
Recommendation and valuation
Upgrade to BUY rating: Because we have raised our loan growth forecasts in anticipation of stronger HoH lending in 2H12, we have revised up our FY12-13 earnings projections by 3% and 10%, respectively, to Bt3.7bn and Bt4.4bn. The bank holding company should be broadly resilient to any external economic weakness, in part because it focuses on retail loans (especially HP). Its NPLs/loans ratio remains the lowest in the sector of 1.3% with a big loan loss cushion ratio of 171%.
Given our earnings forecast upgrades for FY12 and FY13, we have raised our YE12 target price by 7% to Bt46, pegged to a PBV target of 1.84x, still far below its 2010 peak (PBV of 1.93x, up 1.5SDs). Given scope for lending growth upside and a favourable outlook for HP vendors, we have upgraded our TISCO rating from HOLD to BUY.