Bangkok Life Assurance

Bangkok Life Assurance Plc (BLA)

2Q12’s profit contracts beyond expectation on soaring premium reserve and tax expense

BLA declared net profit in 2Q12 lower than expected at B808m, contracting
11.6%qoq and 37.5%yoy because of following reasons. 1) Premium reserves
in 2Q12 has touched 70.8% of total premium income again – higher than

Maintain 2012-13’s forecast. Total premium income reaches target, but reserve and tax are key variables
The growth of total premium income in 1H12 at 18.6%yoy has begun to be in
line with the company’s target for FY2012 at 18.6%yoy, so the company
would still maintain its target and not cut it as we had projected. Moreover,
although total premium income growth in FY2012 we have estimated at only
11.9%yoy is substantially lower than the company’s target, the likely rising
premium reserve and tax expense might depress BLA’s net profit.
Consequently, we maintain our earnings forecast for FY2012-13, projecting
net profit growth at 11%yoy and 27.4%yoy respectively. We still have
positive perspective toward BLA’s long-term business strategy to focus on
appropriate level of growth in order to keep good profit margin and capital
adequacy ratio according to RBC at 238% at present (to make it not lower
than this level).

Reiterate “hold to receive dividend”. 2012’s fair value is B50.84
We reiterate our recommendation of “hold to receive dividend”. The company
has recently announced dividend for 1H12 at B0.36/share or a dividend yield
of 0.8%. The current share price has substantially reflected pressuring
factors from the business strategy adjustment. Fair value in 2012 is B50.84
(embedded value is B24.35 and VNB is B26.49).
projected, after falling to lower than 70% in the past 2 quarters. Although
the company has benefited from the growth of 12.2%qoq and 24.9%yoy in
total premium income (mainly from the growth of first year premium for the
whole life product by 63.9%qoq while renewal year premium has stayed flat
from the prior quarter), aggressive selling of life insurance products through
Bancassurance (65% of total premium income through insurance sale agents
and 40% through Bancassurance at end 1H12) raised a burden for the
company to make high reserve for first year and renewal year premiums. 2)
Income tax expense in 2Q12 has increased to 35.2%qoq – higher than
expected. The tax rate in 2Q12 has risen to 38.3% from 28.8% in 1Q12 due
to premium reserves. This is because if premium reserves are higher than the
Revenue Department criteria, they will not be counted as a tax expense.
Return on investment (ROI) has decreased to 4.92% from a very high level
of 5.68% in 1Q12 (overall, ROI in 1H12 is still as high as 5.35%, higher than
the company’s target of no lower than 5%) because of a slight decrease in
dividend yield after a high season and a decline of profit from securities
trading in equity portfolios while interest income has still escalated following
increasing investment. Overall, net profit of BLA in 1H12 equated to B1.72bn,
still shrinking by 24.5%yoy and comprising 45% of our FY2012’s net profit
forecast.