Thanachart Capital

Thanachart Capital (TCAP)

Q3 2012’s profit to weaken qoq. Extraordinary income falls but core business still grows We estimate TCAP’s net profit in Q3 2012 at B1.57bn, contracting 8.1%qoq but still growing 17.5%yoy. The factor to pressure net profit in this quarter is a decrease of profit from selling of non-performing asset (NPA) which was booked as large as B400m in the previous quarter. However, it is compensated by recognition of dividend income from Vayupak fund at B170m in this quarter.
Excluding the item, profit from operation would still grow continuously by 18.3%qoq due to following factors. 1) Net interest income is anticipated to grow by 3.1%qoq and 3.6%yoy. The contribution is net loan growth in Q3 2012 which is expected as high as 4%qoq and 9.8%yoy, led by car hire-purchase loan especially for new car, the main target group of TCAP of which the demand is still strong despite some deceleration in the end of the 3rd quarter as Motor Show is coming in the end of the year. At the same time, corporate and SME loans are still declining, except for small SMEs that have shown robust growth (but accounting for a small portion of total loans). Consequently, overall NIM in Q3 2012 is projected to contract slightly by 3bp to 2.75% from yield that decrease from the company’s focus on new car loans which provide lower yield and
funding cost that has risen continuously from massive deposit raising (+15%qoq) and issuance of 10-year sub debts worth of B8.5bn at an interest rate of 4.7%. 2) Fee income is anticipated to thrive 11.4%qoq and 36.8%yoy,mainly from the growth of fee income for car hire-purchase related transactions especially Bancassurance. 3) Operating expense is anticipated to remain flat
qoq as a result of effective cost control according to the company’s policy of cutting cost to income ratio to lower than 50% in the long term. However, another factor that will pressure net profit in this quarter is debt provision that is foreseen to hike by 84.3%qoq or the credit cost of around 51bp from 29bp in the previous quarter, which is in keeping with the company’s policy that debt
provision expense would increase at an accelerated rate in 2nd half 2012.

Concerns over capital adequacy alleviated by plan to sell life insurance business
We project 4Q12’s earnings to be pressured by debt provision expense that would stabilize at a high level for another quarter. However, profit from operation is expected to continue growing following loan demand which is entering a high season, especially car hire-purchase loan as mentioned above. Meanwhile, corporate and SME loans are believed to grow at a more
accelerated rate. Consequently, we still estimate overall EPS growth in 2012 at 12.4%yoy. In addition, the plan to sell life insurance business in 2 companies TCAP has stakes (TLife and SCIBLife) that will be a short-term supporting factor for TCAP is now rounding the corner and it would generate worthwhile returns for the company. Preliminary, we estimate profit from the
sale of investment (before MI and tax but net after the cost of investment at B1.7bn) at B15.4bn. However, net after tax and non-controlling interests (49%), total net profit is B6.31bn or B4.94/share, which will help enhance capital adequacy ratio, especially core tier 1 (after deducted with goodwill (GW) of B13.9bn) of TCAP to above 8% as we have projected.

S-T catalyst boosts share price to outperform continuously
We confirm our Buy recommendation for TCAP and select it as a top pick of mid-cap banks. Fair value at 1.21x PBV is B40 in 2012 and B44.07 in 2013.However, including profit from the life insurance business sale, fair value in 2013 will be B48.51 or an increase of 10%.