Thanachart Capital

Thanachart Capital Plc (TCAP)
Investment thesis: We have raised our FY12 and FY13 loan growth forecasts to 14% and 12%, respectively, from 11% and 10% to reflect TCAP’s strong 8M12 lending performance. Thus, we have revised up our FY12 and FY13 earnings forecasts by 4.4% and 4.5%, respectively, to Bt6bn and Bt7bn. Given our higher profit forecasts, we have upgraded our YE13 target price to Bt50 (up 11% from our old target of Bt45), pegged to a fair PBV of 1.35x. Our BUY rating stands.
FY12 loan growth revised up to 14%: The tax rebate scheme for first-time car buyers has boosted TCAP’s retail loan portfolio during 8M12. Net lending grew 10% YTD against an FY12 lending growth target range of 10-12%.  In order to adjust for the bank holding company’s YTD performance, we have revised up our FY12 and FY13 loan expansion forecasts to 14.0% and 12%, respectively, from 11.0% and 10% formerly. We expect a surge in lending in 4Q12 because of seasonality and ahead of the year-end expiry of the first-time car buyer tax (because demand for some models has been so strong that the car makers haven’t been able to keep up, the government has extended the deadline for delivery to end-June 2013).   
Big LLPs will squeeze 3Q12 numbers: TCAP plans to set heavy loan loss provisions of Bt600-800m for 3Q12, up from Bt129m in 3Q11 and Bt488m in 2Q12. As such we forecast that it will deliver a 3Q12 net profit of Bt1.5bn, up 12% YoY (but down 12% QoQ). The bank holding company currently has a low loan loss coverage ratio of 69% against a sectoral mean of 115%.
Potential upside from asset sales: Management has been studying the possibility of divesting Thanachart Life Assurance to a third party. The deal (if done) could generate an extra gain of Bt5-6bn to TCAP’s bottom-line this year (or early next year). We haven’t factored this possible upside into our model.
Outlook
FY12 loan growth forecast revised up to 14% from 11%: Management believes that TCAP will comfortably achieve its official FY12 loan growth target range of 10-12%. The bank holding company guides that lending will accelerate in 2H12, especially in 4Q12, driven by HP for cars. Note that Toyota Motor (Thailand) forecasts new car sales of 1.2m units in 2012, up 51% YoY. 8M12 new car sales rose 48.6% YoY to 867K units, which represents 72% of Toyota’s full-year projection.
Hence, we have revised our FY12 and FY13 TCAP loan growth forecasts to 14.0% and 12%, respectively, from 11% and 10% formerly to factor in its YTD performance and our expanded expectations for the future. The bank holding company achieved loan growth of 10.1% YTD in 8M11 (normally, the fourth-quarter is the best lending period of the year for HP-driven banks).   
At end-June 2012, the HP portfolio represented 48.7% of total lending, followed by corporate & SME at 35.6% and other retail sub-categories at 15.7%. Management anticipates that retail loans will comprise 70% of the total portfolio within three years.
Heavy LLPs will squeeze 3Q12 profit: Because of strong lending growth in 3Q12 in the face of a low loan loss coverage ratio of 69%, we expect TCAP to set heavy loan loss provisions of up to Bt800m for the quarter, up by 64% QoQ and 520% YoY, in order to build its loan loss coverage ratio toward the level of its peers (the sectoral mean is 115%). Given big loan loss provisions, we estimate a 3Q12 profit of Bt1.5bn, up a modest 12% YoY (but down 12% QoQ). Stripping out loan loss provisions and extra items, its 3Q12 pre-provision operating profit (PPOP) would rise by 21% YoY and 8% QoQ in tandem with lending growth.