Thanachart Capital

Thanachart Capital Plc (TCAP)

Q3 2012’s profit is worse than expected. NIM contracts, extraordinary income falls, provision increases
TCAP posted net profit in 3Q12 at B1.24bn, plunging 27.4%qoq and
7.2%yoy, worse than our projection for a contraction of only 8.1%qoq.The
main factors that pressured net profit in this quarter were as follows. 1) Debt
provision has skyrocketed 125.2%qoq and 752.3%yoy – higher than
expected, or a credit cost of 63bp from 29bp in the prior quarter, due to an
increase of NPL by B358m in this quarter as the bank could not complete
corporate debt restructuring in time. However, despite not having the effect,
it is already the bank’s policy to acceleratedly increase its debt provision in
2H12. 2) Net interest income dropped 2%qoq and 1.5%yoy to stand lower
than expected in spite of a support from net loan growth in 3Q12 at 4.4%qoq
and 10.2%yoy as expected (especially new car hire-purchase loan, the main
business of TCAP which has strong demand despite some deceleration in the
end of the 3rd quarter as Motor Show is coming in the end of the year.
Corporate and SME loans remained weak (-2.3%qoq but +1.3%ytd and
+2.1%qoq but -0.1%ytd respectively), except for small SMEs that have
shown robust growth (but accounting for a small portion of total loans).
However, NIM in 3Q12 shrank severely by 14bp to 2.64%. Although yield has
increased only slightly, funding cost hiked 16bp from aggressive deposit
raising (+14%qoq and 41.8%) while the bank also has a plan to issue 10-
year sub debts worth of B8.5bn at an interest rate of 4.7%. On the other
hand, positive factors that helped prevent the net profit from a substantial
decline in this quarter was extraordinary income recognition including profit
from selling of non-performing asset (NPA) at B315m, better than our
projection of B150m, and dividend income from Vayupak fund at B170m.

4Q12’s profit to rebound aggressively from provision decrease
We project TCAP’s earnings in 4Q12 to recover from a decrease in debt
provision expense that was unusually high in 3Q12 (but it will still be higher
than the quarterly average in 1H12). 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 revise up our net profit forecast for 2012-2013 slightly in
order to reflect our previous underestimation of loan and NIM. We, at the
same time, raise our assumption for operating expense and cost to income
ratio we have underestimated. Overall EPS growth in 2012-2013 is still
estimated high at 13.5%yoy and 13.8%yoy respectively. 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 bank.
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.

Gradually buy. Share price still faces pressure in short term

We confirm our Buy recommendation for TCAP and select it as a top pick of
mid-cap banks. 2013’s fair value at 1.21x PBV is B44.32. However, investors
should gradually invest as the share price is pressured in the short term from
3Q12’s earnings that were reported substantially lower than projected.