Thanachart Capital

Thanachart Capital Plc (TCAP)

Investment thesis

We are bullish about TCAP’s earnings prospects, given the V-shaped recovery in new car sales and anticipation of stronger loan growth in 4Q12 onward. Furthermore, we expect its main subsidiary, TBANK (51% stake), to post a big gain from selling Thanachart Life Assurance (TLIFE) in 1Q13, which would boost its CAR by 2% from 14.2% (8% Tier-1) to 16.2% (10% Tier-1). The bigger CAR should put to rest intermittent rumors of an upcoming cash call. Among Thai banks, TCAP currently has the cheapest YE13 PBV of 0.9x; the regional mean is 1.7x. Our BUY rating stands.

Earnings upside from TLIFE sale in 1Q13
We calculate that TBANK’s sale of TLIFE to Prudential Life Assurance (Thailand) will enable TBANK to book an investment gain of about Bt14bn before tax in 1Q13. Note that management said TLIFE’s BV is Bt3.8m (with some adjusted carrying costs). As such, TCAP could book a before-tax extra gain of about Bt7bn before tax.

Life assurance fee income will plunge in FY13 with sale of TLIFE
Management said that fees from bancassurance sales will dive with the sale of TLIFE to Prudential in 1Q13. However, life assurance fees will recover in FY14 on business expansion. As part of the deal, Prudential appointed TBANK its exclusive bancassurance sales agent for 15 years. As such, TBANK will share commission fees on sales of Prudential products. We model that TCAP’s FY13 bancassurance fee income will fall to Bt1bn from about Bt2.5bn this year.

Expect bigger loan loss provisions in FY13
TBANK plans to use a big chunk of its investment gain to build its loan loss coverage ratio (LLR/NPLs) to a level near the industry mean of 115% (at end-Sept it was only 69%). We expect TCAP to set FY13 loan loss provisions of Bt5.2bn, up from Bt3bn this year. 

CAR expansion    
The expected 2% increase to CAR to be brought about by the sale of TLIFE will secure TBANK’s capacity to lend robustly for years into the future. TCAP officially targets modest FY13 loan growth of 10% (focused on HP for used cars and lending to small businesses). We calculate that the YE13 CAR will expand to 16.2% (10% Tier-1), which would be far in excess of would will be necessary under the Basel III accord (which goes into effect on January 1, 2013)—Tier-1 capital of 6.0%, up from 4.25% currently.