Thanachart Capital

Thanachart Plc (TCAP)

Investment thesis
We reiterate our BUY rating on TCAP, premised on: 1) earnings growth, fueled by lending and good OPEX management, 2) a Bt6.25bn gain from selling Thanachart Life Assurance (TLIFE) on May 3, 3) the share buyback program (10% of its paid-up capital) with total budget of Bt3.4bn and 4) a low YE13 PBV of 1.2x; the regional mean is 2.0x.
Bt6.25bn before-tax gain from the sale of TLIFE
We calculate that TBANK’s sale of Thanachart Life Assurance (TLIFE) to Prudential Life Assurance (Thailand) will enable TBANK to book a before-tax investment gain of about Bt12.5bn in 2Q13 from a sales price of Bt18bn. Management said TLIFE’s BV is about Bt5m (with some adjusted carrying costs). As such, TCAP and Scotiabank could book a before-tax extra gain of about Bt6.25bn each. Note, however, that we expect TCAP to set Bt2bn in extra loan loss provisions, in which case, it would have only Bt4.25bn left (it would also have to pay tax on the full Bt6.25bn).
Heavy FY13 loan loss provisions not a big deal
TBANK plans to use a big chunk of its investment gain to raise its loan loss coverage ratio (LLR/NPLs) to a level closer to the sector mean of 131% (at end-March 2013 it was only 75%). We expect TCAP to set 2Q13 loan loss provisions of Bt5.5bn, up from only 488m in the same period last year. TBANK also targets reducing its YE13 NPLs/loans ratio to 2.5-3.5% from 4.3% at YE12. It has set a credit cost target of 70 bps of total gross loans for FY13, up from 36 bps in FY12. We expect its LLR/NPLs ratio to rise to 97% at YE13.
Share buyback to strengthen share price
The share buy-back period started on Dec 11, 2012 and is scheduled to end on June 10, 2013. TCAP has budgeted Bt3.4bn for the scheme with a repurchase ceiling of 127.7m shares. So far it has spent Bt1.17bn for 25.2m of TCAP shares. The remaining of Bt2.2bn will be used to support the share price till June 10, 2013. Note that TCAP’s board eased the share buyback value ceiling from 1.1x BVS to 1.15x the stock’s average five-day close price. The bank holding company intends to start reselling the shares into the market six months after the buyback ends (June 10).
Hefty FY13 ROE and high YE13 CAR expected
TCAP has set an FY13 ROE target range of 12.5-15% (excluding the extra gain from divesting TLIFE, noted above). We are more bullish—our model indicates a hefty FY13 ROE of 21.2%, up from 13.6% last year. Given the strong FY13 ROE outlook, we also expect YE13 CAR to increase to 15% (9.3% Tier-1) from 11.32% (7.16% Tier-1) at end-March 2013. This will enable swift business expansion without need for a cash call for at least several years, we believe.