TISCO Financial Group

TISCO Financial Group Plc
Investment thesis
We have cut our TISCO profit forecasts by 4.2% for FY13 to Bt4.6bn and by 11.7% for FY14 to Bt5.3bn. The cuts were prompted by heavier LLP assumptions. Thus, our YE14 target price dives 22% to Bt47.50, pegged to a PBV of 1.45x. Despite our earnings projection cuts, our BUY rating stands, premised on: 1) a cheap valuation (a YE14 PBV of 1.1x and the highest ROE in the Bank sector of 20%), 2) scope for loan growth upside (SME and corporate) in FY14, 3) good asset quality management (the lowest NPLs/loans ratio in the sector of 1.45% with a loan loss coverage ratio of 145%) and 4) generous dividend yields of 6.4% for FY13 and 7.4% for FY14. 
Good loan growth through 3Q13
3Q13 lending expansion of 2.5% QoQ is assumed, with growth across the corporate SME and HP (new car sales) categories. We also anticipate a 3Q13 NIM of 2.9%, basically flat QoQ. Note that TISCO’s 8M13 net lending expanded by 14.5% YTD and 27.1% YoY. We expect FY13 loan growth of 22%.
Heavier YoY loan loss provisions
Given strong lending growth and good asset quality management, we assume 3Q13 loan loss provisions of Bt680m, up 28% YoY but down 16% QoQ (after TISCO set loan loss provisions for counter-cyclical risk in 1Q13 and 2Q13). Note that management plans to set a credit cost equal to 0.8-1.0% of gross loans in 3Q13, down from 1.5% the previous quarter. In order to reflect extra provisions for counter-cyclical risk in 1H13 and in anticipation of such in FY14, we have raised our LLP assumptions by 7% to Bt2.9bn for FY13 and by 20% to Bt3bn for FY14.
Cost/income ratio looks sustainable
We expect TISCO to post a 3Q13 cost/income ratio of 43.7%, close to the corresponding period last year. Fee income should report a jump of 20% YoY, driven by loan-related fees, bancassurance sales commissions and securities brokerage fees. Note that TISCO’s FY12 fee income shot up 44% YoY. We expect much more modest fee income growth of 19% for this year and another 13% in FY14.
Expect strong 3Q13 profit growth of 21% YoY
Earnings should post expansion of 21% YoY to Bt1.15bn for 3Q13, driven by ongoing lending growth, a sustained NIM, good OPEX management and a lower headline corporate tax rate of 20% (down from 23% in 2012). However, that would represent slight QoQ bottom-line slippage, due to lower fee income (chiefly lower securities brokerage fee revenue and investment gains).