Tisco Financial Group

Tisco Financial Group (TISCO)

- 4Q13 profit sinks 25.9%qoq. Provision higher than expected, NPL increases
TISCO reported 4Q13 net profit at B804m, plunging 28.9%qoq and 19.2%yoy, 17%
worse than our projection. Debt provision in 4Q13 was booked at B1.61bn, increasing
107.4%qoq and 197.6%yoy – substantially higher than expected. Credit cost shifted to
221bp, versus 118bp on average in 9M13, in line with an increase in NPL by B769m to
1.46% of the total loan, mostly from repossessed cars that have been affected by a fall
in market price. NPL from other retail loans have also increased as a result of domestic
economic slowdown caused by the prevailing political crisis. Excluding such items,
normalized profit in 4Q13 stood at B2.33bn, still growing remarkably by 23%qoq and
52.9%yoy due to the following factors. 1) Operating expense decreased
21.0%qoq and 32.0%yoy – better than expected. Personnel expense went down
37.6%qoq and 39.1%yoy (the cause of the decrease is still unknown), so cost to
income ratio in the quarter dropped to 32.11% from 41.18% in 3Q13. 2) Other
operating income increased 32.2%qoq (down 31.5%yoy though), mainly from
an increase in profit from investment trading. Moreover, the following pressure has
lower weight than the aforementioned positive factors, thus still benefiting the
normalized profit. 1) Net interest income stayed quite flat in 4Q13, shifting
0.1%qoq and 20.3%yoy – as projected, against strong net loan growth of 2.6%qoq
and 17.6%yoy, mostly from corporate loans for the property sector and long-term
loans for infrastructure projects. Retail loans, despite growing new car leasing loans,
have decelerated from previously, while other retail loans, mainly car cash and
personal, have shown good growth. NIM in 4Q13 contracted more than expected by
14bp to 2.71% from falling loan yield. 2) Fee income in 4Q13 shrank 2.9%qoq
and 3.9%yoy. Nevertheless, in spite of pressure from decreasing brokerage fee
income, fee income from fund sale and bancassurance still grew impressively. Overall,
TISCO posted FY2013 net profit at B4.25bn or a rise of 14.7%yoy, making the year’s
high.
- Maintain forecast. Retail loan is major driver in 2014, leasing loan drops
We maintain our earnings forecast for FY2014-2015. Total net loan growth is projected
at 10-15%yoy in 2014, mainly from other retail loans (7-8% of total loan) that would
grow continuously from 30%yoy targeted in 2013, as well as corporate loans that are
anticipated to grow 15-20%yoy. Only SME loans would slow down from 2013 as a
result of a stricter loan issuance measure for floor plan entrepreneurs as TISCO
believes the bad situation in repossessed car sale would continue until 1H14, thus
making the credit cost high. In terms of fee income, the bank would focus more on
deposit-customers-related transactions for cross-selling. All these factors would help
boost the profit in 2014 to grow continuously by 10.2%yoy.
- Buy for dividend. PBV lower than 10-year average. Dividend yield of 7-8% p.a.
We reiterate "BUY". Though there is no stimulating factor in a short term, TISCO's
share price has substantially absorbed the pressure. As TISCO is a small commercial
bank, it can change its business strategy flexibly. Moreover, its financial position is
strong, and its debt provision is higher than other small commercial banks. TISCO's
current share price has 1.3x PBV, which is lower than 10-year average of 1.8x. We
derive TISCO's FY2014 fair value at B47.41 (1.50x PBV, 19% long-term ROE forecast),
implying over 24% upside. Dividend yield in 2013-2015 is estimated at 7-8% p.a.
(paying annually).