Thanachart Capital

Undervalued - with earnings back on track soon BUY

Thanachart Capital Plc (TCAP)

TCAP manages NPLs by selling them, which sliced NPL amount by 5% in

December. Asset quality will also be given a boost by the stabilization

of used car prices. Rate cuts now seem more likely than a hike, good

news for HP banks like TCAP. It is trading at an overly deep discount

that is overlooking the upcoming recovery. Buy with a TP of Bt44.

Proactive NPL resolution reconfirms view of easing provision. TCAP manages its

NPLs via selling them - in December, it sold three tranches valued at Bt1.78bn (0.2% of

total loans): Bt609mn in credit card & personal loans and Bt1.17bn in auto loans. This

cut the amount of its NPLs by 5%. TCAP expects asset quality to improve further as it

sells more NPLs and undertakes proactive debt restructuring, aided by steady

improvement in used car prices from the 20-30% drop from the first-car buyer scheme

over 2012-2013. These moves have reduced its provision needs and confirm our

expectation of easing credit cost, which we expect to come down to 0.89% in 4Q14F

from 0.93% in 3Q14 (0.96% in 2014F) and 0.9% in 2015F (vs. 0.8% normalized provisions).

Rate cuts more likely than hikes, lifting NIM upside. The probability of a hike in

interest rate is now less and in 4Q14 TCAP has gone back to raising S-T deposits

(current & savings) in order to ease cost of funds. In fact, with inflation tamed and the

economy needing stimulus, an interest rate cut now seems more likely, giving upside

to NIM. Interest rate cuts benefit banks that focus on auto loans like TCAP as the

duration of their liabilities is shorter than that of their assets. The threat to NIM from

rate hikes is now more distant and we expect NIM to be stable at 2.8% in 2015.

Poor loan growth. Loan growth continues negative at -1.8% QTD (-4.2% 11M14 YTD),

partly attributable to lower agricultural product prices. We cut our 2014F to -4% from

-1% but continue to expect a gradual recovery to 3% for 2015F. Due to the country’s

high household debt and high repayments of loans extended in 2012-2013, auto loan

growth is expected to be flat in 2015. To compensate for this, it will become more

active in the small SME segment (no larger than Bt10mn/account) in 2015 after

installation of a new business platform and IT system in 2014.

4Q14F preview: Earnings recovery starting. Although loan growth is expected to

remain negative in 4Q14, we expect NIM to improve. A pick-up in non interest income

and easing provisions are expected to lead to a 22% QoQ rise in 4Q14 earnings (but -5%

YoY). We expect a QoQ improvement in its net interest margin (NIM) in 4Q14, driven by

easing cost of funds. Outlook for non-interest income is better, mainly from fees

related to the capital market, i.e. brokerage income and asset management fees.

Provisions are expected to decline on improving asset quality. Opex is expected to

increase QoQ in line with business volume.

Deep discount. TCAP is undervalued at 0.7x 2015F PBV and 7x 2015F PER relative to our

conservative forecast. This reflects a deep discount to factor in poor loan growth

prospects and slow auto loans, though this has been easing as used car prices stabilize.

Better asset quality means lower provisions and this plus a gradual recovery in loan

growth will lead to earnings recovery from 4Q14 onward.