TISCO Financial Group

TISCO Financial Group Plc (TISCO)

2015 is expected to show good earnings recovery to growth of 15% (from 0% in 2014) despite only modest loan growth. Supplying the growth will be: 1) easing provisions as asset quality stabilizes, 2) NIM improvement continuing from 2H14 and 3) recovery in fee income from loan-related fees. We keep TISCO as our top buy as it has the most attractive valuation (7x PER and 1.2x PBV relative to 18% ROE). This reflects the market’s over-penalization for the slump in the auto hire-purchase business, which is getting back to normal after a poor 2014.

Reconfirms reducing provisions. Management says provisions will step down in 2015, gradually returning to normal in tandem with the return to normal for the used car market – stabilized now after prices plunged 30% in 2012-2013 - and used car loans. The number of repossessed cars has been declining, allowing provisions to do likewise. Nearly all used car NPLs came from loans extended in 2012 and 1H13; borrowers have thus reached the “point of no return”, with more than half the loans paid off. Credit cost slimmed from 1.7% in 3Q14 to 1.36% in 4Q14, better than we had anticipated. We conservatively expect its credit cost to ease from 1.68% in 2014 to 1.4% in 2015F and 1.3% in 2016 and return to a normal 1.2% in 2017F.  

Good NIM sustainable. We expect the good NIM of 3.12% in 2H14 (well above 1H14’s 2.74%) to be sustained in 2015 as the Hire-Purchase Association continues to push hire-purchase operators to raise auto loan interest rates. Though they agreed to raise the flat rate by 25 bps from YE2013, to date it has been raised by only 5bps due to high competition, particularly by captive operators. If TISCO is able sustain NIM at 3.12% (the same as 2H14) throughout 2015, this will translate to a 29 bps NIM expansion in 2015F. We conservatively forecast a 23 bps improvement in its NIM to 3.07% in 2015F.

Sights are low for loan growth. TISCO has set its initial 2015 loan growth target at a low single digit. In view of the country’s high household debt and high repayments of loans extended in 2012-2013, TISCO expects retail loans (71% of total loans), mainly auto loans, to be little changed in 2015F. Its loan growth will be driven by corporate and SME loans, which TISCO hopes to be able to grow at a double digit rate. We cut our 2015F loan growth from 5% to 3%, assuming zero growth for retail loans and 10% growth for corporate and SME loans. We expect its loan growth to gain momentum to 7% in 2016F and return to double digits at 10% in 2017F.

Upward revision of 2015F. We raised 2015F earnings by 4% to fine tune our forecast after obtaining the 1Q14-3Q14 financial statement adjusted for the change in the treatment of TISCO Tokyo Leasing from consolidation to equity.

Attractive valuation. We maintain Buy on TISCO. It is trading at a deep discount of 7x PER and 1.2x PBV relative to 18% ROE, reflecting an over-penalization for the slump in the auto hire-purchase business, which is getting back to normal after a poor 2014.