TISCO Financial Group

TISCO Financial Group Plc   

 

Loans are not growing, with auto loans still absent and we see little chance of loan growth this year. We thus cut our loan assumption to a contraction of 2%. On the bright side, it will enjoy the largest widening in NIM this year and credit costs are coming down with provisions as fewer loans migrate to the NPL column. It has proactively guarded against a possible problem with SSI’s loan payment.

 

Earnings growth is beating the sector and valuation is cheap: Buy with new TP of Bt54. 

Cut 2015F loan growth to contraction. According to its May balance sheet, TISCO’s loans contracted 0.6% MoM in May, the same as in April, with auto loans shrinking. In the 5M15, loans contracted 4.3%, a factor of the fall of 15% YoY in 4M15 domestic car sales. With the economy coming back slower than expected, household debt high and high repayments of loans extended in 2012-2013, it is unlikely to see loan growth this year. We cut our 2015F loan growth to -2% from 1% to fine tune with 5M15 figures, forecasting -5% for retail loans (71% of total loans) and +5% for corporate & SME loans. 

Largest NIM expansion. TISCO cut fixed deposit rates by 25-35 bps in 1Q15 and 30-35 bps in 2Q15 and rates on savings deposits by 10-25 bps in 2Q15. It cut MLR by 12.5 bps in 1Q15 and MOR by 7.5 bps in 2Q15. With assets at a longer duration than liabilities and a greater cut in deposit rates than in lending rates, cost of funds will ease and NIM widen. We expect it to beat its sector with NIM expansion of 25 bps to 3.1% this year.   

Gradual ease in credit cost. Provisions are expected to step down in 2015 as they return to normal in tandem with the used car market, stabilized now after prices plunged 30% in 2012-2013, and thus used car loans. Repossessions are fewer, allowing provisions to fall. We conservatively expect credit cost to ease quarter by quarter, from 1.68% in 2014 to 1.5% in 2015F and 1.3% in 2016 and return to a normal 1.2% in 2017F. 1Q15 credit cost was 1.53%.   

SSI loans fully provisioned. SSI is scheduled to pay loan principal of Bt2.08bn and US$10mn in June. Although SSI loans are at risk of being classified as NPLs, TISCO has provisioned 36% of its Bt4bn exposure, adequate to meet required reserve if they do. TISCO has excess provisions of Bt3bn and if SSI loans go NPL, its NPL ratio will rise to 4.2% from 2.65% at 1Q15 and its LLR coverage will decrease to 66% from 105% at 1Q15.  

2Q15F: Stagnant, up 15% YoY (on YoY lower provisions) but fall 5% QoQ (on QoQ drop in investment gain) to Bt1.14bn. Loans are expected continue contracting QoQ, but NIM to improve QoQ as cost of funds ease. Provisions are expected to come down QoQ. Non-interest income is expected to decrease QoQ due to lower fee income from asset management business and investment gain on the back of a bearish stock market. 

Maintain Buy with a trim in TP. Although TISCO share has outperformed the sector 

YTD (+11% for TISCO vs. -13% for SETBANK), we keep it as a Buy: 1) it will beat the sector with earnings growth of 10% vs. the sector average of 3%, driven by a better NIM and lower provisions, and 2) valuation is cheap at 8x PER and 1.3x PBV relative to 17% ROE. The cut in 2015F loan growth to -3% from 1% trims TP by 2% to Bt54 from Bt55.