Thanachart Capital

Thanachart Capital Plc (TCAP) 

 

- 2Q15 profit grows qoq despite extra bad debt reserve  

TCAP posted 2Q15 net profit of B1.39bn, which was 5% lower than projected but still grew 4.6%qoq and 12.8%yoy. Bad debt reserve in this quarter was B3.53bn higher than expected; B1.73bn was usual reserve (average credit cost of 89bp), in line with our projection, and B1.79bn was extra reserve (extra credit cost of 92bp) to cope with the economic fluctuation. As a result, total credit cost in this quarter increased to 181bp. TCAP also had an extraordinary income from a tax benefit of TBANK (TCAP holding 51% stake) since TBANK’s subsidiary, SCIB, had settled account with the Ministry of Commerce, resulting in TBANK facing tax loss from its shares in the subsidiary and TCAP not having to pay income tax in the quarter; accordingly, TCAP was able to increase its coverage ratio (consolidated financial statement) to 98.85% at the end of 2Q15 without any impact on its earnings. The core businesses could grow as projected; although net loans declined in every segment, especially car leasing, net interest income stabilized as a result of decreasing funding cost; NIM continued to increase in this quarter. 

- Fixing weakness, reinforcing strength  

We would revise down TCAP's earnings forecast by another 5-7%, cutting We maintain FY2015-2016 earnings forecast, projecting 2015 net profit to grow averagely 12.3%p.a. Although the core business, car leasing, still needs some more time to recover, the bank’s strategy of restructuring its loan segment mix, cost management (increasing CASA), increasing fee income, and asset quality management (aggressively decreasing NPL), could mean lower bad debt reserve in 2015 and increasing coverage ratio to 100%. The bank also made all tier 1 capital a common equity tier 1 (CET1), thus increasing tier 1 capital to 10%. All these positive factors would help revive TCAP’s earnings when the economy is more favorable. 

- Undervalued price, attractive dividend  

We recommend BUY. 2015 fair value is B37.50, based on PBV of 0.87x (GGM, under long-term ROE of 11% and terminal growth rate of 4%). We believe TCAP would outperform and get back to a 10-year average PBV of 0.9x again for the current PBV and P/E ratio are very low and the share price has a limited downside because its share buy-back program has already proceeded by 40% (program timeline is February 10 – August 2015).