Thanachart Capital

Thanachart Capital Plc (TCAP)

 

TCAP is seeing continued improvement in asset quality and has a big plus in the form of tax loss benefit that it will use to hike LLR coverage. Its 3Q15F is expected to show continued earnings recovery. We still Buy with TP of Bt42. 

 

Bt29bn tax loss at TBANK. TCAP disclosed in a note to its financial statement that TBANK, in which it holds 50.96%, is carrying tax losses totaling Bt29bn arising from the liquidation of its investment in SCIB. TBANK has not booked these as deferred tax assets because management believes there is uncertainty about their future benefit. Based on TBANK’s pre-tax profit of ~Bt10bn per year, this Bt29bn tax loss will allow it to book zero tax for almost three years. We calculate this will bring TCAP’s consolidated effective tax rate down to 2% in 2015F, 3% in 2016F and 6% in 2017F before returning to the normal 20% rate in 2018. Recall that TCAP reversed Bt1bn in income tax in 2Q15, translating to a Bt354mn tax reversal in 1H15. Effective tax rate in 2H15 is estimated at ~10%.    

Utilizing tax loss benefit to lift LLR coverage. TCAP plans to put the extra funds from tax reversal and any other extra income to work as extra provisions to bring LLR coverage up – as it did in 2Q15, when LLR coverage rose to 98% from 88% in 1Q15. TCAP aims for its LLR coverage to be on par with the sector average of ~130% via both extra provisioning and proactive NPL resolution. We thus raise our 2015F-2017F provision forecast to offset the benefit from tax loss carried forward. We upped provisions by 4% to Bt8.4bn (1.2% of total loans) in 2015F, 25% to Bt7.1bn (1% of total loans) in 2016F and 33% to Bt7.5bn (1% of total loans) in 2017F. We expect its LLR coverage to rise from 98% at 2Q15 to 111% at YE2015, 123% at YE2016 and 131% at YE2017.  

Continued fall in NPLs. NPLs came down 13% in 1H15 and TCAP expects them to come down further in 2H15 after two quarters of reducing NPLs via proactive NPL resolution (selling, restructuring and writing off). It completed restructuring of some NPLs in 2Q15, and is now proceeding with the process required to take them out of the NPL column. Virtually no auto loans are slipping into the NPL column at this point and it expects normalized provisions to therefore step down in 2H15. TCAP also sold Bt3.6bn NPLs in 3Q15 (12% of 2Q15 NPLs) vs. Bt3.8bn sold in 2Q15. 

3Q15F preview: Continued recovery. We forecast 23% YoY growth in 3Q15F (lower provisions and income tax) and 6% QoQ to Bt1.5bn. This is based on expectation of:  1) continued loan contraction, 2) a slight QoQ squeeze in NIM on the back of low-yield corporate loans booked in August, 3) a QoQ slip in non-NII, mainly gain on investment and foreclosed properties, 4) a return to normalized provisions with absence of Bt1.8bn extra provisions booked in 2Q15, 5) stable opex and 6) 10% effective tax rate.    

Maintain Buy as valuation is at a deep discount. TCAP is undervalued, trading at a deep discount of 0.7x 2015F PBV and 6.7x 2015F PER. This reflects market perception of poor loan growth prospects, despite the fact that its asset quality is recovering.