Thanachart Capital
Best asset quality ever with extra ROE lift BUY
Thanachart Capital Plc (TCAP)
Aggressive NPL resolution, tax benefit and capital management via treasury stock is raising profitability. TCAP is now our top pick in its sector and we raise TP to Bt48 after a cut in provisions forecast and a capital deduction of treasury stock.
Cut provision forecast with the best asset quality ever. Better asset quality than expected has allowed us to lower TCAP’s 2016F credit cost to 0.95% from 1% (vs. 1.2% in 2015 and 0.92% in 1H16), which raises our 2016F earnings forecast by 3%. TCAP has achieved its best asset quality ever with the lowest NPL ratio (2.8% at 2Q16) and highest LLR coverage (125% at 2Q16) since the 1997 financial crisis. Behind this is proactive NPL management whereby it has slashed NPL amount by nearly half within eight quarters. Though we reduce our provision forecast in 2016F, we expect TCAP to achieve its target to enhance LLR coverage to >130% by YE2016, on par with the sector average. We expect a further fall in credit cost to 0.8% in 2017 and 0.6% in 2018 on less need to further expand LLR coverage.
Capital deduction enhances EPS, BVPS and ROE. TCAP reduced its paid-up capital by 6% by writing off 71.35mn treasury shares at the end of 2Q16. This enhances EPS, BVPS and ROE for 2016F-2018F. Of its treasury stock, 41.35mn shares (3.4% of paid-up shares) will expire for resale on the market in 2018. In the presence of three years of contraction in its loan book over 2014-2016, expected weak loan demand in 2017, a strong capital adequacy ratio (18.8% for TBANK and 15.4% for TCAP), there is a good chance it will do another capital reduction in 2018, further enhancing EPS and ROE.
More of the tax benefit will flow to the bottom line. TBANK’s Bt29bn tax loss carried forward arising from the liquidation of its investment in SCIB pulled TCAP’s effective tax rate in 2015 down to only 2% and this is expected to continue low at 3% in 2016 and 4% in 2017 before returning to the normal 20% in 2018. This gives it tax savings of ~Bt2bn per year in 2015-2017. TCAP used the majority of this to make special provisions to build LLR coverage in 2015. In 2016, we expect TCAP to use around half of the tax savings as special provisions and allow the other half flow to the bottom line. For 2017, we expect the majority of the tax benefit to appear in the bottom line as it will have less need to build up LLR coverage.
Buy: Raised TP; still the sector’s top pick. We lowered 2016F provisions and factored in the write off of the treasury stock and this raised TCAP’s TP to Bt48 (1x mid-2017F BVPS) from Bt45. We expect it to outperform its sector in terms of asset quality, plus it will use the huge tax loss carried forward from the liquidation of its investment in SCIB to enhance its LLR coverage and ROE. Buy.
