Tisco Financial Group

Another good half year ahead BUY (maintained) Target Price: Bt51.50 Price (13/07/11): Bt39.50

Tisco Financial Group

Investment thesis: We maintain our BUY rating on TISCO, premised on: 1) consensus-beating loan growth of 16% YTD for 1H11, 2) a declining loan loss provisioning trend and 3) rising fee income. These factors will push up the firm's core profit substantially above the current consensus projection (our model is ahead of the herd). For the moment, our FY11-12 forecasts stand unchanged.

TISCO to revise up FY11 lending target: Given 1H11 lending expansion of 16%, management plans to upgrade its FY11 loan growth target from 15% to at least 20% (still under review). Corporate and retail lending will be the drivers in 2H11. We are confident that our FY11 loan growth forecast of 25% is achievable.

Loan loss provisioning: With the second-highest loan loss coverage ratio in the sector of 162% and a low NPLs/loans ratio of 1.6%, TISCO anticipates cutting loan loss provisioning further in 2H11. We, however, conservatively maintain our FY11 loan loss provision assumption at Bt1.4bn (Bt680m in 1H11 and another Bt720m in 2H11).

Interest spread will fatten in 2H11: Faster retail lending growth in 2H11—particularly HP (after Toyota and Honda resume normal operations)—will boost TISCO's lending yield HoH. Note that because of the component parts shortage from Japan as a result of the tsunami in March, vehicle sales slipped (as did demand for HP), so loan growth was dominated by the corporate and SME categories in 2Q11. Looking ahead, the BOT's policy interest rate is expected to peak in 3Q11 at 3.5%. Thus, pressure on deposit rates should ease in 2H11.

Outlook

2H11 lending growth to be driven by retail and corporate categories: Despite the supply disruptions to automobile production in Thailand during May-July, TISCO expects to achieve its FY11 HP lending growth target of 15%. The bank anticipates that its retail lending portfolio (73% of total loans) will grow at least 8% HoH in 2H11. Additionally, the incoming government's spending plans should bring on unprecedented concurrent private and public sector investment super-cycles combined with consumption expansion. As such, corporate and SME credit demand will rise further in the second-half of this year. We maintain our TISCO FY11lending growth forecast at 25%. Note that its corporate loan portfolio expanded a spectacular 47% YTD (albeit from a relatively low base), followed by SME at 26% and retail at 13.4%.

Recommendation and valuation

BUY: (maintained): We believe that TISCO will deliver better HoH earnings in 2H11, with the bottom-line boosted by a greater emphasis on high-yield HP lending and well-managed interest spread. Note that our projections don't include the possibility of lower loan loss provisioning or of Puea Thai implementing programs, such as the first new car buyer scheme or its planned corporate tax cut next year. For the moment, we maintain our BUY rating on TISCO with a YE11 target price of Bt51.50, based on a justified PBV of 2.1x (close to that of YE10), 1.5SD above its long-term average.