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TISCO Financial Group

BUY 2Q14: Beat forecast, but asset quality worsening

TISCO Financial Group Plc

- 2Q14 profit Bt992mn (-14% YoY, +6% QoQ), 6% above our forecast, but asset quality is still deteriorating.

The 26 bps improvement QoQ in net interest margin exceeded our expectations. However, a 19% QoQ rise in 2Q14 NPLs and 11 bps rise in credit cost to 1.75% were worse than expected. We believe deterioration in asset quality is at or close to nadir on an expected economic recovery in 2H14 and stabilizing used car prices in 1H14. 1H14 accounts for 47% of SCBS 2014 forecast. We expect a small HoH earnings recovery in 2H14 backed by a small pickup in loan growth and a slight reduction in provisions. In 2015, we expect TISCO to show the strongest earnings recovery at 24%, driven by a strong recovery in loan growth (off a low base) and a material fall in credit cost from normalization. Key points:

1. Loan growth: As expected, -1.5% QoQ vs. -2.6% QoQ for 1Q14, bringing YTD

growth to -4.1%. We maintain our full-year forecast of +2%, expecting a

recovery of auto loans and sizable corporate loans. Corporate loans rose 3.4%

QoQ%, SME loans fell 8.6% QoQ, and retail loans dipped 1.8% QoQ.

2. Net interest margin (NIM): Better than expected, +26 bps QoQ to 2.95%. Yield

on earning assets rose 9 bps QoQ. Cost of funds eased 17 bps QoQ. We expect

a further improvement in 2H14, driven by rising loan to deposit ratio.

3. Non-interest income: In line, -3% YoY and +3% QoQ. The pick-up QoQ was

mainly from fee income related to the capital market.

4. Cost to income ratio: As expected, down 214 bps YoY and 12 bps QoQ to 35.5%,

reflecting its cost tightening policy.

5. Asset quality: Worse than expected: NPLs rose Bt1bn or 19% QoQ. NPL ratio

rose to 2.27percent from 1.89% in 1Q14, mainly from retail loans, particularly used

car loans. Credit cost rose 11 bps QoQ to 1.75%, above the guidance of stable

QoQ. LLR coverage continued falling to 105percent from 121% at 1Q14.

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