Thanachart Capital

A setback on the way up OUTPERFORM - Maintained Share price: Bt37.00 Target price: Bt45.00

Thanachart Capital Plc (TCAP)

TCAP's 3Q12 net profit missed consensus estimates by 13% on a surge in provision from a low base. Its quarterly earnings have been choppy although the trend should be a positive one on the back of the bank's internal restructuring, with vast areas for operational improvements. 9M12 net profit trailed at 70% of our full-year estimate due to a high credit cost. We cut our FY12-14F EPS but raise our target price on a roll forward in our valuation, set at 1.3x FY13 P/BV, derived from GGM assuming 13% long-term ROE. With the share price hovering at its forward book value, the risk-reward looks appealing. Maintain Outperform.

Disappointing 3Q12

TCAP's 3Q12 net profit came in at THB1.24bn (-27% qoq, -7% yoy). The key culprit was a provision surge to 16bp vs. 7bp/qtr in 1H. Pre-provision, PPOP was flat qoq and up 24% yoy.

Loan growth accelerated into the year, boosting YTD growth to 10%, driven solely by auto leasing. Fee income growth was decent at 29% yoy. Cost ratio stabilised encouragingly at 58%.

However, NIM fell 13bp to 2.68% on a higher funding cost.

Earnings cut

We cut our FY12-14F EPS by 5-10% mainly as we raise this year's credit cost from 30bp to 45bp (55bp in FY13, 60bp in FY14). This negative revision is offset partly by our higher loan growth assumption from 12% to 14% this year (8% in FY13-14).



The trend remains positive

TCAP's choppy quarterly earnings suggest that its turnaround is not yet in full swing. While costs now seem under control, there is more work to be done in the areas of NPL resolution (potentially lifting the coverage ratio) and loan growth beyond auto leasing. We believe management's efforts will bear more fruit over time, leading to stock rerating. In the meantime, the stock's low valuation on 1x forward P/BV and a sustainable 4% dividend yield should provide downside support.

Adjusted for a 100% coverage ratio, TCAP would be on 1.2x FY13 P/BV for 16.8% ROE vs. the unadjusted as-is basis of 1x P/BV for 14.7% ROE. Either way, we deem the stock

inexpensive.