Thanachart Capital

Top pick of mid-cap banks. Insurance business sale to increase capital is the right strategy,brightening profit in 2013 BUY

Thanachart Capital (TCAP)

4Q12's profit to brighten qoq. Loan booms. NIM remains good despite high provision

Overall business outlook in 2013 after the sale of TLife and earnings outlook in 4Q12

are very promising. 4Q12's net profit is estimated at around B1.36bn, growing more

than 9.7%qoq and 45%yoy with a support from debt provision that is projected to

decrease remarkably by 18.2%qoq with average credit cost of around 48bp (still

higher than the normal average in 1H12 at around 25bp as the bank want to increase

coverage ratio from the current 81.7% which is lower than the sector's average of

111.4%) as in 3Q12 the bank has set provision for SSI debtors that were classified as

NPL at B300m, while NPL has been decreasing continuously from 4.88% of total loans

at end-3Q12 due to effective debt solving. At the same time, overall operating profit

in this quarter will remain quite flat qoq; profit from the main business is very bright,

but will be offset by an increase of operating expense during a high season. Net loan

in 4Q12 is anticipated to grow notably by 6.5%qoq, pushing total net loan in FY2012

to grow by 17.5%yoy, substantially exceeding the bank's target of only 10%yoy and

our target of 11%yoy as benefiting from the growth of car hire-purchase loan

following the growth of domestic car sales. On the other hand, the growth of corporate

and SME loans remain dull and is slightly lower than targeted. In addition, NIM is

projected to increase slightly by 4bp from 3Q12 to 2.68% in this quarter. Pressure

from low yield from new car loans has been offset by a decrease in funding cost from

the prior quarter from raising of low interest deposits. Fee income in this quarter has

grown significantly by 5.3%qoq, in line with increasing car hire-purchase loan

transactions (such as license plate renewal fee and tax) and income from insurance

and life insurance businesses which have entered a peak season in the end of the

year. All these factors have benefited TCAP, likely making FY2012's net profit grow

10.1%yoy, but still lower than the current forecast by 3%.

ASP's view differs from consensus, projecting solid profit growth in 2013 after TLife sale

Overall business outlook of TCAP in 2013 would be more aggressive with the policy of

focusing on small SMEs (hardware stores and old-style shop houses which have

security) which have high yield. Accordingly, this will be more beneficial to the bank's

NIM after it adjusts the problematic loan approval system to be more effective. At the

same time, although car hire-purchase loan growth is projected to decelerate in 2H13,

income generating efficiency of this type of loan will be strong throughout 2013

because car supply (eco cars in particular) still has a lag time in transferring to

customers in the next 6-9 months for the current sales. We estimate 2013's net profit

growth at 23%yoy, against the consensus which projects a contraction in profit after

the selling of TLife. We are still confident about the bank's management team that the

net cash of more than B10bn from the business sale will be changed into returns in a

form of short-term investment by around one-third of the profit of B1.5bn from TLife

that will disappear in 2013. Meanwhile, the rest returns will be recognized in a form of

income from Bancassurance from its position as an exclusive partner with Prudential

life which has various life insurance products, especially the popular endowment and

whole life (previously, TCAP had only credit life products regarding accident and

simple life insurances). Accordingly, we foresee aggressive growth potential from this

business in the long run.

Top pick of mid-cap banks. Very likely to outperform market in next 3 months

We reiterate our "BUY" recommendation for TCAP and select it as a top pick of the

mid-cap banks. 2013's fair value is B49.14, implying 31% upside from the current

share price. Moreover, the current share price is still laggard comparing to the sector,

so it would help reduce the risk during the market correction in the next 3 months.