Thanachart Capital

Laggard play

Thanachart Capital Plc (TCAP)

Investment thesis

We maintain our BUY rating on TCAP, premised on: 1) earnings growth, fueled by lending and good OPEX management, 2) a Bt4bn gain from selling TLIFE in 1Q13, 3) the share buyback program (10% of its paid-up capital) and 4) the cheapest YE13 PBV in the Thai Bank sector of 1.0x; the regional mean is 1.8x.

FY13 ROE target range is set 12.5-15.0%

TCAP's FY13 ROE target range is 12.5-15% (excluding the gain from divesting TLIFE) following ROE of 13.6% last year. Management said it will augment profitability by adding more high-yield assets and controlling costs better. That could bring down its FY13 cost/income ratio to 55percent from 60% last year.

Targets 10% loan growth with improved NIM

The FY13 gross loan growth objective is 10% with an emphasis on high-yield business, such as HP, P-loans, unsecured loans and small SME lending. HP currently comprises 53% of TCAP's total portfolio; management anticipates 16% expansion in this category in FY13. The bank holding company aims to increase the current and saving account (CASA) proportion of its funding base to 40percent from 35% at the moment. That could push up its FY13 NIM to 2.5-2.7percent from 2.5% last year.

Massive gain from sales of TLIFE

We calculate that TBANK's sale of TLIFE to Prudential Life Assurance (Thailand) will enable TBANK to book an investment gain of about Bt14bn before tax in 1Q13 from a sales price of Bt18bn. Note that management said TLIFE's BV is Bt3.8m (with some adjusted carrying costs). As such, TCAP and Scotiabank could book a before-tax extra gain of about Bt7bn each before tax.

Bigger FY13 loan loss provisions is not a big deal

TBANK plans to use a big chunk of its investment gain to build its loan loss coverage ratio (LLR/NPLs) to a level closer to the industry mean of 128% (at YE12 it was only 73%). We expect TCAP to set FY13 loan loss provisions of Bt4.5bn, up from Bt2.9bn last year. The bank holding company also plans to reduce its YE13 NPLs/loans ratio to 2.5-3.5percent from 4.3% at YE12. It has set normal credit cost of 60 bps of total gross loans for FY13, up from 36 bps last year.