Company Update. TMB Bank. BUY (15E TP Bt2.90) July 17, 2014

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1 Company Update July 17, 2014 TMB Bank Growth momentum underway BUY (15E TP Bt2.90) Price Bt2.70 We maintain our BUY rating for TMB. We still like TMB on the evident improvement in its profitability, especially with regard to its stronger deposit franchise (which should help enhance its Non-NII base in the long term) and its SME lending base. Moreover, the M&A theme could remain a share price catalyst over the long term. Maintain focus on fee income-led strategy TMB s 1H14 earnings are quite in line with the bank s 14E targets, except for the targets for NIM (~3% vs. 2.9% in 1H14) and noninterest income growth (>20% vs. -10% YoY in 1H14), which we see as being hard to achieve. TMB views that its NIM should be quite steady at ~3% for the L-T after showing a sharp turnaround from <2% in TMB will maintain its core strategy over the next three years, with a focus on increasing the non-interest income base. We see TMB showing good improvement in terms of enhancing its fee income base as a result of its strategy to push cross-selling transactions with its stronger deposit franchise. This is especially the case in regard to the bank s strategy that aims to grow transactional deposit accounts, e.g., One Bank One Account (focused on SME customers), which grew 34% QoQ in 2Q14. Main gainer from second-loss absorption program for SMEs As per the latest update from TMB related to the second-loss absorption program for SME loans, the International Finance Corporation (IFC) has agreed to provide a credit guarantee for SME loans up to 50%, on top of the current guarantee of ~20% by the Thai Credit Guarantee Corporation (TCG). We believe this program should benefit TMB the most, given its proven success and good track record with the TCG. Fine-tune earnings with latest results and new guidance We raised our net profit (NP) forecast for TMB for 2014E by 7%, but cut our NP forecasts for E slightly by 3%, mainly to fine-tune with the latest operating environment and the bank s business guidance. We maintain our 15E TP of Bt2.90/share (for an implied target P/BV of 1.7x). M&A theme remains its share price catalyst The latest acquisition price in the BAY-BTMU deal at ~2X P/BV implies an acquisition price for TMB at ~Bt3.5/share (based on TMB s 15E BVPS of Bt1.72). However, the timeframe for the M&A deal remains unpredictable. Financials and Valuation FY Ended 31 Dec E 2015E 2016E PPOP (Btmn) 10,126 12,553 12,129 14,826 17,393 Provision (Btmn) 8,751 7,613 4,382 5,686 6,141 Net profit (Btmn) 1,262 5,737 7,987 9,392 11,566 EPS (Bt) EPS growth (%) -69% 353% 39% 18% 23% Book value (Bt) Dividend (Bt) FY Ended 31 Dec E 2015E 2016E PER (X) PBV (X) Dividend yield (%) ROE (%) 2% 10% 12% 13% 14% Stock Performance (%) 1M 3M 12M Absolute Relative to SET Share data Reuters / Bloomberg Sector TMB.BK/TMB TB Banking Paid-up Shares (m) 43, Par (Bt) 0.95 Market cap (Bt bn / US$ m) /3, Foreign limit / actual (%) 50.36/ week High / Low (Bt) 3.08/1.88 Avg. daily T/O (shares 000) 216, NVDR (%) 9.03 Estimated free float (%) 43.8 Beta 0.92 URL Major Shareholders (24/04/2014) Ministry of Finance % ING BANK N.V % Thai NVDR Co., Ltd % FY14 FY15 Consensus EPS (Bt) KT ZMICO vs. consensus 2.9% 10.6% Company Profile The Bank engages in universal banking business to serve corporate, SME, and retail customers. ING Bank B.V., a large financial group in Europe is its strategic partner and is its major shareholder as well as Ministry of Finance. The Bank also conducts its business through a nationwide branch network and in certain major centers of the world. CGR 2013 Prapharas Nonthapiboon Analyst, no Prapharasn@ktzmico.com 66 (0) REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 1 of 6

2 Main gainer from second-loss absorption program for SMEs As per the latest update from TMB related to the second-loss absorption program for SME loans, the International Finance Corporation (IFC) has agreed to provide a credit guarantee for SME loans up to 50%, on top of the first credit guarantee scheme of 18-20% by the Thai Credit Guarantee Corporation (TCG). Note that the total size of the second-loss program for SMEs is around Bt165bn and it is expected to be launched in Aug-14. The program is aimed at helping small SMEs, which have quite limited access to funding and are more vulnerable to the economic slowdown. There has been an escalation in NPLs and special-mention loans in the SME portfolios of several banks. Thus, many banks have been hesitant to lend to small SMEs, even with the current 18% credit loss guarantee by the TCG. We believe this program should benefit TMB the most among SME players, given TMB s proven success and good track record with the TCG. Note that TMB s SME lending with the TCG credit loss guarantee accounted for around 15% of its total loan portfolio and for 40% of its SME portfolio. Fine-tune earnings with latest results and new guidance We raised our net profit (NP) forecast for TMB for 2014E by 7%, but cut our NP forecasts for E slightly by 3%, mainly to fine-tune with the latest operating environment and the bank s new business guidance (see Figure 1). The main reason behind our upward NP revision in 2014E is the lower provision (to 82 bps from 112 bps); this reflects its write back of the provision (Bt1,026mn) in 2Q14 arising from NPL sales of Bt3.3bn in 2014 and its successful debt restructuring of a major client. Meanwhile, we also cut our non-interest income forecast for 2014E due to the weak momentum in 1H14, especially in 1Q14. On the other hand, the earnings cuts for E came mainly from the lower NIM forecasts, reflecting more competitive environments in both deposits and lending as well as the bank s latest guidance. Meanwhile, we also raised our loan growth forecasts for E to reflect the potential benefit from the upcoming second-loss absorption program for SMEs as mentioned earlier. We maintain our 15E TP of Bt2.90/share (for an implied target P/BV of 1.7x). Figure 1: Main assumption changes in our earnings revision Key assumption changes 2014E 2015E 2016E Previous New Previous New Previous New Net profit (Btmn) 7,432 7,987 9,692 9,392 11,883 11,566 % Change in net profit from previous forecast 7% -3% -3% % Change in net profit YoY 39% 18% 23% Loan growth (%) 7% 7% 10% 12% 10% 14% Net interest margin (NIM) 3.01% 2.92% 3.10% 3.04% 3.13% 3.09% Fee income growth (%) 17% 0% 18% 15% 18% 20% Provision for loan loss (Btmn) 6,000 4,382 5,879 5,686 5,820 6,141 Provision for loan loss (% to loans) 1.12% 0.82% 1.00% 0.95% 0.90% 0.90% Cost to income ratio (%) 50.8% 52.6% 48.0% 48.8% 45.8% 45.7% Source: TMB, KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 2 of 6

3 Figure 2: TMB s PER Band (X) S.D S.D. +1 S.D. Avg. -2 S.D. Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Source: Bloomberg, KT ZMICO Research Figure 3: TMB s PBV Band (X) +2 S.D. +1 S.D Avg S.D. -1 S.D. -2 S.D. Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Source: Bloomberg, KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 3 of 6

4 Statement of Comprehensive Income (Btmn) Year-end 31 Dec E 2015E 2016E Interest Income 30,678 34,271 35,411 39,650 45,126 Interest Expenses 13,613 14,004 14,383 16,212 19,301 Net Interest Income 17,065 20,267 21,028 23,438 25,824 Non-Interest Income 7,641 8,265 8,415 9,659 11,430 Operating Income 24,705 28,532 29,443 33,097 37,255 Operating Expenses 13,434 14,550 15,115 15,781 16,611 Operating Profit 10,502 13,849 14,069 17,036 20,294 Provision (Reversal) for loan loss 8,751 7,613 4,382 5,686 6,141 Taxes 376 1,297 1,940 2,210 2,900 Extraordinary Item (857) Minority Interests (26) (10) (20) (28) (36) Net Profit 1,262 5,737 7,987 9,392 11,566 Pre Provisioning Operating Profit (PPOP) 10,126 12,553 12,129 14,826 17,393 Pre Provisioning Profit (PPP) 10,013 13,350 12,369 15,078 17,707 EPS (Bt) Statement of Financial Position (Btmn) Year-end 31 Dec E 2015E 2016E Cash 14,599 16,576 16,742 16,909 17,078 Interbank & Money Market 96,267 96, ,259 91,133 82,020 Net Investment 109, , , , ,672 Loans 452, , , , ,379 Accrued Interest Receivable 955 1,004 1,069 1,197 1,365 Loan Loss Reserves (24,923) (31,468) (31,495) (34,582) (37,473) Net Loans 428, , , , ,270 Total Assets 712, , , , ,145 Deposits 496, , , , ,957 Interbank & Money Market 66,053 66,038 69,340 70,726 72,141 Borrowing 43,248 38,173 32,447 30,825 29,283 Total Liabilities 658, , , , ,780 Paid-up Capital 41,372 41,426 41,495 41,495 41,495 Retained Earning 6,367 15,204 21,194 27,939 36,438 Total Equity 53,604 61,757 68,070 75,284 84,261 Source: KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 4 of 6

5 Valuation and Ratio Analysis Year-end 31 Dec E 2015E 2016E Per/Share Data (Bt) EPS DPS BV Multiplier (X) P/E P/BV Dividend yield (%) Percentage Growth (%) Net Profit -68.5% 354.5% 39.2% 17.6% 23.1% EPS -68.5% 353.2% 39.2% 17.6% 23.1% Net Interest Income 19.9% 18.8% 3.8% 11.5% 10.2% Non Interest Income 16.1% 8.2% 1.8% 14.8% 18.3% Operating Income 18.7% 15.5% 3.2% 12.4% 12.6% Operating Expense 3.0% 8.3% 3.9% 4.4% 5.3% Operating Profit after tax 41.9% 31.9% 1.6% 21.1% 19.1% Loans 13.9% 10.3% 7.0% 12.0% 14.0% Deposits 9.7% 6.7% 5.0% 8.7% 11.0% Gross NPLs -25.9% 1.4% -5.1% 3.7% 0.9% Asset Quality Ratio Gross NPLs (Btmn) 22,103 22,421 21,272 22,053 22,241 Gross NPL/Loans 4.1% 3.9% 3.4% 3.3% 3.0% Loan Loss Reserve/NPLs 112.8% 140.4% 148.1% 156.8% 168.5% Accrued Interest/Loans 0.2% 0.2% 0.2% 0.2% 0.2% Loan Loss Reserve/Loans 5.5% 6.3% 5.9% 5.8% 5.5% Property Foreclosed/Loans 0.5% 0.4% 0.3% 0.3% 0.2% Capital & Liquidity Ratio Equity/Asset 7.5% 8.1% 8.6% 8.9% 9.1% Tier I to Risk Assets 11.1% 10.6% 11.5% 11.8% 12.1% Total Capital Adequacy Ratio 18.2% 15.9% 15.7% 15.7% 15.7% Loan to Deposit Ratio (LDR) 91.2% 94.3% 96.1% 99.0% 101.7% Loan to Deposit and ST Borrowings 83.9% 88.0% 90.8% 94.2% 97.4% Profitability Ratio ROA 0.2% 0.8% 1.0% 1.1% 1.3% ROE 2.4% 9.9% 12.3% 13.1% 14.5% Cost to Income 57.3% 52.0% 52.6% 48.8% 45.7% Non Interest Income/Total Income 30.9% 29.0% 28.6% 29.2% 30.7% Net Interest Margin 2.61% 2.99% 2.92% 3.04% 3.09% Key Assumptions E 2015E 2016E Loan Growth - Net 13.9% 10.3% 7.0% 12.0% 14.0% Cost to Income 57.3% 52.0% 52.6% 48.8% 45.7% Net Interest Margin 2.61% 2.99% 2.92% 3.04% 3.09% Provision expenses (Btmn) 8,751 7,613 4,382 5,686 6,141 Provision to loans (%) 1.93% 1.52% 0.82% 0.95% 0.90% Source: KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 5 of 6

6 DISCLAIMER This document is produced using open sources believed to be reliable. However, their accuracy and completeness cannot be guaranteed. The statements and opinions herein were formed after due and careful consideration for use as information for the purposes of investment. The opinions contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. The use of any information contained in this document shall be at the sole discretion and risk of the user. KT ZMICO RESEARCH RECOMMENDATION DEFINITIONS STOCK RECOMMENDATIONS BUY: Expecting positive total returns of 15% or more over the next 12 months TRADING BUY: Expecting positive total returns of 10% or more over the next 3 months SELL INTO STRENGTH: Expecting total returns between -10% to +10% over the next 12 month; share price has largely priced in fundamentals SELL: Expecting negative total returns of 10% or more over the next 12 months SECTOR RECOMMENDATIONS OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index by at least 10% over the next 12 months. NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index by 10% over the next 12 months. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 6 of 6

7 KT ZMICO Securities Company Limited 8 th, 15 th -17 th, 19 th, 21 st Floor, Liberty Square Bldg., 287 Silom Road, Bangrak, Bangkok Telephone: (66-2) Fax. (66-2) Phaholyothin Branch 3 rd Floor, Shinnawatra Tower II, 1291/1 Phaholyothin Road, Phayathai, Bangkok Telephone: (66-2) Fax. (66-2) Nakhon Pathom Branch 1156 Petchakasem Road, Sanamchan Subdistrict, Amphoe Meuang, Nakhon Pathom Province Telephone: (034) Fax: (034) #100 Chachoengsao Branch 108/34-36 Mahajakkrapad Road, T.Namuang, A.Muang, Chachoengsao Telephone: (038) Fax. (038) Khon Kaen Branch 5 th Floor, Charoen Thani Princess Hotel, 260 Srichan Road, T. Naimuang, A. Muang, Khon Kaen Telephone: (043) Fax. (043) Central World Branch 999/9 The Offices at Central World, 16 th Fl., Rama 1 Rd, Pathumwan, Bangkok Telephone: (66-2) , (66-2) Fax. (66-2) Pak Chong Branch , Mittapap Road, Nong Sarai, Pak Chong, Nakhon Ratchasima Tel. (044) Fax. (044) Nakhon Ratchasima Branch 624/9 Changphuek Road,. Naimaung, A.Maung, Nakhon Ratchasima Telephone: (044) Fax: (044) Ploenchit Branch 8 th Floor, Ton Son Tower, 900 Ploenchit Road, Lumpini, Pathumwan, Bangkok Telephone: (66-2) Fax. (66-2) Viphavadee Branch G Floor, Lao Peng Nguan 1 Bldg., 333 Soi Cheypuand, Viphavadee-Rangsit Road, Ladyao, Jatujak, Bangkok Telephone: (66-2) Fax. (66-2) Chonburi Branch 4 th Floor, Forum Plaza Bldg., 870/52 Sukhumvit Road, T. Bangplasoy, A. Muang, Cholburi Telephone: (038) Fax. (038) Hat Yai Branch 200/301 Juldis Hatyai Plaza Floor 3, Niphat-Uthit 3 Rd, Hatyai Songkhla Telephone: (074) Fax: (074) Chiang Mai Branch 422/49 Changklan Road, Changklan Subdistrict, Amphoe Meuang, Chiang Mai Telephone: (053) Fax: (053) Cyber North Nana Krung Thai Bank PCL, 2 Floor, North Nana Branch 35 Sukhumvit Rd.,Klong Toey Nua Subdistrict, Wattana District, Bangkok Telephone: Sindhorn Branch 2 nd Floor, Sindhorn Tower 1, Wireless Road, Lumpini, Pathumwan, Bangkok Telephone: (66-2) Fax. (66-2) , Phitsanulok Branch Krung Thai Bank, Singhawat Branch 114 Singhawat Road, Muang, Phitsanulok Telephone: Pattaya Branch 382/6-8 Moo 9, T. NongPrue, A. Banglamung, Cholburi Telephone: (038) Fax. (038) Sriworajak Building Branch 1 st 2 nd Floor, Sriworajak Building, 222 Luang Road, Pomprab, Bankgok Telephone: (02) Fax. (02) Phuket Branch 22/61-63, Luang Por Wat Chalong Road, Talat Yai, Mueang Phuket, Phuket Tel. (076) ,(076) Fax. (076) Bangkhae Branch 6 th Floor The Mall Group Building Bangkhae 275 Moo 1 Petchkasem Road, North Bangkhae, Bangkhae, Bangkok Tel. (66-2) Fax. (66-2) Information herein was obtained from sources believed to be reliable, but its completeness and accuracy are not guaranteed. All opinions expressed constitute our views on that date and are not intended as an offer or solicitation to sell or buy any securities. Investors should exercise care when making a decision to invest in securities. No one may modify or distribute any part of this report unless written permission is first received from Seamico Securities Plc. If any modifications are made, quotes or references taken from the report and the report date must be clearly mentioned and must not cause misunderstanding or damage to the company.