Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Vol m Results Review, TISCO Financial Group PCL (TISCO TB) Sell (from Neutral) Financial - Diversified Financial Services Target Price: THB41.0.0 Market Cap: USD1,087m Price: THB42.3 Profit Passed Peak Macro Risks Growth Value 63 58 53 TISCO Financial Group (TISCO TB) Price Close Relative to Stock Exchange of Thailand Index (RHS) 128 121 115 Although 2Q13 earnings were above estimate, key profitability indicators were negative: i) falling NIM with funding cost spiking up, ii) a significant increase in NPLs, and iii) unrealised loss in portfolio. Despite solid earnings in 1H13, the peak has already passed and falling earnings will be in 2H13. Thus, we downgrade FY13F/FY14F earnings by 3%/16% and cut target price 22% to THB41 (PE9x, PBV 1.5x). 48 108 43 101 38 95 33 12 88 10 8 6 4 2 Source: Bloomberg Avg Turnover (THB/USD) 126m/4.17m Cons. Upside (%) 20.3 Upside (%) -3.0 52-wk Price low/high (THB) 36.0-57.1 Free float (%) 65 Shareholders (%) Thai NVDR CoLtd 29.7 State Street Bank And Trust 4.9 Shariah compliant 2Q13 earnings THB1.1bn (26% y-o-y, flat q-o-q). Earnings are higher than our/consensus estimate by 9%/4%, due to lower-than-expected opex. The strong y-o-y growth reflected a solid NII growth, which came mainly from auto loans (+33% y-o-y). A sharp decline in fee income led to the flat q-o-q growth. Several negative implications in 2Q13. NIM started falling below 3% again on the back of funding cost pressure. Upward pressure should continue, given the stretched liquidity, with LDR at 113% (the highest in the industry). This implies that new funding needs to be raised despite a lack of loan growth. Furthermore, TISCO has started raising new funding towards non-deposits, with the attempt to lengthen duration of liability matching with the duration of loans. Thus, its funding will be even higher and force NIM down in 2H13. Rising NPL triggers asset quality concerns. Gross NPLs increased strongly by +20% q-o-q and +31% YTD with an NPL ratio of 1.45% (up from 1.28%), which came mainly from auto loans (+22% q-o-q) and pushed auto loan NPLs to 1.8% (1Q13: 1.5%). Although the NPL ratio is still low, rising NPLs from auto loans should be monitored closely going forward. Given the further weakening in domestic consumption, we expect NPLs to be on an upward trend over the next few quarters, which force us to increase FY13F/FY14F credit cost assumption. Downgrade earnings 3%/16% on higher credit and lower margin. We lower NIM assumption from 3% to 2.9%/2.8% in FY13F/FY14F, and revised credit cost to 130bps each (from 100bps), with loan growth unchanged at 16%/6%. Thus, earnings were cut by 3%/16%, and we revised down our TP to THB41. We rate TISCO as a SELL, given its lack revenue diversification to offset falling revenues in auto loans. Chalie Kueyen 66 2862 9745 chalie.ku@th.oskgroup.com Forecasts and Valuations Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Net interest income (THBm) 7,205 6,914 7,044 8,650 9,151 Reported net profit (THBm) 2,888 3,266 3,705 3,902 3,702 Net profit growth (%) 45.3 13.1 13.4 5.3 (5.1) Recurrent net profit (THBm) 2,888 3,266 3,705 3,902 3,702 EPS (THB) 3.97 4.49 5.09 5.11 4.62 Return on average equity (%) 21.2 21.1 21.5 18.6 15.3 Return on average assets (%) 1.9 1.7 1.4 1.3 1.1 P/E (x) 10.6 9.4 8.3 8.3 9.1 P/B (x) 2.08 1.90 1.69 1.43 1.38 See important disclosures at the end of this report Powered by Enhanced Datasystems EFA TM Platform 1
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 TISCO Financial Group PCL (TISCO TB) NPLs becoming an issue NPL is a key highlight. Gross NPLs increased strongly by +20% q-o-q and +31% YTD with NPL ratio of 1.45% (up from 1.28%), which came mainly from the auto loans segment that grew by +22% q-o-q and pushed auto loan NPL to 1.8% (from 1.5% in 1Q13). Although the NPL ratio is still low, rising NPLs from auto loans should be monitored closely going forward. Given the further weakening domestic consumption levels, we expect NPLs will be an upward trend over the next few quarters, which force us to increase the credit cost assumption. Figure 1: NPL by loan segments Unit : THBm 1Q13 % of total 2Q13 % of total Consumer loan - Auto loan 2,660 1.51% 3,254 1.78% - Mort 101 6.97% 92 6.40% - Other consumer loan 169 1.48% 207 1.68% Total 2,930 1.55% 3,553 1.80% Non-consumer loan - Manufacturing 97 0.55% 101 0.54% - Real estate @ construction 279 3.04% 274 2.80% - Utilities 36 0.21% 43 0.24% - Agri 9 1.23% 9 1.12% Total 468 1.05% 516 1.08% Grand total 3,398 1.45% 4,069 1.66% Rising NPLs pushes NPL coverage lower. Regarding Figure 3, rising gross NPLs in 2Q13 put pressure on TISCO s asset quality, as it reduced loan loss reserves and pulled down NPL coverage ratio to 145% (down from 167% in 1Q13). Regarding Figure 3, the current NPL ratio is touching 2011 s NPL levels, when the massive flooding happened. As the upward trend is expected to continue, the NPL cycle at this time will surpass 2011 s figures. Figure 2: Absolute NPL and NPL coverage THBmn 4,500 NPLs NPL coverage 4,000 3,500 250% 200% Figure 3: NPL ratio: moving to 2011 levels (massive floods) 5.0% 4.5% 4.0% 3.5% 3,000 2,500 2,000 1,500 1,000 500-150% 100% 50% 0% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Source: RHB estimates Source: RHB estimates See important disclosures at the end of this report 2
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 TISCO Financial Group PCL (TISCO TB) Credit cost pressure on profit in 2H13F Credit costs higher than 2011 level (massive flooding). TISCO has maintained low credit costs over the past two years (around 70bps-90bps). Even during the massive flooding at end-2011, provisioning expenses remained at around 60bps- 70bps. However, at this time, rising NPL levels seem to be worse than what occurred in 2011. This will force TISCO to move upward its provisioning expenses at above 100bps going forward. Figure 4: Credit cost bps 220 200 180 160 140 120 100 80 60 40 20 - Rising NPL triggers asset quality concerns. Given further weakening of the domestic economy (with weak consumption as the main driver), we view that NPLs will trend further upward in 3Q13. NPLs from auto loans remain the major source of asset quality risk. Thus, this economic environment will force TISCO to maintain its credit cost at above 100bps, otherwise its NPL coverage will sharply fall. See important disclosures at the end of this report 3
TISCO Financial Group PCL (TISCO TB) Figure 5: TISCO quarterly earnings Unit: THBm 2Q12 3Q12 4Q12 1Q13 2Q13 %chg 1H12 1H13 % Chg QoQ YoY YoY Interest income - net 1,729 1,823 1,928 2,103 2,229 6% 29% 3,294 4,332 32% Non-interest income 1,518 1,762 1,835 2,218 1,732-22% 14% 2,820 3,950 40% Gain (loss) on investments 14 102-6 166 87-48% 523% 24 253 932% Fees and service income 974 1,118 1,345 1,639 1,268-23% 30% 1,945 2,907 49% Other income 530 542 496 413 377-9% -29% 851 790-7% Non-interest expense 1,470 1,821 1,926 1,909 1,664-13% 13% 2,978 3,573 20% Personnel expenses 778 800 950 1,000 949-5% 22% 1,474 1,949 32% Premises and equipment expenses 209 211 216 229 224-2% 7% 417 452 9% Taxes and duties 50 45 16 3 55 1562% 9% 113 58-49% Fees and service expenses 18 58 143 66 59-12% 222% 78 125 60% Other expenses 415 709 600 611 378-38% -9% 897 988 10% Pre-provision profit 1,776 1,763 1,836 2,413 2,297-5% 29% 3,136 4,709 50% Provision (Reverse) 589 532 533 940 810-14% 38% 857 1,750 104% Income tax 261 271 300 284 303 7% 16% 509 586 15% Net profit 920 953 995 1,154 1,159 0% 26% 1,757 2,313 32% EPS (THB) 1.26 1.31 1.37 1.59 1.60 0% 26% 2.41 3.19 32% Book value (THB) 22.31 23.64 25.00 26.52 27.76 22.3 27.8 Key figures and ratios Money market lending 14,520 35,618 31,196 4,163 32,376 14,520 32,376 Investment 4,354 5,008 7,016 6,703 7,640 4,354 7,640 Total loan (THBm) 210,213 228,510 248,668 267,136 280,952 210,213 280,952 Loan grow th -YoY (%) 20.0% 25.6% 34.1% 27.1% 22.9% - H/P 137,615 150,388 163,697 176,184 183,140 137,615 183,140 - Non-H/P 78,779 64,473 72,598 90,952 97,812 78,779 97,812 H/P Growth - QoQ 5.6% 9.3% 8.8% 7.6% 3.9% - YoY 15.9% 21.7% 31.0% 25.3% 33.1% 16% 33% Non-H/P Growth - QoQ 22.2% -18.2% 12.6% 0.0% 7.5% - YoY 39.8% 10.6% -7.8% 15.5% 108.7% Funding - Deposit 81,428 181,590 219,823 248,914 238,093 81,428 238,093 - Non-Deposit 111,895 49,626 27,877 21,916 34,728 111,895 34,728 Total 193,323 231,216 247,701 270,830 272,821 193,323 272,821 Grow th (YoY) - Deposit 85% 419% 480% 497% 192% 85% 192% - Non-Deposit -7% -61% -79% -85% -69% -7% -69% Total 18% 34% 26% 40% 18% 18% 18% NPL (Bt mn) 2,761 2,712 3,099 3,404 4,069 2,611 3,099 NPL (%) 1.31% 1.19% 1.25% 1.27% 1.45% 1.4% 1.2% NPL coverage (%) 171% 180% 165% 167% 145% 170% 165% Credit cost (bps) 112 93 86 141 115 84 128 Asset yield (%) 6.2% 6.1% 6.2% 6.4% 6.4% 6.1% 6.4% - H/P yield 7.4% 7.3% 7.5% 7.5% 7.5% 7.4% 7.5% - Non-H/P yield (%) 6.5% 7.0% 6.3% 6.9% 6.8% 6.4% 6.9% Cost of fund (%) 3.95% 3.94% 4.03% 3.83% 4.08% 3.9% 4.0% Net interest margin (NIM) (%) 2.98% 2.83% 2.80% 3.03% 2.98% 2.8% 3.0% LDR(including S-T borrow ing) 119% 109% 110% 109% 113% 116% 111% Cost to income ratio (%) 45% 51% 51% 44% 42% 49% 43% Effective tax rate 22% 22% 23% 19% 20% 22% 20% ROA (%) 1.7% 1.6% 1.6% 1.7% 1.7% 2% 2% ROE (%) 23.8% 23.2% 23.0% 25.1% 25.3% 22% 25% Source: RHB estimates See important disclosures at the end of this report 4
TISCO Financial Group PCL (TISCO TB) Financial Exhibits Profit & Loss (THBm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Interest income 9,520 12,375 15,211 18,585 19,987 Interest expense (2,315) (5,461) (8,166) (9,935) (10,836) Net interest income 7,205 6,914 7,044 8,650 9,151 Non interest income 3,517 4,165 6,138 7,393 7,036 Total other income 3,517 4,165 6,138 7,393 7,036 Total operating income 10,722 11,080 13,183 16,043 16,187 Total costs x depn & amortn (4,630) (4,934) (6,447) (7,602) (8,067) Operating EBITDA 6,092 6,145 6,736 8,441 8,120 Total costs (4,630) (4,934) (6,447) (7,602) (8,067) Operating profit 6,092 6,145 6,736 8,441 8,120 Total provision charges (1,933) (1,291) (1,922) (3,563) (3,492) Post-provision operating profit 4,159 4,854 4,814 4,878 4,628 Income from associates (0) - - - - Pre-tax profit 4,159 4,854 4,814 4,878 4,628 Taxation (1,256) (1,562) (1,081) (976) (926) Profit after tax 2,902 3,292 3,733 3,902 3,702 Minority interests (14) (26) (28) - - Profit after tax & minorities 2,888 3,266 3,705 3,902 3,702 Reported net profit 2,888 3,266 3,705 3,902 3,702 Recurring net profit 2,888 3,266 3,705 3,902 3,702 Balance Sheet Employment Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Net cust loans/assets (%) 84.9 81.9 83.7 85.0 85.2 Net earning assets / assets (%) 96.0 97.5 96.9 95.7 95.4 Non-earning assets/assets (%) 4.0 2.5 3.1 4.3 4.6 Net cust loans/cust deposits (%) 299.9 475.8 110.6 111.5 111.8 Equity / assets (%) 8.6 7.3 6.3 7.3 7.1 Equity / gross cust loans (%) 9.9 8.8 7.3 8.5 8.2 Equity & provns / gross cust loans (%) 9.9 8.8 7.3 8.5 8.2 Liquid funds / cust deposits (%) 41.1 93.0 17.9 14.5 13.8 Provision charge / avg cust loans (%) 1.5 0.8 0.9 1.3 1.2 Provision charge / avg assets (%) 1.2 0.7 0.8 1.2 1.0 See important disclosures at the end of this report 5
TISCO Financial Group PCL (TISCO TB) Financial Exhibits Balance Sheet (THBm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Total gross loans 162,278 215,835 279,512 310,452 331,296 Securities - total 6,481 3,706 7,016 4,086 4,290 Total gross interest earning assets 168,759 219,541 286,527 314,538 335,587 Total provisions (4,162) (4,428) (5,122) (5,336) (6,209) Net loans to customers 145,570 180,685 243,194 274,526 294,186 Total net interest earning assets 164,597 215,113 281,406 309,202 329,377 Cash & accrued interest 1,037 1,169 1,399 1,624 1,661 Tangible fixed assets 1,467 1,451 1,384 1,750 1,850 Other assets 4,307 2,984 6,308 10,502 12,216 Total non-interest earning assets 6,811 5,605 9,091 13,877 15,727 Total assets 171,408 220,718 290,497 323,079 345,104 Broad deposits 59,378 52,456 233,794 255,901 273,988 Other interest-bearing liabilities 90,774 145,396 27,877 28,111 26,787 Total interest-bearing liabilities 150,152 197,852 261,671 284,012 300,775 Other non-interest bearing liabilities 6,398 6,554 10,445 15,354 19,762 Total non-interest bearing liabilities 6,398 6,554 10,445 15,354 19,762 Total liabilities 156,550 204,406 272,117 299,366 320,538 Share capital 7,279 7,279 7,279 8,007 8,007 Retained earnings reserve 6,448 7,932 9,877 13,741 15,612 Other reserves 1,046 999 1,040 1,964 947 Shareholders' equity 14,773 16,210 18,196 23,713 24,567 Minority interests 84 101 184 - - Other equity (0) 0 0 - - Total equity 14,857 16,312 18,380 23,713 24,567 Total liabilities & equity 171,408 220,718 290,497 323,079 345,104 Key Ratios Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Cust deposit growth (%) (14.6) (21.8) 478.8 12.0 7.0 Broad deposit growth (%) (6.0) (11.7) 345.7 9.5 7.1 Growth in IBLs (%) 22.8 31.8 32.3 8.5 5.9 Return on interest earning assets (%) 6.2 6.4 6.0 6.2 6.1 Cost of funds (%) 1.7 3.1 3.6 3.6 3.7 Net interest spread (%) 4.5 3.2 2.5 2.5 2.4 Net interest margin (%) 4.7 3.6 2.8 2.9 2.8 Interest return on average assets (%) 4.6 3.5 2.8 2.8 2.7 Return on average equity (%) 21.2 21.1 21.5 18.6 15.3 Return on average assets (%) 1.9 1.7 1.4 1.3 1.1 EPS growth (%) 44.9 13.0 13.4 0.3 (9.4) Bv per share growth (%) 18.7 9.7 12.3 18.5 3.6 Operating profit growth (%) 38.7 0.9 9.6 25.3 (3.8) See important disclosures at the end of this report 6
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 TISCO Financial Group PCL (TISCO TB) SWOT Analysis Strong expertise in managing the auto loan segment Economic slowdown posts a major risk to asset quality, lack of business diversification Target takeover company Low franchise value Funding cost disadvantage P/E (x) vs EPS growth P/BV (x) vs ROAE 16 1,200% 3.0 35% 14 12 10 1,025% 850% 675% 2.5 2.0 29% 23% 8 500% 1.5 18% 6 4 2 325% 150% -25% 1.0 0.5 12% 6% 0-200% 0.0 0% P/E (x) (lhs) EPS growth (rhs) P/B (x) (lhs) Return on average equity (rhs) Company Profile Tisco Financial Group is a holding company that has TISCO Bank as its core business. TISCO Bank s expertise is in auto hire purchase loans, which accounts for 65% of its total loans. It also engages in retail, SME and corporate lending, as well as private banking. See important disclosures at the end of this report 7
NR 35.0 42.0 55.0 TISCO Financial Group PCL (TISCO TB) Recommendation Chart Price Close 64 54 44 34 24 14 Recommendations & Target Price Buy Neutral Sell Trading Buy Take Profit Not Rated 4 Jan-09 Mar-10 May-11 Jun-12 Source: RHB estimates, Bloomberg Date Recommendation Target Price Price 2013-05-20 Neutral 55.0 51.8 2012-10-12 Sell 42.0 43.1 2012-07-12 Sell 35.0 36.0 Source: RHB estimates, Bloomberg See important disclosures at the end of this report 8
RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Disclosure & Disclaimer All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for information purposes only. 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