TISCO Financial Group: FY25F pressured by credit cost normalisation
- 4Q24 profit came in at THB1.7bn (-4.4% y/y; +0.7% q/q), taking FY24 earnings to THB6.9bn (-5.5% y/y), in line with expectations
- FY24 PPOP increased 5.5% y/y thanks to higher fee income, higher non-NII, and lower C/I ratio
- FY25F PPOP to improve 4.7% y/y but earnings to decline 5.0% y/y due to higher credit cost
- Maintain HOLD with a higher TP of THB108
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Pre-provision operating profit (PPOP) increased 1.3% y/y but decreased 1.8% q/q in 4Q24. The y/y increase was attributed to an increase in fee income (+4.7% y/y) and non-interest income (non-NII; +10.9% y/y). Meanwhile, the q/q decline was due to seasonally higher operating expenses (OPEX).
FY24 PPOP increased 5.5% y/y, thanks to (i) higher fee income from asset management and investment banking businesses, (ii) higher non-NII (+8.4% y/y) from a THB314mn gain on financial instruments designated at fair value through profit or loss (FVTPL) recorded in FY24 (vs. a THB29mn loss on financial instruments designated at FVTPL booked in FY23), and (iii) lower cost-to-income (C/I) ratio.
Loans expanded 1.2% q/q but contracted 0.5% y/y in 4Q24. Retail loans (67.8% of total loans) declined 0.1% q/q and 2.9% y/y. Auto cash loans (18.6% of total loans) were flat q/q but expanded 3.7% y/y. Hire purchase (HP) loans (43.1% of total loans) decreased 1.1% q/q and 6.4% y/y, while housing loans (3.1% of total loans) declined 4.2% q/q and 16.3% y/y.
Meanwhile, corporate loans (26.4% of total loans) increased 4.3% q/q and 4.0% y/y (from all business segments). In the meantime, SME loans (5.8% of total loans) declined 1.3% q/q and 1.6% y/y (from loan repayment in the car inventory financing amid weak domestic car sales).
Well-controlled asset quality. NPL ratio declined to 2.35% at end-FY24, vs. 2.44% at end-3Q24, but was higher than 2.22% at end-FY23. Nonetheless, the ratio was still lower than the pre-COVID-19 level of 2.40% at end-FY19.
TISCO set aside an expected credit loss (ECL) of THB1.4bn (+283% y/y) or a credit cost of 61bps in FY24 (vs. 17bps in FY23), in line with its plan to step up credit cost to a normalised level in 2025.
Coverage ratio declined to 155% at end-FY24, vs. 159% at end-3Q24 and 190% at end-FY23.
Strong capital position to support future dividend payment. At end-FY24, its Tier 1 capital remained high at 17.0%, while its capital adequacy ratio (CAR) was 18.6% (vs. 16.3% and 19.5% at end-FY23). The decline in CAR was due to the decline in Tier 2 capital (approx. THB2.4bn) upon redemption during the year.
With TISCO’s strong capital position and its capital management policy to optimise ROE, we expect a high dividend payout from the company from its FY24-FY25F operations.
Key highlights for the results:
i) FY24 NIM declined on higher cost of funds. Yield on loans increased to 7.74% in 4Q24 (vs. 7.69% in 3Q24) thanks to an increasing mix of high-yield loans (including used-car HP, motorcycle HP, and auto cash loans) to 40.9% of retail loans at end-4Q24 (vs. 40.4% at end-3Q24, 39.2% at 2Q24, 38.3% at end1Q24, and 37.3% at end-FY23).
Meanwhile, its cost of funds remained relatively stable at 2.42% in 4Q24 (vs. 2.43% in 3Q24), as funding cost repricing ended. With that, net interest margin (NIM) expanded 1.8bps q/q to 4.9% in 4Q24.
For FY24, yield on loans increased 26bps to 7.68%, thanks to an increasing mix of high-yield loans as discussed earlier. Nonetheless, cost of funds rose 50bps to 2.42% due to deposit repricing. Net-net, NIM declined 11.7bps to 4.8% in FY24.
Yield and NIM to increase in FY25F. Management believes funding cost repricing should have ended in 3Q24, and as such, its cost of funds should remain relatively stable in FY25F or decline if there is a policy rate cut during the year (note that TISCO now expects only one cut in 2025.)
Meanwhile, with its rising mix of high-yield loans (i.e., 27.7% of total loans or 40.9% of retail loans at end-FY24), its yield on loans should gradually increase, supporting NIM expansion in FY25F.
ii) Decent performance on fee income. Despite a slow economy and unfavourable capital market conditions, TISCO still was able to grow its fee income by 2.1% y/y in FY24, thanks mainly to a good performance of its asset management business. Its assets under management (AUM) increased 3.7% y/y from the increased contributions in provident fund business and new issuances of mutual funds. With that, its asset management basic fee increased 4.4% y/y to THB1.7bn.
Meanwhile, its bancassurance fee income declined 1.8% y/y to THB2.5bn due to the decline in domestic car sales (-26.7% y/y in 11M24), and brokerage fee dropped 10.5% y/y to THB512mn due to lower market trading volume.
TISCO targets to enhance its fee-based income in FY25F via insurance solution offerings to OEM and car dealers. Note that, currently, TISCO already has partnerships with ten insurance companies.
iii) Credit cost to continue rising towards a normalised level. TISCO reiterated its plan for credit cost to step up to a normalised level of 100-120bps in 2025, in line with its loan portfolio, which is shifting towards high-yield loans. With a higher-risk portfolio, NPL ratio is expected to also increase in FY25F.
Meanwhile, excess reserve and coverage ratio are expected to decline, alongside the path of the credit cost normalisation. Nonetheless, management expects to maintain a coverage ratio at a level not lower than 140%.
iv) Manageable OPEX and C/I ratio. OPEX decreased 0.9% y/y in FY24, while cost-to-income (C/I) ratio declined to 48.1% (vs. 49.7% in FY23). The decline was thanks to the company’s effective operating cost control and a slower Somwang branch expansion (i.e., premise and staff expenses) in FY24.
Note that 163 new Somwang branches were added in 2024 (vs. +195 in 2023), bringing the total number of Somwang branches to 808 at end-2024. Management believes that, at this point, Somwang branches have enough coverage that TISCO no longer needs to accelerate branch openings.
Given that, TISCO’s strategy shifts to focus on enhancing efficiency (i.e., increasing sales) at Somwang branches, instead of adding more branches, and as such, TISCO expects its C/I ratio to decline in FY25F.
FY25F to still be pressured by the credit cost normalisation process. Outlook for FY25F remains challenging given the high household debt level, which makes it difficult to grow loan portfolios. With that, TISCO aims to boost its fee-based income to grow top line, while selectively expanding its loans.
Meanwhile, amid the company’s credit cost normalisation process, operating cost control is necessary to cushion its bottom line.
TISCO believes retail (secured) loans will see some growth in FY25F, while portfolio mix will continue to shift towards high-yield loans.
Specifically, it foresees growth opportunities in motorcycle HP and home equity loans, and these products – along with insurance products – will be offered at Somwang branches. Note that approx. 75% of auto cash loans in FY24 were generated through Somwang branches.
Meanwhile, auto HP may exhibit some growth in FY25F, given TISCO’s strategy to penetrate only selective brands / dealers / showrooms.
With that, we expect TISCO’s PPOP to improve 4.7% y/y in FY25F. However, we estimate its FY25F earnings to decline 5.0%, due to higher credit cost (100bps in FY25F vs. 61bps in FY24).
Maintain HOLD with a higher TP of THB108. As we incorporate TISCO’s FY24 results and fine-tune our forecasts for FY25F, we derive a higher TP of THB108 (vs. THB105 previously) for TISCO. Our TP is based on 2.0x FY25F P/BV, i.e., 1SD above its LT average P/BV. We believe TISCO’s premium valuation is justified by its highest ROE among its banking peers.
While we estimate its FY25F earnings growth (-5.0% y/y) to be weaker than the sector average (+2.3% y/y), its dividend yield remains attractive (at c.7.8%) and support TISCO’s share price. Our HOLD rating stands.
| FY Dec | 4Q2023 | 3Q2024 | 4Q2024 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Net Interest Income | 3,502 | 3,385 | 3,402 | (2.9) | 0.5 |
| Non-Interest Income | 1,262 | 1,395 | 1,387 | 9.8 | (0.6) |
| Operating Income | 4,765 | 4,781 | 4,788 | 0.5 | 0.2 |
| Operating Expenses | (2,353) | (2,292) | (2,345) | (0.3) | 2.3 |
| Pre-Provision Profit | 2,412 | 2,488 | 2,443 | 1.3 | (1.8) |
| Provisions | (187) | (359) | (337) | 80.1 | (6.0) |
| Associates | (2.56) | 6.92 | 10.6 | - | 52.9 |
| Exceptionals | - | ||||
| Pretax Profit | 2,222 | 2,137 | 2,117 | (4.7) | (0.9) |
| Taxation | (442) | (423) | (415) | (6.1) | (1.9) |
| Minority Interests | (0.12) | (0.10) | (0.09) | 23.4 | (9.1) |
| Net Profit | 1,780 | 1,713 | 1,702 | (4.4) | (0.7) |
| Growth(%) | |||||
| Net Interest Income Gth | 0.3 | (0.1) | 0.5 | ||
| Net Profit Gth | (5.0) | (2.3) | (0.7) |
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