The bank to bank on
- 2Q24 net profit came in at THB5.4bn (+17.3% y/y; +0.4% q/q), beating expectations on higher-than-expected NII and lower-than-expected OPEX
- Liquidity recycling strategy to continue to help cushion NIM
- FY24F/FY25F earnings raised by 12%/10%, mainly to reflect our new assumptions on tax credit utilisation
- Maintain BUY with higher TP of THB2.14
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The y/y increase was attributed to higher NII (from net interest margin [NIM] expansion), lower C/I ratio, and lower effective tax rate (due to the utilisation of tax credit), while the q/q increase was thanks to lower cost-to-income (C/I) ratio and lower effective tax rate.
Pre-provision operating profit (PPOP) increased 2.4% y/y and 0.5% q/q. The y/y increase was attributed to higher NII and lower C/I ratio, while the q/q increase was thanks to lower C/I ratio.
1H24 earnings accounted for 51% of our new full-year estimate.
Loan portfolio contracted 1.4% q/q and 2.3% YTD-Jun. Such loan contraction was in line with the bank’s strategy to selectively grow a quality portfolio with justified risk-adjusted returns while leveraging its core strength and expertise.
Segment wise, retail loans (62% of total loans) decreased 1.6% q/q, due to the decline in hire purchase (-3.3% q/q) and mortgage loans (-0.7% q/q), while top-up loans, namely Cash Your Car (CYC) (+1.8% q/q) and Cash Your Home (CYH) (+3.8% q/q), expanded on track. In terms of consumer lending, personal loans expanded 2.8% q/q, while credit card loans increased 3.9% q/q,
Corporate loans (30% of total loans) declined marginally 0.5% q/q, in line with the bank’s strategy to recycle liquidity from a low-yield portfolio to selectively grow secured higher yield loans.
SME loans (8% of total loans) declined 2.5% q/q, reflecting the bank’s strategy to continue de-risking the SME portfolio.
Manageable asset quality. Overall asset quality of the bank remained under control, thanks to its quality growth strategy, conservative loan staging, and continuing balance sheet cleanup.
In 2Q24, TTB wrote off THB7.0bn of NPLs (vs. THB6.8bn in 1Q24) and sold THB0.5bn of NPLs (vs. THB0.4bn in 1Q24). With that, its NPLs remained relatively stable at THB40.1bn (vs. THB39.8bn at end-1Q24). NPL ratio ticked up but remained well contained at 2.64% at end-2Q24 (vs. 2.56% at end-1Q24).
TTB set aside an extra provision of THB1.1bn as a management overlay to cushion against future downside risks, taking the total expected credit loss (ECL) to THB5.3bn in 2Q24. Net-net, its coverage ratio remained high at 152% at end-2Q24 (vs. 155% at end-1Q24).
Management revealed that the bank has a small loan exposure (long-term, short-term, and secured loans combined) at approx. THB450mn to Energy Absolute PCL (EA TB).
Currently, the customer’s loan repayment remains normal at the bank. However, if the loan has to be classified as Stage 2 or 3 loan in the future, management is confident that TTB has more than enough management overlay to cover it.
Capital position remained strong. At end-2Q24, its Tier 1 capital stood at 17.10%, while its capital adequacy ratio (CAR) was 19.50%, compared with the Bank of Thailand (BOT)’s minimum requirements of 9.50% and 12.00%, respectively.
TTB: Loan breakdown at end-2Q24 (%)
Source: Company, DBSVTH
Liquidity recycling strategy to continue to help cushion NIM. TTB has been able to manage its NIM well during this interest rate cycle, thanks to its pre-funding and liquidity recycling strategies that helped control funding costs and enhance yield.
With its loan portfolio continuing to contract, management sees less need to acquire new deposits, thus reducing funding cost pressure in 2H24F. Meanwhile, it sees a potential yield enhancement from an increasing mix of high-yield loans. Net-net, it is likely to see NIM decline at a slower pace and start to stabilise.
Utilisation of tax credit to help support TTB’s bottom line. Recall that Thanachart Bank (TBANK)’s liquidation process was completed in Nov 2023 and resulted in an accounting loss from investment, which can be utilised as a tax shield for TTB within five accounting periods (2023-2028). Note that the recognition of the tax benefit will not necessary be on a straight-line basis.
In 2Q24, THB1.4bn of the tax shield of was utilised, resulting in a tax credit of THB474mn (i.e., an effective tax rate of -10%) in the quarter. With that, at end-2Q24, the remaining tax shield was THB12.7bn, which can be utilised until 2028.
Likely to keep credit cost at a high level. TTB has been very prudent in managing its balance sheet quality. On top of NPL write-offs and sales, TTB has continuously downgraded weak loans (i.e., a conservative loan staging approach), while providing sufficient credit costs for such loans to mitigate downside risks amid economic uncertainties and the prolonged economic recovery.
With its tax credit on hand, we believe TTB has some flexibility to manage its credit cost to strengthen its balance sheet health, as seen in 4Q23, 1Q24, and 2Q24.
FY24F/FY25F earnings raised by 12%/10%. As we incorporated TTB’s 1H24 results and revised our key forecast assumptions, especially effective tax rates and credit costs, our FY24F earnings increased 12%/10%.
Given the remaining tax credit of THB12.7bn at end-2Q24, we assume TTB will utilise a tax shield of THB1.4bn/quarter for the next nine quarters (i.e., 3Q24-3Q26). This will translate into an effective tax rate ranging from -11% to -5%, depending on estimated earnings in that respective quarter. Meanwhile, we also assume that TTB will continue to set aside high credit costs during that period – similar to what it did in 4Q23-2Q24.
Specifically, we assume an effective tax rate of -8.9%/-8.1% and credit cost of 164bps/160bps for FY24F/FY25F earnings. With that, we now expect TTB’s earnings to increase 14.4%/1.3% in FY24F/FY25F.
Attractive dividend yield. TTB’s ROE has continued to expand thanks to its ongoing earnings growth and capital management. With its high Tier 1 capital (i.e., 17.1% at end-2Q24) and prudent business expansion amid an uncertain economic outlook, it is likely that TTB will keep its dividend payout at a high level to manage its capital position and enhance ROE.
We expect TTB to pay a THB0.13 DPS for its FY24F performance, implying a dividend payout of 55% and a dividend yield of 7.4%.
Maintain BUY with higher TP of THB2.14. As we incorporated TTB’s 1H24 results and revised our FY24F forecasts, we derived a higher TP of THB2.14 (vs. THB2.02 previously). Our TP is based on 0.85x FY24F P/BV, i.e., 1SD above its 5-year average P/BV. Given its proven synergies from the merger, consistently improving operating earnings, and flexibility to manage its bottom line from the tax credit, we believe TTB has room to further re-rate.
| FY Dec | 2Q2023 | 1Q2024 | 2Q2024 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Net Interest Income | 14,093 | 14,396 | 14,185 | 0.7 | (1.5) |
| Non-Interest Income | 3,617 | 3,204 | 3,127 | (13.5) | (2.4) |
| Operating Income | 17,709 | 17,600 | 17,312 | (2.2) | (1.6) |
| Operating Expenses | (7,863) | (7,570) | (7,210) | (8.3) | (4.8) |
| Pre-Provision Profit | 9,846 | 10,030 | 10,102 | 2.6 | 0.7 |
| Provisions | (4,244) | (5,117) | (5,281) | 24.4 | 3.2 |
| Associates | 51.0 | 69.5 | 60.1 | 17.8 | (13.5) |
| Exceptionals | 0.00 | 0.00 | 0.00 | nm | |
| Pretax Profit | 5,653 | 4,982 | 4,881 | (13.7) | (2.0) |
| Taxation | (1,087) | 351 | 474 | (143.6) | 35.0 |
| Minority Interests | (0.01) | (0.01) | (0.01) | (14.3) | 0.0 |
| Net Profit | 4,566 | 5,334 | 5,355 | 17.3 | 0.4 |
| Growth(%) | |||||
| Net Interest Income Gth | 4.4 | (3.7) | (1.5) | ||
| Net Profit Gth | 6.3 | 9.6 | 0.4 |
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