TISCO Financial Group: FY25F: Another year of earnings contraction
- Highest ROE among its peers
- Credit cost normalisation to continue pressuring earnings growth outlook
- Attractive dividend yield
- Maintain HOLD with lower TP of THB105
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WHAT’S NEW
FY25F: Another year of earnings contraction
Results in line with expectations. 3Q24 earnings came in at THB1.7bn (-8.6% y/y; -2.0% q/q), in line with the Bloomberg consensus and our estimate.
The y/y decrease was attributed to (i) lower net interest income (NII; from net interest margin [NIM] contraction) and (ii) higher expected credit loss (ECL; reflecting its high-yield loan expansion, high household debt level, and fragile economic recovery). Meanwhile, the q/q decline was due mainly to lower non-NII (from lower mark-to-market gains on investments).
Pre-provision operating profit (PPOP) increased 3.6% y/y but declined 3.5% q/q to THB2.5bn. The y/y increase was attributed to higher fee income (from brokerage fees, asset management fees, and investment banking [IB] fees) and higher non-NII (from mark-to-market gains on investments in 3Q24 vs. losses in 3Q23). Meanwhile, the q/q decrease was due to lower non-NII.
Loans remained flat y/y but contracted 1.4% q/q and 1.7% YTD[1]Sep. The q/q and YTD decrease was due to the decline in loans across all segments. Specifically, retail loans decreased 0.8% q/q, due to the decline in HP (-1.8% q/q) and housing (-3.8% q/q) loans. However, auto cash loans expanded 1.9% q/q. SME loans decreased 8.2% q/q from loan repayments, while corporate loans also declined 1.8% q/q due to (real estate) loan repayments.
Asset quality remained in check. NPLs declined 1.4% q/q to THB5.6bn at end-3Q24, while NPL ratio remained stable at 2.44% due to loan portfolio contraction. Segment-wise, only auto cash saw an increase in NPL (+2.4% q/q to THB2.1bn) in 3Q24, reflecting the fragile economic conditions and poorer customer credit profile. Meanwhile, NPLs from other retail loans and the SME segment declined. Still, there were no NPLs from the corporate segment. TISCO set aside an ECL of THB359mn (+338% y/y; -12.2% q/q) in 3Q24. With that, coverage ratio decreased to 159% at end-3Q24 (vs. 163% at end-2Q24).
Strong capital position to support dividend payment. At end[1]3Q24, its Tier 1 capital stood high at 17.2%, while its CAR was 19.0%. With TISCO’s strong capital position and its capital management policy to optimise ROE, we expect it to continue paying out a high dividend in FY24F. 9M24 earnings accounted for 75% of our new full-year forecast.
Key highlights for 3Q24 results:
- i) Yield improvement helped support NIM. Yield on loans increased to 7.69% in 3Q24 (vs. 7.66% in 2Q24) thanks to an increasing mix of high-yield loans (including used-car HP, motorcycle HP, and auto cash loans) to 40.4% of retail loans at end-3Q24 (vs. 39.2% at end-2Q24). Meanwhile, cost of funds remained relatively stable q/q at 2.43% in 3Q24, thanks to the declining funding base in line with slow loan demand. With that, NIM expanded q/q to 4.91%. Management believes cost of funds should stabilise in 4Q24F, while yield should continue to increase with an increasing mix of high-yield loans. Note that management expects two policy rate cuts for the coming interest rate cycle – with the first cut potentially happening as early as in Dec 2024. However, we anticipate two policy rate cuts in 2Q25F-3Q25F.
- ii) Credit cost to continue rising towards a normalised leve TISCO maintains its guidance for credit cost to continue to inch up towards a normalised level of 1.0% by 2025, along with declining excess reserve and coverage ratio. However, it expects to maintain a coverage ratio at the level of not lower than 140%. Previously, TISCO guided for a 50bps credit cost in FY24F and 100bps in FY25F. In 9M24, credit cost was 62bps, due to its stronger-than-expected operating performance (not because its asset quality had deteriorated), and management has hinted that if its 4Q24F performance comes in stronger than the company’s budget, it will likely set aside a high credit cost in 4Q24F to reduce its FY25F burden.
iii) Fee income came in toward the end of 3Q24. Fee income increased 5.3% y/y and 2.4% q/q in 3Q24. Fee income growth was attributed to an increase in brokerage fees (from increasing market trading volume toward the end of the quarter and TISCO Securities’ higher market share) and asset management fees (thanks to a more favourable capital market condition in late 3Q24).
4Q24F upside is on asset management fee; yet pressured by higher credit cost. TISCO will continue to expand retail high-yield loans, premised on the higher risk-adjusted return compared with other loans. This implies further yield improvement going forward. Nonetheless, we should expect a correspondingly higher NPL ratio and a higher credit cost from such loan expansion.
Meanwhile, its 4Q24F loan growth should be supported by seasonal floor plan loan demand (ahead of the Motor Expo 2024 event, 29 Nov-10 Dec 2024), with some HP loans – as well as bancassurance fees –also expected. Moreover, we also expect some corporate loan drawdowns in 4Q24F.
With cost of funds expected to stabilise, while yield and loans are likely to increase, NIM and NII should improve q/q.
While we believe fee income will seasonally increase in 4Q24F, we still see an upside on our fee income forecast, given the currently favourable condition in the capital market, which will drive our asset management fees.
In the meantime, operating expenses (OPEX) should largely move with income. With that, we expect PPOP to increase y/y and q/q in 4Q24F. Nonetheless, a higher credit cost will pressure bottom line and likely results in a y/y and q/q decline in 4Q24F earnings.
To see another year of earnings contraction in FY25F. Management expects potential catalyses for FY25F, including (i) favourable capital market conditions, (ii) stronger loan growth (from corporate and auto cash loans), (iii) interest rate cuts, and (iv) auto market recovery.While we expect TISCO’s PPOP to improve y/y in FY25F, we also expect its credit cost to increase and thus result in a 5.6% y/y earnings contraction in FY25F.
Maintain HOLD with lower TP of THB105. As we roll over our valuation base to FY25F, we derive a lower TP for TISCO at THB105 (vs. THB107 previously). 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 expect its FY24F earnings growth (-5.7% y/y) to be weaker than peers’ average (+5.6% y/y), we expect dividend yield to remain attractive at 8.0%. Our HOLD rating stands.
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