Date: October 21, 2024
Broker: Maybank Securities (Thailand) PCL
Overview
TMBThanachart Bank (TTB) is highlighted for its strong earnings visibility, strategic focus on quality loans, and effective cost control measures. The bank is navigating a challenging market environment by shifting its loan mix, maintaining prudent financial strategies, and emphasizing sustainability.
High Earnings Visibility and Dividend Yield
TTB is recommended as a “BUY” with a target price of THB2.20, reflecting a 0.85x FY25E P/BV and 9.5% Return on Equity (ROE). The bank’s forecasted ROE is expected to increase to 9.6% by FY26, from 8.2% in FY23, driven by:
- A shift in the loan mix toward more profitable segments.
- Rising dividend payouts.
- Continued focus on cost control.
Despite a forecasted decline in revenue due to loan contraction, TTB expects operational expenditures (opex) and credit costs to decrease at a faster rate, maintaining profitability.
Loan Strategy and Cost Control
TTB’s CEO reported that loan volumes contracted in the third quarter of 2024 as the bank adheres to a prudent loan growth policy, prioritizing asset quality. The bank is shifting its focus to better risk-adjusted return products, which require less capital, leading to higher profitability. Furthermore, TTB has implemented cost-saving measures, such as human resources (HR) and branch optimizations, resulting in a 1.4 percentage point year-over-year reduction in its cost-to-income ratio to 42.2% as of the first nine months of 2024.
Net Interest Margin (NIM) and Asset Quality
TTB’s NIM is expected to decline in the last quarter of 2024 due to lower asset and investment yields, though it is forecasted to stabilize by the second quarter of 2025 as deposit costs decrease. Despite challenges, TTB is actively managing its balance sheet, including USD187 million in Additional Tier 1 bonds that are due for a call date in December 2024.
The bank has experienced a slight increase in its Non-Performing Loan (NPL) ratio, rising 12 basis points quarter-on-quarter to 3.21%. This was attributed to loan contraction, but gross NPLs remained flat.
3Q24 Financial Performance
TTB’s third-quarter net profit grew by 10% year-over-year, amounting to THB5.2 billion, though it showed a slight quarter-on-quarter decline. Key performance highlights include:
- A 3.5% quarter-on-quarter reduction in loans, mainly due to decreased corporate and SME lending.
- A marginal decline in Non-Interest Income (Non-NII), down 5% year-over-year due to reduced fee income.
- Operational expenditure fell by 6% year-over-year due to cost control efforts, lowering the cost-to-income ratio to 42.3%.
- Tax benefits of THB1.0 billion were utilized in the quarter, leaving THB11.7 billion in available tax benefits that can be used until 2028.
Key Financial Metrics (FY22-FY26E)
- Operating Income: Expected to decrease slightly, reflecting adjustments in the loan mix and cost controls.
- Net Profit: Projected to grow steadily with core net profit reaching THB24.5 billion by FY26.
- Return on Equity (ROE): A gradual increase is forecasted, reaching 9.6% by FY26.
- Cost-to-Income Ratio: Continues to improve due to strategic cost management initiatives.
Price Drivers and Valuation
TTB is expected to trade at a premium compared to other major banks due to its robust earnings visibility and rising ROE. However, there are risks, including weaker-than-anticipated asset quality and potential divestments by major shareholders, such as the Ministry of Finance. The bank’s valuation is supported by a strong dividend yield, forecasted to rise to 9.6% by FY26.
Sustainability Initiatives
TTB is committed to sustainability across multiple dimensions, including business operations, environment, social, and corporate governance:
- The bank has been recognized as a leader in sustainable banking, ranking No. 1 among Thai banks by Fair Finance Thailand.
- TTB has a strong track record of issuing green bonds and promoting eco-friendly financing solutions.
- It is actively reducing exposure to high-risk sectors like tobacco and coal-fired power plants, with a commitment to exit these sectors by specific target dates.
Upside and Downside Factors
Upside:
- Stronger-than-expected economic conditions and accelerated growth in high-margin loans.
- Better asset quality, reflected in lower NPL ratios.
Downside:
- Global economic slowdown affecting lending and fee-based income.
- Higher-than-expected deterioration in the asset quality of SME and retail loans.
Conclusion
TTB is strategically positioned to leverage its cost control and loan mix adjustments to enhance profitability, even in a challenging macroeconomic environment. Its sustainability practices and focus on high-quality loans add to its attractiveness for long-term investors. However, the bank must navigate potential risks related to asset quality and shareholder changes to sustain its growth trajectory.
