Maybank Kim Eng has upgraded its view on Thai Consumer Finance to “Positive,” seeing a decent net interest margin (NIM) and strong earnings per share (EPS) growth.
As of 14:30 local time in Thailand, AEONTS rose ฿1.00/share or 0.52% to trade at ฿192.00/share, and MTC increased ฿0.25/share or 0.39% to trade at ฿64.00/share.
SAWAD gained ฿0.50/share or 0.73% to trade at ฿69.00/share while KTC dipped ฿0.25/share or 0.63% to trade at ฿39.25/share.
Maybank states that it initiates the Thai consumer finance sector with a POSITIVE view on strong earnings growth of 16% in 2020-2021 (vs -2% for the banking sector), supported by solid loan growth and high NIM. Thus, Maybank recommends BUY companies with clear earnings visibility and strong asset quality.
Its top BUYs are AEONTS and MTC, and also a BUY calls on KTC over SAWAD due to better operation efficiency and asset quality. In the meantime, Maybank puts SAWAD on HOLD, thinking that the operation turnaround have been priced into their 67% rally in 2019.
Loan growth remains strong
An ongoing economic slowdown should prompt loan demand from low-income earners who have limited access to banks. Maybank expects MTC and SAWAD to deliver strong loan growth of 20-25% in FY19-21F, much higher than its forecast of 3-4% loan growth for banks on average. Solid loan growth is due to continued branch network expansion to gain market share. KTC and AEONTS’s loans should grow 7-10% in FY19-21F, supported by a growing customer base for both credit cards and personal loans.
NIM to improve on lower cost of fund
SAWAD and MTC’s NIM declined in 2018 and 1H19 due to one-time effect from a change in calculation of interest rate from fixed rate to effective rate. Looking into 2020, Maybank expects sector NIM to expand 10-30bps YoY due to the decline in cost of funds as the Bank of Thailand cut the policy rate twice to 1.25% in 2H19. Maybank sees better profitability on finance sector with ROE of 20-30% vs banking sector of c.10% due to higher NIM of 15-21% vs banking sector of 3%.
Expect higher credit cost and NPL ratio
Given weak export and economic growth, it is expected that the sector NPL ratio will increase 10bps YoY and credit cost to rise YoY in 2020, except for KTC. Weak farm income and high household debt are likely to impact consumers’ ability to service debts. Maybank sees limited impact from TFRS9 implementation for KTC and MTC due to their high NPL coverage and low NPL ratio. SAWAD and AEONTS may set aside additional provisions by deducting equity from their balance sheet with no impact on the P/L.