Target price : Bt0.78
Recommendation : BUY
Closing Price (12 May 09) : Bt0.66
Earnings to improve along with business restructuring
- First-quarter earnings improved from the prior quarter but expenses stubbornly stayed high with much of them being exceptional items.
- TMB is expected to book a Bt2.80b gain from the buyback of its hybrid
Tier-1 bonds in 2Q09, but it is also likely to book huge loan-loss provisions.
- Netting out the impact, the sale of TMB IT-One subordinated debentures to replace hybrid Tier-1 bonds with higher-than-expected proceeds is unlikely to affect the bank's capital adequacy ratio (CAR), which remains unchanged at 14.1%.
- Organizational restructuring is still ongoing. Though earnings may be unexciting this year, we believe things would be better next year and the bank would also wipe out retained losses.
- We raise our rating on TMB to 'TRADING BUY' from 'SELL' based on strong positive new flow for the stock. Our 2009 price target is Bt0.78/share.
1Q09 earnings review
TMB, Thailand's sixth largest lender by assets posted a net profit of Bt436.17m in 1Q09. The results marked a turnaround from a massive loss of up to Bt3.99b in the prior quarter but the profit figure was 72.6% lower than in the same year-ago quarter. The results topped our forecast of Bt253.76m thanks to a Bt1.09b provision reversal. The cost to income ratio however remained high at 115.6% as a result of exceptional items: (i) losses on sale of NPL worth Bt1.37b and NPA worth Bt1.55b to be sold in May 2009; and (ii) investment impairments of Bt892m. Excluding provisions and ex-items, the operating performance improved sharply from the prior quarter but fell slightly from the same year-ago quarter.
Buyback of hybrid perpetual Tier-1 bonds and sale of TMB IT-One unlikely to affect CAR
On Apr 17-29, 2009, the bank made a tender offer to buy back hybrid perpetual Tier-1 bonds. The bank bought back US$131.20m of the bonds with settlements made on May 6. There was US$68.80m of hybrid perpetual Tier-1 bonds outstanding from a total of US$200m raised in Apr 2006. As the tender offer price was 57%, the bank is therefore expected to book a Bt2.80b gain from bond buyback as a one-time phenomenon in 2Q09. However, the bank may also likely book huge loan-loss provisions in the face of slowing economic outlook, which may somewhat offset strong earnings in the second quarter.
On Apr 22-29, 2009, the bank issued Bt4b of TMB IT-One subordinated debentures with a coupon of 7% and interests payable semi-annually. The said debentures had the same characteristics as the ones to be bought back. The bank had a call option to buy back the bonds, callable after five-year maturity. Netting out the impact, the sale of TMB IT-One subordinated debentures to replace hybrid Tier-1 bonds with higher-than-expected proceeds is unlikely to affect the bank's capital adequacy ratio (CAR), which remains unchanged at 14.1% with Tier-1 capital of 10.6%.
Losses on sale of NPL/NPA unlikely to take a bite out of second-quarter earnings as much of them booked in the prior quarter
On May 7, the bank sold Bt15b worth of NPL and Bt4.4b worth of NPA to BAM in line with its business plan to spin off the problem loans. Of the total, Bt6b, Bt6.5b and Bt2b of NPL sold came from corporate, SME and retail respectively. The Bt2.92b loss was booked in 1Q09 and it is unlikely to impact the bank's 2Q09 operating performance. The sale took the bank's NPL and NPA down 20% and 26% respectively. NPL and NPA dropped 3% and 0.7% to 13.2% of the loan portfolio and 2.8% of total assets respectively.
Organizational restructuring still ongoing
The bank remains in restructuring mode with some progress made under its three-year business plan for 2009-11. We expect the bank's earnings to improve sequentially. However, we maintain our view that the bottom line will remain under pressure from organizational transformation this year. We expect a clearer recovery picture to emerge next year, and the bank would wipe out retained losses after preferred treasury shares are expired and converted into ordinary shares in May 2010. We believe the bank would resume paying dividends again for its 2010 performance.
We slightly ratchet up our 2009 profit forecast for the bank to Bt3.17b. Despite a provision reversal based on IFRS in 1Q09, the NPL coverage ratio fell to 60% after sale of NPL/NPA, below other big-cap banks and the industry average. We believe there is a need for the bank to set aside more provisions. We revise our price target slightly upward to Bt0.78/share from a previous price estimate of Bt0.72/share. We also raise our rating on TMB to 'TRADING' from 'SELL' based on strong positive news flow for the stock.
By Phillip Securities (Thailand) Plc. on May 13, 2009
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