AEONTS - Gradual ease in credit cost ahead

Preview 3QFY24: So-so. In 3QFY24 (September-November), we expect earnings of Bt707mn, down 14% QoQ (no gain on NPL sales) and flat YoY, with a 29 bps QoQ ease in credit cost (+31 bps YoY), thanks to the government’s Bt10,000 cash handout to vulnerable groups. Loans are expected to be stagnant as it has tightened its credit policy. We expect NIM to squeeze by 13 bps QoQ (+31 bps YoY) in 3QFY24 due to the mandated cut in lending interest rate by 10 pct for loans under the persistent debt (PD) measure (around 4% of total loans).

Expect gain on sale of NPLs in 4QFY24. AEONTS is planning to sell NPLs in 4QFY24 (December-February) and we anticipate it will book a gain of Bt170mn from the sale (on par with the 2QFY24 figure). This gain will help raise 4QFY24 earnings 18% QoQ but we expect a fall of 24% YoY due to higher ECL from the lower-than-usual ECL in 4QFY23.

Gradual ease in credit cost ahead. We expect credit cost to come down in 2HFY24 and FY2025 on lower NPL inflow as a result of the Bt10,000 cash handout, a hike in minimum wage to Bt400 (up 2.9% on average) in 2025, and the PD measure, to which ~4% of its loans are exposed. It has management overlay LLR of ~Bt400mn, comprising Bt200mn to cover the impact of flooding (actual impact was limited) and Bt200mn for the step up in minimum credit card payment to 10% (postponed from the original schedule of 2025). We expect credit cost to continue to come down, to 8.4% in 3QFY24 and 8.03% in 4QFY24, from 8.69% in 2QFY24 and 9.14% in 1QFY24. We expect credit cost to fall to 8.45% (-10 bps) in FY2025 from 8.55% (+73 bps) in FY2024.

Cut loan growth forecast. We cut loan growth forecast to 1% from 3% in FY2024 and 2% from 4% in FY2025 to reflect the prolongation of a stricter credit policy. According to the company’s IR, loans were stagnant as of 3QFY24, well behind its target growth of 3-5%. We thus cut earnings forecast by 2% each for FY2024 and FY2025.

Narrowed NIM. We expect NIM to fall in 2HFY24 and FY2025 as a result of: 1) the BoT’s PD measure and 2) cash back of 0.5% interest on credit card loans in 1H25 and 0.25% in 2H25 for debtors who make the 8% minimum repayment. We forecast an 18 bps narrowing in NIM for FY2025.

Maintain Outperform but cut TP. We maintain our Outperform rating on the back of an expected gradual earnings recovery in tandem with a gradual ease in credit cost and sizable management overlay. However, we cut TP from Bt158 to Bt149 (based on 1.35x PBV for FY2025) as we de-rated our valuation to reflect the lower loan growth potential.

Key risks: 1) Asset quality risk from uneven economic recovery, 2) regulatory risk from the BoT’s household debt measures, and 3) ESG risk from market conduct.