AEONTS – 1QFY23: Big miss on ECLs

Far worse than expected on larger provisions, 1QFY23 results exhibited weak loan growth, narrowed NIM, rising credit cost and YoY higher cost to income ratio. We cut our earnings forecasts by 20% each for FY2023F and FY2024F. We maintain our Neutral rating with a cut in TP to Bt180.

1QFY23: Big miss on ECL. 1QFY23 net profit (March-May) fell 45% QoQ and 11% YoY to Bt617mn, 36% below estimates. The miss was mainly due to larger expected credit loss (ECL).

Highlights:

• Asset quality: Credit cost was up 22 bps QoQ (+61 bps YoY) to 8.92%, much worse than we anticipated. NPL ratio rose 22 bps QoQ. LLR coverage fell to 184% from 190% at 4QFY22. The deterioration in asset quality was due to the ending of moratorium program for customers impacted by COVID-19 from December 2021.
• Loan growth: Slower than expected, loans were stagnant QoQ (+1% YoY), comprising of a 1% QoQ contraction in personal loans, a QoQ stagnancy in credit card loans and a 4% QoQ growth in HP loans (motorcycles and used cars in Thailand and electrical appliances, mobile phones and others overseas). IT implemented a more stringent credit lending policy (mainly on personal loans and HP) in 1QFY23 due to risks from the slow recovery of some business sectors, including the export sector.
• NIM: NIM narrowed 15 bps QoQ due to a 12 bps QoQ slip in yield on loans and a 12bps QoQ rise in cost of funds.
• Non-NII: Non-NII fell 4% QoQ (-6% YoY) due to an 11% QoQ (+14% YoY) fall in bad debt recovery.
• Cost to income ratio: Seasonally down 163 bps QoQ but up 92 bps YoY to 41.23%. Opex eased 6% QoQ on seasonality but was stable YoY, reflecting well-controlled opex in line with its digitalization plan.

Cut earnings forecast. We cut our earnings forecast by 20% each in FY2023 and FY2024 as we raised our ECL forecast and cut loan growth forecast. In FY2023, we expect earnings to fall 10%, with 5% loan growth, a 60 bps fall in NIM, a 15 bps rise in credit cost and 15% growth in bad debt recovery.

Maintain Neutral with a sharp cut in TP. We stay Neutral with a cut in TP to Bt180 (1.8x PBV or 13.1x PE for FY2023). We see no share price catalyst in the immediate future on expected low loan growth, falling NIM and high credit cost.

Key risks: 1) Asset quality risk from high inflation, 2) NIM risk from uptrending interest rates and 3) regulatory risk from the BoT’s plan to reduce unnecessary borrowing via unsecured loans in order to ease household debt.