Consumer Finance: Overhangs On Asset Quality And Price War Have Been Eased.

We believe the sector’s earnings should bottom out in 3Q21 as the government has partially lifted the second lockdown measures in early-Sep 21, and most of the overhangs have been eased. However, valuation is not cheap. Hence, we maintain our MARKET WEIGHT rating and recommend investors to selectively buy stocks that have a
strong earnings growth outlook.



• Additional debt aid programme to curb NPLs. The Bank of Thailand (BOT) has provided an additional debt aid programme which includes measures such as expanding the maximum credit line for personal loans and credit card loans. The key measure in these additional aids for consumer finance operators is the extension of the relaxation in distressed loan classification. BOT announced that it would be extending the deadline for relaxing loan classification from 2021 to 2023. Hence, the overhang in the rapid increase in NPL ratio and credit cost has been removed. In return, consumer finance companies have to provide debt relief programmes to those that are heavily impacted by the COVID-19 pandemic, and the impact of this should be much less severe to the sector’s bottom-line than a spike in
provision expenses.

• A second ceiling rate cut in consumer loans is unlikely. Regarding Prime Minister Prayut’s request for a second ceiling rate cut in consumer loans products, BOT’s chairman has stated that a second ceiling rate cut might not be the best solution to help borrowers at the moment as consumer finance operators are currently taking a more conservative lending approach. Based on the first ceiling rate cut, rejection rates for credit card loans and personal loans have increased by 5-13% and 4-10% respectively. This could lead to borrowers depending on loan sharks, which charge interest rates of up to 200%.


• Competition in auto-title loans has softened. The intensity of competition in auto-title loans has softened considerably compared with 1H21. Fast Money (FM), a JV company between Srisawad (SAWAD) and Government Saving Bank (GSB), seems to have eased on cutting its interest rates. FM did not extend its special promotion that offered an interest rate of only 11% for motorcycle title loans, which had expired on 31 Aug 21. FM is now focusing
on its new promotion that allows borrowers to pay only interest payments, with the principal to be paid in full with the last instalment (balloon payment). However, the interest rate for this promotion has rebounded to 18%. Meanwhile, Muangthai Capital (MTC) has increased its motorcycle interest rate from 15% to 16% in Aug 21.


• Maintain MARKET WEIGHT. The sector is trading at 22x 2022F PE, which is +1SD to its 5- year mean. We maintain our MARKET WEIGHT rating and recommend that investors selectively buy stocks which have a strong earnings growth outlook.

• Our top pick is TIDLOR. We like Ngern Tid Lor (TIDLOR) because it has the strongest earnings outlook with a 26.5% CAGR over 2021-23 (vs the sector’s 13.7% during the same period), supported by: a) rapid growth in the insurance brokerage business, b) lower provision expenses on the company’s robust asset quality, and c) improvement in cost-to-income on normalisation of IT investment and economies of scale.