• Contraction in SME loans and weak growth of retail fee income to drag core operations
• Raised FY18F profit by 35% after including gain from TMBAM deal; cut FY19F profit by 9% on lower fee income and NIM
• Downgrade to NEUTRAL, lowered TP to Bt2.50 from Bt2.70, implying 12x FY19F P/E and 1x P/BV

Weak core profit due to drop in SME loans and retail fee income

CEO acknowledged it would be challenging to grow SME loans due to higher credit cost requirement after the adoption of IFRS9 in 2020. The bank has maintained target to offer mortgage loans to salaried workers to improve asset quality. In 3Q18, mortgage loans made up 24% of its loan book with 90% of the borrowers being salaried workers, and NPL ratio for these loans was only 1.57% compared to 3.39% for the industry. On asset quality, total NPL formation was stable qoq but TMB had reclassified weak loans as NPL to clean up its balance sheet. This pushed up NPL ratio to 3.14% from 2.71% in 2Q18. Looking ahead, credit cost should drop to 135bp from 4Q18 given high NPL coverage of 157% after Bt7bn extra provision in 3Q18.

Raised FY18F net profit after including gain from TMBAM deal but cut FY19F EPS on lower NIM and fee income

We raised FY18F net profit by 35% but cut FY19F profit by 9% after reducing NIM and fee income (details on page 2). We estimate fee income from mutual funds would drop by Bt50m per quarter starting 4Q18, following the sale of TMBAM. For bancassurance, fee income will drop due to adjustments to expenses in capital reserve for unit-linked products (Bt300m in 9M18 and expect Bt100m in 4Q18). Mutual funds and bancassurance fees account for 70% of net fee income and both fell 35% yoy in 3Q18. TMB plans to launch new products to offset the impact of weak profit margin of unit link insurances. But we believe it would take time.

Downgrade to NEUTRAL; cheap valuation but no catalyst

We cut TP to Bt2.50 from Bt2.70, after revising down FY19F profit. Although valuation is inexpensive at 0.95x FY19F P/BV, it would be difficult for the share price to outperform given weak core operations. OPEX could rise if there is a change in labor law related to employee retirement benefits in 4Q18.