TMBThanachart Bank Public Company Limited (TTB-R.BK) Earnings Call Transcript & Summary

[Audio Gap] But bearing in mind that one of the most important issues during COVID is not just only to launch the new product, it is also to make sure that we manage the risk properly. So with good execution, a lot of reorganization in preparation to handle troubled customer, we see that the trend is improving to deploy that, we decided that we should put more provision instead of led the onetime benefit from well-managed risk costs in Q4, and put that into management overlay to prepare for this year where Central Bank will stop the forbearance benefit by the end of the year. I will talk more about that in the next few slide. Based on this one, this is the current definition which I will stop sharing the [ EBT ] based on this concept, maybe from next quarter onwards. Why? Originally, it is Central Bank who will come up with standard package that the bank must offer to clients during recovery. So all the bank provide information to analysts and investors that how big of their portfolio that customers seek support mostly based on standard program. Now those kind of concept is gone. Bank must forecast on the sustainable restructure to support clients. We see that 80% of that 12% need or like modification. However, we have to look at the risk, and also look at the trend of customers who see support from banks. Take for example on the next page. When we look at what customers seek for support, we look at what type of support that they request. Maybe I should go to next page, and then come back to this page again. In order to systematically affect the severity of impact to the customer that were hit by COVID, we offer them savings scheme. As you can see, start from the very light one, that customer pay interest and principal fully after the support period. The only thing that they can make installment is the actual interest during the period that they seek for help. The second scheme, it is the loan extension, meaning that they still pay interest fully, but they have to extend the loan. So you can see that on staging and PD, we start to apply closer and closer to the normal situation. Take for example, the scheme #4, where customers can only pay interest partially and have to push back on the principal. Under Central Bank forbearance support, we can still call this group of customers as stage 1. But today, we decide to already move more than 50% into stage 2 and 3. And the rest, even they are in stage 1, and we believe that they can come back and pay it not only very soon, we start to shift their PD up. So the list continue on that and for those who even ask for more support, we would shift them into stage 2 or 3 and up shift PD right way to avoid the big risk cost that would hit us when BOT lifted forbearance support. With that fact, may I go back to Page 7. We decided to move back corporate customer, for example, who acts for scheme 2, 3, which they cannot go back, and pay normally, and seek for small support. Back to loan under relief program. Again, if we use normal testing, this corporate plot report would be -- would not be necessary. So moving onward in order to prepare for the withdrawal of forbearing support from Central Bank. Our direction is that we will move to the normal staging right? Even BOT come out with the special support deal that if the bank give principal had cut or accrued interest had cut, the bank that give that much of the support to customer would be eligible to keep those customers as stage 1. We will not do so. We will start to apply normal practice that if customers who are severely impact to the point that they need principle had cut or accrued interest, wherever we will [ downgrade ] them. So the [ recall ] of how much relief in the part would not be long-term valid. So that would be the direction moving forward for this year, meaning prepared for coming back to the normal growth regulation. Based on that fact and direction, here is the result for last year. As mentioned, our goal is to play conservative during the time that we have to focus on the equation. We don't want to grow loan against the headwind, and spend our precious resources on integration, and try to preserve NIM by reducing or optimizing our funding and deposit base. So by year-end, we shrink our book a bit in order to preserve NIM, and prepare for future growth when we can better manage COVID and we become clearer about COVID. We can manage to close the year with improvement in fee income. And also with the strict discipline, we can self-fund our integration cost through the cost containment initiative, which result in good cost income ratio. And with that stringent direction, as I mentioned and continue to sell NPL and write-off to make sure that outstays free and remain at low level so that we can continue to upgrade customer that would not be able to survive post COVID. So our NPL on Stage 3 at the end of year stay at 2.8% lower than our original expectation because of that discipline that I mention. And the risk cost stay were within the target that we expect based on a lot of initiatives that would be put in place during the year. So may I pass on to our CFO to walk you through the details of what had happened last year before we talk about the direction moving forward.

Thank you, CEO. So maybe with this slide, I would like just to share that our loan year-to-date, as CEO has mentioned, declined 1.5%, but that is because of the selected lending that we have done to preserve the quality of the asset. Nevertheless, in Q4, we managed to grow the loan portfolio, particularly in terms of the auto HP portfolio with our -- when we see the [indiscernible] and we -- with our strong relationship with the dealers and the [indiscernible] for the used car, it happens that we managed to get the recovery. And because -- and we have done very well in this model expo in Q4. And we will have another model show in Q1. So we expect that the growth will continue. Also, we managed to grow the retail [ unsecured ] and also home loan as planned. In terms of the commercial loan, we continue to grow the portfolio, but we strengthened this throughout the supply chain network. Lastly, on the loan side that I would like to share is on our support to our customers with the asset warehousing, we've been talking about this in the past 2 quarters. Now the program that we have achieved during Q4 is about THB 2.6 billion. Hence, with this asset warehousing, the loan portfolio reduced with this amount, but the NPA increase. So that is on the loan side. Next, I'll move to the deposit. With the corresponding strategy of the loan growth and also managing of the deposit cost, we focus on our work of 3 products, which is transactional. Year-to-date growth is 39% because we are paying -- we are paying no interest on this account. Also, we grow the [ TD ] mix here in this quarter. We are using the up and up product program. This would lead -- we get a good appetite from our well customer and also noncustomer. And this paves the way for us to mitigate against the risk of interest rate rise in particularly why we are expanding our auto portfolio, which is a fixed rate loan. Our non-fixed accounts still play the good purpose of giving the flexibility for the customer to invest with high -- better return and then can switch to the investment return -- investment product that we offer, and we see that. So the mix has been -- has changed a little bit, but that is based on the strategy that we have planned for. Next is on the liquidity. Still very strong position in liquidity. The LDR is 102.5%, LCR is 174%. This increased from the 167% of last quarter. The cost deposit is on the next slide. We asked with the plan, we managed to year-on-year decrease the cost of the deposit by 33 basis points. On the contrary yield -- the loan yield also in the negative of 42 basis points year-on-year. Nevertheless, on the next slide, you see that our NIM for the year is 2.97%. It's a negative 3 basis points year-on-year. The net interest income on year-on-year is declined by 5.2%. But based on the strategic direction that I have to share with you. Next will be on the non-NII. For the full year, we managed to get the non-NII to the average asset at the 0.82%, and this is according to the guidance. This is the lower bound. We did one thing in Q4. This is the reclassification is of the bancassurance incentives that paid to this far. Before this, it was presented asset fee expenses, but to correctly report the nature of these expenses, we reclassified to the HR expenses. So this is the overall picture that I would like to highlight here. On the next slide is the fee performance. On the below chart, you will be seeing that from the commercial fee business. We are growing trade finance and FX by 16% year-on-year. The legal -- LG fee at 7% year-on-year. The loan-related fee is declining by negative 6%. This is because of the -- our strategy on selective lending. Nevertheless, if you see on the top chart on -- about the bancassurance fee, we managed to grow loan, particularly the auto portfolio, hence, the bancassurance fee increased Q-on-Q 19%. We also grew the retail bancassurance also. On the mutual fund, throughout the year, it's been a positive quarter, closed out quarter. So -- but it annual or all in all the year closed with 9% increase of the mutual fund fee. Next is on the operating income. In aggregate, the net operating income reduced negative 5% year-on-year. However, the total operating expense also declining negative 3% year-on-year. This THB 31.2 billion expenses here is inclusive of the integration expenses, about THB 2.6 billion in there. With that, we still -- because of the cost efficiency that the CEO also has mentioned, we managed to self-fund this integration expense, and we are ready to move on with the growing of the business in 2022. The C/I ratio, if you were seeing the Q4 of 48% there, that is a result of also the reclassifications from the fee to the HR expenses. On the average year, we are reporting 47.6% C/I ratio. So next is the PPOP, I will skip, but maybe I will spend some more time on the ECL. You'll be seeing on this slide that in Q4, our risk cost is THB 5 billion. In the past 3 quarters, it's THB 5.5 billion. Was it because that we want to the uptick the net profit or not I would say that is not the intention. But as CEO also has mentioned, due to a few things that we have done with the already selective loan growth to preserve asset quality with the collections and the recovery of the written-off portfolio and the corporate portfolio sales. We managed to have a low floor to Stage 2 and 3 in Q4. Nevertheless, we -- what we did, therefore, is take into consideration the review of the ECL model assumption in terms of the PD and the LGD to reflect the historical data that we've got from this COVID post relief customer. Hence, we adjust the model. And so now I can say that we have the guiding principle that is most specific systemic approach in providing for our post-COVID relief customer. And also, we take the forward-looking assumption, looking in terms of the economic scenario having the Omicron and the uncertainty of what would lies ahead of us. So we decided to put up more management overlay to protect -- to cover the COVID. And the Bank of Thailand has also came into audit us. I can share that they are, satisfactory, with what we have been doing so far. So we believe that the provision that we have at the end of the year would be enough, and would already got against the uncertainty that we are seeing in 2022. The profit of the quarter was THB 2.8 billion and the year-end profit is THB 10.474 million. This is increasing year-on-year by 4%. If we look also into the loan -- the LLR coverage by stage. In Q4, as I've mentioned, we have done a number of things in terms of looking into the ECL model assumption. You will see that we increased the coverage of the stage 3 and stage 2, now it is 47% for stage 3, and almost 20% for stage 2. This has increased from the Q3. We also track -- on the next slide, we also track the accrued interest. You will be seeing on the orange that the accrued interest of the stage has been coming down. This is due to the written off and the sales of the portfolio, but the accrued interest of the stage 1 and 2 also remain, I would say, flat Q-on-Q. This is because we continue to use the conservative EIR assumption so that it would not be overstating our interest income. So next slide, you will see on this slide that the stage 3 balance has been coming down from THB 44.4 billion to THB 42.1 billion or 2.8%. Also, the stage 2 percentage has come down from 7.9% to 7.4%. This is based on the active portfolio management that I have mentioned. Last slide that I want to share is our capital. The Tier 1 capital shown in this slide is 15.3%. This is excluding the first half of the this year profit. If we were to roll in, the Tier 1 will be 15.6%, so we believe that this capital positioning is sufficient to go against the uncertainty that is coming in this year. So I pass back to CEO.

Okay. Let's talk about the future directions. As already mentioned, the first 2 years of the new TTB. We already completed that successfully. Now we become the neobank rank. So there are 3 priorities: First, we have to deliver revenue synergy on top of the cost and balance sheet synergy that we have done quite well. Secondly, we need to invest and continue to invest in the digital platform so that we can transform this bank to unlock the value of large customer base that we have. And we want to be one of the top 3 digital platform, which I will walk you through the details later. And thirdly, in order to grow and unlock the bank from the huge customer base that we have, we need to reorganize so that we can forecast and unleash the potential that we have. Let's start the first one. You can see that this is a number that we shared before we merged with Thanachart bank that we see the potential of the synergy into 3 areas: Balance sheet synergy, revenue synergy, and cost synergy. On the balance sheet synergy, it's about better managed asset and deposit because each bank has their own strength. So with balance sheet optimization, we should be able to review cost improve NIM. On that part, we have done very well. We managed to bring down deposit costs very sharply, and get rid of the low yield asset at the same time. So the progress to that is already beyond what we originally expected. On the other part that we have done quite well is on the cost synergy. We managed to bring down almost 260 branches in 2 years, brought down more than 4,000 staff with the early retirement package, and we reduced marketing expense because 2 brands become 1. On that one, on the first 2 years of this journey, we already can complete more than 50% of our milestone. The last thing that still remains the challenge is revenue synergy because of the COVID and because we get up by the integration initiative. We cannot execute many initiatives during the very first stage. But as you can see from the graph that is by [ design ] as well, that the revenue synergy would come in after we complete the integration. So move on to next page. Digital would be the key to unlock revenue potential. We see that digital banking at the initial stage is about reducing cost, giving convenience to customers. But the more mature digital bank should be able to help deepen customer engagement through personalization. So mobile banking should be just like your mobile phone meaning that even we use the same model, the app and the way the customers use mobile phone is different, the app is different. So the new app that we will launch will allow personalization, recommendation, look and feel, that would care better to watch each individual customer. With that, a bit more engagement with the customer, we hope that we would be able to generate more sustainable income. Many product and service will turn from digital as a supporting channel to become digital first and to the point that could become digital only, meaning that we would not require traditional channel to serve or to deliver that product to the customer anymore. Also, we would like to use this digital banking to create new business ecosystem, which I will walk you through that a bit. Last year, while doing the integration, we do not pause our business initiative. Corporate segment that got it less by the integration project, we continue to revamp our digital capability. We launched new internet banking, new mobile banking for corporate and supply chain initiative that help enhance engagement with our customers, create new business model and also bring in deposits at low cost. This year, on the next page, we will launch our new mobile banking platform, which will not only be just the new UX/UI. As mentioned, it will create a different level of engagement. Maybe I would not spend too much time on this one. After the launch of this product, we can come back and share with you in more details later. But on this one, surely with the goal to change the engagement level with the customer, and not only add the customer at a digital level, we would like to change engagement at the ecosystem. Take for example, we have 1 million customer who pay a monthly installment for their new car, used car that borrow money from us. We also have a renew [indiscernible], you have to pay insurance, you have to pay fine, you want to sell a car. So we also have those players in our ecosystem. So through this mobile banking and through the new business initiative that we will launch sometime this year, we will connect those ecosystem together to deploy that a customer can even sell and buy new car through network of our partner. So that is just one example that digital will play a more important role in creating a new business model that become digital-first, now digital as supporting channel. In order to achieve this on the next page, we need to transform between the bank, not having subsidiary that could lead that change. But it also does not mean that we will not create subsidiary to take certain initiatives. So it would be the mix of price coming from the inside and also creating the required subsidiary to take certain initiatives. The key thinking is, we believe that even it will become digital bank, our culture and the size of our organization, we can still operate at a midsize bank mentality, meaning that we are not to be to create a change from the routine. With that, we can create end-to-end agile way from multiple unit along the evolution in the organization, to create new service, new product from the inside and increase our digital capability. So this year, next page, please, we cleared a unit called TTB spot, we would be the spearhead to create our digital product and service. This will be the new unit that will not only enhance rational product or service at the bank to become digital first delivery to clients or even digital-only. This unit will also help achieve new business that we call beyond banking, of which we will share with you later when we launch this service to clients. Talking about subsidiary. If we look at TTB business, we can separate into 2 parts to preserve the current business model and asset value, and to unlock and enhance current business model. So we can separate subsidiary into 3 areas that we will be setting up already, some already set up. The first area is bad bank management. As we know, COVID hit banking does pretty quite hard. So we still have issues that remain to be managed. It is important to have unit that focusing on this particular matter for the bank. Last year, we created a subsidiary called PAMCO to be asset management company have our bad asset, so that they can manage to deploy that one day we can even sell this company and unload discrete asset to third party so that we do not need to consult, and then create pressure on reserve and things to the bank. Second area would be the unsecured loan, which I will walk you more into details. It would help a lot, and create the revenue synergy that we have. And the third area is secured loan. Because TTB would like to become more of a retail bank. So it is important to have a dedicated unit to focus on secured loans and unsecured loan. And this would help unlock the value from the customer that we have. On this one, it is the summary of what we already have based on this strategy. Last year, we already acquired 10% of Thanachart Securities and Thanachart Insurance. There will be strategic partner so that we can have full suite offering to our own clients. TTB broker is something that we achieve from the merger of the 2 banks. [ TT Broker ] play important roles in offering insurance products that come from an insurance company or major insurance company in Thailand by bundling with the product and service that TTB already offers to clients. We have the goal to grow TTB broker to become top 5 in the insurance brokerage business. Last year, TTB broker has done pretty well based on this direction. Phahonyothin Asset Management or PAMCO, as already mentioned, the first asset class that already transferred and will be transferred more to PAMCO is the NPL and written-off of corporate customers. The next one, TTB consumer will be the new unit that we will set up and launch within the first quarter of this year, and the goal is to focus on unlocking the business that we can get from starting from existing customers, the 10 million customer that still use us mainly as a mono product, which I showed you the number later. And we will also set up a new subsidiary to help unlock the value in the future period. Take for example, the subsidiary to help unlock the secured loan business, and also to help manage in terms of optimizing our funding structure and funding costs. I would like to zoom in a bit into TTB consumer. That's why we would like to do this. You can see that by looking at the current market share. We have a very sizable market share on auto loan business and home loan. However, our unsecured loan is still much less than fair share. With the current setup, it would be difficult to grow this business, but by setting up TTB consumer with the right focus, we believe that we can grow this product, starting from penetrating onto our own customer base. And it is not just a dream because we already pilot launched this initiative, starting from middle of last year when we completed the EBT, and we've seen very promising results from the spending from the recognition and awareness from clients in the market. So in 2022, we will form TTB consumer to become sales organization first and prepare to move asset, and system, and people. So that at the end, it would be the full-stack company and with opportunity that we would be able to IPO in the later stage to spin off and unlock value. Last but not least, this is something that we do it by heart, not to hunt for the reward or to be recognized on any international program. We believe that sustainability is the key to our business. So we -- this is what we divide our sustainability program into business, corporate governance, environmental, and social. I will not walk you into details because this is -- can be [indiscernible] and we have the whole package if you interest and you can contact us that what we have done so far. On the final page before we go to Q&A, this would be the guidance for this year. As you know, Omicron is still the key risk to almost every country, including Thailand, we opened up the country for a month and then we have to close again. Hopefully that we can reopen again, meaning that the business enrollment still -- will still very fragile, and I believe that it is still important to play a conservative in growing assets for this year. So our loan growth and deposit growth would be on a very selective basis on the loan growth. And on the deposit growth, we need to start growing long-term deposit so that we can hedge against the rise in the inflation, and our cost will impact the interest rate increase maybe sometime at the end of this year. Meaning that the NIM would be quite stable because we need to grow more on the long-term deposit even we can grow assets with a higher yield, that would be offset by the rise of deposit cost a bit. The fee income, I believe that it still remain quite challenging because of the strict guideline that still be introduced by the government to ensure that we can live quite a normal life and do not require lockdown. So it would not be easy to operate as normally for banks. Again, we need to invest on IT and digital capability, meaning that the cost would not go down sharply this year. But on the future year onwards, once we finish the investment program, and also the precious client location that would be reduced very significantly next year. We believe that the cost/income ratio will start to improve very significantly from 2023 onwards. But for next year, it's -- for this year, I mean, it will still require certain investments so that we can grow healthily and sustainably. On stage 3, as I mentioned, we intend not to use forbearance by Central Bank. We will start to downgrade so that we will not first fit the policy lift that would happen by year-end. So that would rise a bit and credit costs will remain quite elevated during this year, even lower than last year before going to the normal level like 120 basis points, which is our aspiration in the future year. So that would be the summary of what I would like to share and would like to open for Q&A. Thank you.