AEONTS - Preview 2QFY24: Up QoQ, down YoY

2QFY24 preview. In 2QFY24 (June-August), we expect earnings to be Bt700mn, up 34% QoQ but down 17% YoY. The 34% rise QoQ is supported by: 1) an expected Bt160mn gain from NPL sales and 2) an expected 40 bps QoQ drop in credit cost to 8.74%. A QoQ ease in credit cost is due to slower write-offs after 1-2% of its debtors joined the Persistent Debt offer and front-loading ECL in 1QFY24 to accommodate a step up in minimum credit card payment to 8% in January 2024 from 5% in 2023. The 17% YoY fall expected is due to YoY higher ECL and lower net interest income. Loan growth was muted in 2QFY24 due to a tightening in credit policy. AEONTS expects to release 2QFY24 result on October 7.

Benefit from cash handout with management overlay for flooding. AEONTS has ~10% exposure to debtors with monthly income of under Bt10,000, some of which hold state welfare cards and/or are disabled and thus are in the 14.5mn eligible for the government’s cash handout of Bt10,000 each starting on Sep 25. AEONTS estimates 300,000-400,000 of its 10mn debtors have monthly income of ~Bt8,000 and are thus likely to hold state welfare cards. It has some management overlay for the current flooding and also Bt200mn management overlay remaining for the step up in minimum credit card payment to 10%, which has been postponed from the original schedule of 2025. We maintain our credit cost forecast at 8.25% (+43 bps) in FY2024.

Squeezing NIM. Despite factoring in policy rate cuts of 50 bps in 4Q24 and 50 bps in 1H25, we expect NIM to narrow 12 bps in FY2024 and 16 bps in FY2025 as we expect a rise in cost of funds in FY2024 and a fall in loan yield in FY2025 as a result of: 1) the BoT’s persistent debt (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.

Trim FY2024 loan growth. We trim our loan growth forecast to 2% from 3% to fine tune with the negligible loan growth expected in 2QFY24. Its FY2024 loan growth has been dragged down by the hike in minimum payment on credit card loans. The company penetrated into used car HP and title loans in FY2024.

Good growth in non-NII. We expect non-NII to grow 19% in FY2024 from a 20% rise in bad debt recovery and gain on NPL sales in FY2024. It sold NPLs in 2QFY24 and will sell more in 2HFY24. It also plans to enhance fee income from insurance brokerage via adding one more partner and starting an AMC.

Maintain Outperform with unchanged TP. We maintain our Outperform rating with an unchanged TP of Bt158 (based on 1.5x PBV) on a catalyst from the benefits from the cash handout and the potential policy rate cuts.

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.