AEON Thana Sinsap (AEONTS TB) is poised for an earnings improvement in the second quarter of FY25, driven by lower credit costs and gains from non-performing loan (NPL) sales. Maybank Stock Broking House has maintained a BUY rating on the stock and has raised the target price to THB160 from THB150, reflecting a valuation of 1.5 times FY25 estimated price-to-book value (P/BV) and a return on equity (ROE) of 13%. The firm expects net profit to surge 44% quarter-on-quarter to THB753 million in Q2, although a year-on-year decline of 10% is anticipated due to lower net interest income (NII) and higher operating expenses.

The extension of the central bank's 8% minimum credit card payment rate policy until the end of 2025 is expected to benefit AEONTS, which primarily caters to low-income earners. Additionally, the outlook for earnings in the second half of FY25 is optimistic, bolstered by increasing government spending and a minimum wage hike. The key risk to this outlook remains the potential for weaker-than-expected asset quality, which may impact future earnings.

In the second quarter, the bank's loan portfolio is projected to decline slightly as it shifts focus from personal loan growth to balancing its financials. Non-NII is expected to grow by 8% year-on-year, primarily driven by improvements in bad-debt recovery income and gains from NPL sales. A reduction in the cost-to-income ratio is anticipated due to strong growth in non-NII and effective cost management. The company is scheduled to announce its Q2 FY25 results on 7 October 2024.

Despite the expected rise in the NPL ratio on a quarter-on-quarter basis, the decline in credit costs should mitigate overall risk. Maybank Stock Broking House forecasts THB1.9 billion in provisions for the quarter, down 1% year-on-year and 7% quarter-on-quarter, translating to a credit cost of approximately 8.5% for Q2 FY25, compared to 9.1% in the previous quarter. While the NPL ratio is likely to increase due to a slow economic recovery and a smaller loan base, the company anticipates an overall improvement in asset quality during the latter half of FY25.

The upward revision of FY25-26 earnings forecasts by 1-4% reflects expectations for a recovery in profits in the second half of FY25. With AEONTS having set aside additional credit costs in response to the minimum credit card payment rate, the continuation of this policy is expected to further alleviate credit costs. Projections indicate that credit costs could peak at 8.1% in FY25, with a subsequent decline to between 7.8% and 7.9% in FY26-27. Notably, 80% of AEONTS's credit card customers are currently making only the minimum payments