Siam Commercial Bank

Siam Commercial Bank Plc (SCB)

Investment thesis: We maintain our BUY recommendation on SCB, based on: 1) sustainable loan growth through FY12, led by the corporate and SME portfolios, 2) continued strong fee income expansion, driven by fees related to loans and bancassurance, and 3) the lowest cost/income ratio in the sector of 43%. We expect its lending portfolio to perform the better than any of the other big-five banks this year, triggering a flow of earnings forecast upgrades and a re-rating.
FY12 loan growth target range of 12-14%: Following 22.1% YoY growth in FY11, SCB has set an FY12 lending expansion target range of 12-14%. The SME and corporate categories will make further strong contributions in this year (retail will also post expansion, but at a relatively subdued pace compared with FY11). We forecast more modest FY12 loan growth of 10%.
NIM guidance of not less than 3.0%: Given a stable interest rate trend and anticipation of good loan growth, SCB expects its FY12 NIM to exceed 3%, down just slightly from the 3.16% reported last year. Our FY12 NIM forecast is 3.0%.
FY12 LLPs to normalize: In the aftermath of the Oct-Nov flooding SCB increased its loan loss provisioning to Bt3.5bn, up from Bt1.5bn in 3Q11. Assuming no cataclysmic events ahead, the bank plans to cut its LLPs back to Bt1.5bn a quarter, or Bt6bn for FY12, down from Bt6.7bn last year.  Its YE12 NPLs/loans ratio target is 2.5%, down from 2.61% at YE11. At the end of last year, it had a big loan loss cushion ratio of 127%.
Efficiency remains good: SCB’s FY12 cost/income ratio target range is 43-44%, which would make it the lowest in the sector. The bank has pretty much finished its branch network expansion program. The successful cross-selling of financial products (chiefly bancassurance and mutual fund sales) through its branches has boosted the ratio. SCB’s fee income growth target for this year is 15% YoY, a deceleration from 27% in FY11, due to the much bigger base comparison created by last year’s expansion. Note that SCB’s FY11 cost/income ratio was 43%.
Outlook
Lending expansion play: Management has set an ambitious FY12 loan growth target range of 12-14%, to be driven by the corporate and SME portfolios. SCB indicated that lending expansion will continue through 1H12, but not at quite the same rate as in 1H11, due to intensifying competition. The main drivers in 2H12 will be big-ticket corporate draw-downs and the SME finance.
Note that FY11 loans outstanding rose 22.1% YoY—SME lending expanded 35% YoY, followed by corporate at 17% and retail at 22%. We maintain our FY12 loan growth assumption of 10%, which is considerably more modest than the bank’s target, as we anticipate that SCB will become more picky about who it approves high-yield credit to.
Fee income expansion of 15%: In tandem with its 12-14% loan growth target for this year, management guides that fee income (net fees & service income + gains from FX+ gross bancassurance sales) will expand 15%, a deceleration from the spectacular 26.8% rate posted for FY11. The drivers will be bancassurance/fund management and banking fees. Note that our model assumes FY12 fee income will rise 12% YoY.
NIM target set at not less than 3%: SCB targets an FY12 NIM of 3.0%+ (we forecast 3.0%). Stiffer competition for corporate business (which yields lower returns than other types of loans) is the main squeeze factor for NIM at the moment. Despite the BOT’s plan to levy new fees on bank deposits, starting July, in order to service the FIDF debt, management is confident that NIM can be sustained at 3% or more.
FY12 LLPs to normalize: In the aftermath of the Oct-Nov flooding SCB increased its loan loss provisioning to Bt3.5bn, up from Bt1.5bn in 3Q11. Assuming no cataclysmic events ahead, the bank plans to cut its LLPs back to Bt1.5bn a quarter, or Bt6bn for FY12, from Bt6.7bn last year.  Its YE12 NPLs/loans ratio target is 2.5%, down from 2.61% at YE11. At the end of last year, the bank had a big loan loss cushion ratio of 127%.
FY12 cost/income guidance of 43-44%:  SCB’s FY12 cost/income ratio target range is 43-44%, which would make it the lowest in the sector (our number is 44%; the FY11 ratio was 43%). The bank has pretty much finished its branch network expansion program (though it plans to increase it further to 1,150 at YE12 from 1,094 at YE11, already the most extensive in the country). The successful cross-selling of financial products (bancassurance and mutual fund sales) through its branches has boosted the ratio. Note that SCB expects its effective FY12 corporate tax rate to be 23%.
FY12 ROE is set at 17-19%: Given its strong loan growth profile and good OPEX management, the bank believes that its FY12 ROE will remain in the 17-19% range (it posted 18% for FY11). SCB anticipates that the implementation of the Basel III accord in 2013 will result in its headline capital adequacy ratio (CAR) being revised down by only 10-15 bps (its current CAR is at 14.5%). Thus, Basel III won’t have an observable impact on operations.