Siam Commercial Bank

Siam Commercial Bank Plc (SCB)  

SCB’s solid operating trend in Q2 2012
SCB’s solid operating trend in 2Q12 was masked by its LLP build-up, which led to a 2% earnings shortfall. When it comes to asset quality, management could be just hoping for the best but preparing for the worst. In any case, strong profits should arm it for the unexpected. We tweak our FY12-14 forecasts up for higher loan growth and NIM, offset partly by higher credit cost assumptions. In light of the positive business momentum, we assign a higher P/BV target of 3x (prev. 2.8x), derived from GGM assuming 17.5% ROE, 11.7% COE, 8.7% growth. Maintain Outperform. 
Strong at PPOP
SCB’s 2Q12 net profit came in at THB10.1bn (-3% qoq, +24% yoy), 2% below our and market expectations. While pre-provision operating profit continued to improve qoq, a surge in loan loss provision robbed the bank of another quarter of record profit. High loan growth (9.4% YTD) was led by lending to car buyers (+22%), SMEs (+14%) and homebuyers (+12%).
NIM continued to widen and the cost ratio barely moved.
Forecast revisions
We raise our FY12 loan growth forecast from 15% to 18% and NIM by 7bp to 3.18%. These are partially offset by a 10bp rise in our credit cost estimate to 55bp. The net result is a 2% increase in our EPS forecast. Our forecast assumes provisions ofTHB2bn/quarter in 2H12 versus the bank’s guidance of THB1.5bn.

Preparing for the worst?
SCB’s THB20bn loan (1.4% of loan book) to steelmaker SSI has been the subject of concern. The bank may have to make THB4bn-8bn provisions if this loan turns non-performing (assuming 60-80% collateral value) or if it goes into restructuring (assuming NPV loss of 20-40%). As at end-1Q12, SCB held an excess reserve (over the minimum amount required by the Bank of Thailand) of THB15bn, which should more than cover the incremental requirement for the SSI case. However, the bank could look to use extra profit growth to rebuild its loan loss reserve cushion.