Bank Sector
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No loan and deposit rate reduction foreseen from this round of RP cut OVERWEIGHT
Index Sector 504.78
Market cap (B bn) 2,005.21
- MPC cuts policy RP 1-day 0.25% to 2.75%
- No loan and deposit rate reduction foreseen in this round
- Maintain Overweight. KBANK and TCAP are top picks
- MPC cuts policy RP 1-day 0.25% to 2.75%
The Monetary Policy Committee (MPC) decided to cut the policy interest rate
(RP 1-day) by 0.25% to 2.75% yesterday (17 October) on increasing
concerns over effects from the world economic slowdown on the Thai
economy. The implementation of an easy monetary policy through the policy
rate cut is consistent with other countries worldwide. At the same time, there
is the hope that the BOT would stimulate domestic economy, especially
consumer demands and investment which will recover as a result of the low
policy rate.
No loan and deposit rate reduction foreseen in this round
We believe that in the short term there will not be reactions from local
commercial banks to this round of RP 1-day rate cut in a form of loan and
deposit rate cut. This is because many banks are bearing high funding cost
from aggressive deposit raising in the past. According to recent data from the
BOT, loan to deposit ratio or LDR (B/E excluded) at end-August 2012 of the
overall banking sector stood high at 95% (it would be 91% if including B/E)
although it already dropped from 108% at end-2011. The high LDR resulted
from aggressive deposit raising (with the growth of 22.4% from end-2011,
the record high in several tens of year) compared with the loan growth of
only 8.4% from end-2011, or an excess liquidity of B1.77tr due to the
following reasons: 1) a replace of B/E with deposit as the BOT’s collection of
B/E issuing fee for the first time at a rate of 0.46% has influenced
commercial banks to turn to raise capital through deposit instead of B/E, and
2) a preparation of high liquidity of reserves for loan issuance in 2013 as well
as disbursement of already-issued loans. Consequently, with the rising fund
cost from rising competition in deposit raising, we believe the banks will not
reduce their interest rates in this round. However, if any bank decides to cut
the interest rates to respond to the government’ policy, other banks might
subsequently cut their interest rates, though limitedly such as only 0.12 –
0.125% which is lower than the RP rate cut, in order to keep their market
share. Accordingly, the interest rate cut will not affect NIM of the banking
sector during the interest rate downtrend (at every 25bp of decrease in NIM,
net profit of the banking sector will decrease by 6-7%). Nevertheless, if the
BOT keeps the loose monetary policy at its next meeting on 20 November,
there will certainly be the interest rate cuts by the commercial banks then.
Maintain Overweight. KBANK and TCAP are top picks
We assign OVERWEIGHT for the sector. Although the current 2012’s PBV of
the Thai banking sector is 1.9x, slightly higher than the regional average of
1.5x, it is still lower than PBV of above 2.0x of leading banking sector in
Indonesia, Malaysia, and the Philippines. With drives from strong GDP growth
which has been supported by the government investment to push forward
private investment, we believe that in the view of foreign investors price of
the Thai banking sector still has a chance to be re-rated to equal to PBV of
top regional banks, especially for big banks. We select KBANK and TCAP as
the top picks.
