Banking sector

Banking sector

- 4Q12F: Expect seasonal acceleration in loan and fee & insurance income growth
  but seasonal hike in opex to lead to a QoQ fall in bottom line.
- 2013F: Expect earnings growth to moderate, with slower growth in loans and fee
  & insurance income and a slip in NIM with a plus from easing in cost to income ratio, credit cost and tax rate.
- Top picks: KTB and KBANK

3Q12A recap. Earnings for the Bank sector in 3Q12A rose 23% YoY and were flat QoQ,
reflecting: 1) sustainable good loan growth at +3% QoQ, +9% YTD, led by retail loans, followed
by SME and corporate loans; 2) 2 bps QoQ narrowing in NIM to 3.05% due to rising cost of
funds (+4 bps QoQ) and a falling loan to deposit ratio on aggressive fund-raising to support
future loan growth; 3) small 3% QoQ growth in net fee & insurance income; 4) easing cost to
income ratio; 5) stable asset quality with insignificant rise in NPL amount and slight increase
in LLR coverage to 116% from 114% at 2Q12.

4Q12F: Seasonal strong top lines but weak bottom line. We expect a seasonal QoQ fall in
4Q12 earnings on the back of a seasonal hike in opex and rising provisions for some banks (i.e.
KTB and TCAP), though we envisage acceleration in loan growth (13% full year vs. 9% 9M12) on
seasonality of working capital loans and also high season for fee income, particularly from
bancassurance, credit card and mutual funds. 4Q12F NIM for all except TISCO, KK and TCAP is
expected to slip due to the negative implication of the policy rate cut.

Easing back to moderate growth in 2013. We expect earnings growth to slow to 20% in
2013F from 28% in 2012F, caused by: 1) fall in loan growth of 10.6% in 2013F from 13.4% in
2012F on slower private investment growth and domestic car sales after the expiration of tax
incentives; 2) 4 bps squeeze in NIM, under pressure by interest rate cuts and rising deposit
competition; 3) slower fee & insurance income growth to 15% for 2013F from 18% for 2012F
due to base effect; 4) easing cost to income ratio on slowing opex growth; 5) lower credit
cost; 6) lower income tax to 20% from 23%.
 

KTB and KBANK as the top pick. The share price correction triggered by the policy rate cut
has made bank valuations moderately undervalued. We keep KTB and KBANK as our top picks.KTB: 1) Its recapitalization overhang is removed, giving it the ability to remove the LLR
overhang, 2) Easing asset quality risk following SSI’s capital call and 3) the best play on the
theme of accelerating public investment. KBANK: 1) strongest growth in fee & insurance
income; 2) improvement in cost to income ratio upon completion of the IT upgrade and
3) best play on SME loan demand recovery.