Siam Commercial Bank

Siam Commercial Bank Plc (SCB)

Investment thesis
We feel confident in SCB’s FY13 earnings outlook, premised on: 1) a strong loan growth profile with scope for upside, 2) efficiency improvements that have squeezed its cost/income ratio to be the lowest in the sector, 3) good asset quality management (an NPLs/loans ratio of 2.1%) and 4) a high CAR of 15.8% (Tier-1 of 11.3%).  Thus, our profit forecasts are unchanged at Bt50.7bn for FY13 and Bt61.8bn for FY14. We reiterate our BUY rating.
2Q13 lending growth to slow a little in QOQ terms
SCB guides for good loan growth in 2Q13, but not as strong as the 3.1% QoQ posted for 1Q13. During 5M13, SCB posted 17.3% YoY lending expansion, driven by SME and corporate categories. Thus, its FY13 loan growth target range of 12-15% looks easily achievable. The bank guides that actual FY13 lending would be very likely to exceed its target if credit demand related to infrastructure projects were to manifest faster than scheduled. SCB expects 2Q13 NIM to be in line with its FY13 NIM guidance of 3.1-3.2%. Our FY13 and 2Q13 NIM projections are 3.18% and 3.20%, respectively.
2Q13 LLP-setting will rise slightly QoQ
Although the bank already had a high loan loss coverage ratio of 145% and a low NPLs/loans ratio of 2.1% at end-March, it guides that 2Q13 loan loss provisioning will rise to 65 bps of gross loans from 60 bps in 1Q13. We assume 2Q13 LLPs of Bt2.7bn, up by 5% QoQ and 12% YoY. SCB expects its NPLs/loans ratio to be 2% at end-June, close to its YE13 target of below 2%.
2Q13 FY13 cost/income ratio guidance of 40-42% 
SCB anticipates a 2Q13 cost\\income ratio of 40-42%, slightly above the 1Q13 number of 39%, attributable to lower QoQ fee income growth in the face of higher OPEX. Management expects 2Q13 non-net interest income growth of only 15% YoY, which would be slower than its 1Q13 Non-NII growth of 21.4%. Note that we forecast its FY13 and 2Q13 cost/income ratios at 42.6% and 40.3%, respectively. SCB’s FY13 cost/income ratio guidance is 40-42%.
Expect 2Q13 earnings growth of 22% YoY
Given lending growth of 2% QoQ and 5% YTD, a NIM sustained at 3.2% and a lower headline corporate tax rate of 20%, down from 23% last year, we estimate SCB’s 2Q13 earnings at Bt12.3bn, up 22% YoY but down 6% QoQ (mostly due to heavier LLPs and less other income, such as dividends). However, we expect the bank to deliver a record profit for 3Q13 because of its role advising (and helping to finance) CPALL on its takeover of Siam Makro Plc.