Siam Commercial Bank

Siam Commercial Bank Plc (SCB) 
2Q13 earnings were 2.8% above our number
SCB reported a 2Q13 profit of Bt12.6bn, up by 26% YoY but down 4% QoQ. The result was 2.8% above our forecast and 4.5% over the Bloomberg consensus. Pre-provisioning operating profit was Bt18.1bn, up 25% YoY (but down 1% QoQ), driven by lending and fee income expansion. 1H13 earnings jumped 26% YoY to Bt25.8bn, which represents 51% of our FY13 forecast. 
Results highlights
Lending grew by 3.6% QoQ and 16.8% YoY, in line with our model. SME and retail were the drivers during the quarter. Note that auto HP loans rose by 3.5% QoQ, mortgages by 4.7% QoQ and SME business by 4.6% QoQ. NIM inched up 1 bps QoQ (but declined 10 bps YoY) to 3.15% in 2Q13 (in line with our number). The QoQ NIM enhancement was attributable a greater proportion of SME and retail loans in the aggregate portfolio (the two categories both pay higher yields than corporate loans). The NPLs/loans ratio was 2.07% at end-June, unchanged QoQ. SCB’s loan loss cushion ratio inched up to 144.9% at end-June from 143.6% at end-March.
Net interest income (NII) grew by 18% YoY and 4% QoQ to Bt17.9bn, while net fee income rose by 24% YoY and 6% QoQ to Bt11bn. Non-NII also grew 23% YoY (but dipped 3% QoQ, due to lower dividend income). The cost/income ratio declined slightly to 39.2% from 39.3% the previous quarter and 41.8% in 2Q13, as OPEX growth was slower than net interest income expansion (NII). LLPs were Bt2.7bn for 2Q13, up by 14% YoY and 7% QoQ.
Outlook
SCB should deliver strong YoY earnings growth for 3Q13, driven by an aggressive lending policy, fee income, a sustained NIM and good OPEX management. Given the good 2Q13 loan expansion of 16.8% YoY, the bank may possibly also exceed its FY13 loan growth target range of 12-15% (we currently assume 15%).  
What’s changed? 
Our FY13-14 profit forecasts stand unchanged for the moment at 50.7bn and Bt61.8bn, respectively.   
Recommendation
We remain bullish on SCB, premised on: 1) a consensus-beating lending growth profile, 2) potential upside from fee income, 3) the lowest cost/income ratio in the sector of 39% and 4) good asset quality management—an NPLs/loans ratio of only 2.07%. Additionally, its CAR is high 14.5% (11.1% Tier-1), substantial enough for SCB to sustain robust lending expansion for some years without need for a cash call. Given its good earnings outlook and the scope for upside, we rate the stock a BUY.