Siam Commercial Bank

Siam Commercial Bank Plc (SCB)
Investment thesis
We are 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 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 have a BUY rating on the stock.
3Q13 lending growth to slow a little in QOQ terms
SCB guides for good loan growth in 3Q13, but not as strong as the 3.6% QoQ posted for 2Q13. During 8M13, the bank reported lending expansion of 13.9% YoY and 8.1% YTD, driven by the SME and corporate categories. Thus, its FY13 loan growth target range of 12-15% looks easily achievable. SCB guides for a 3Q13 NIM in line with its FY13 NIM target range of 3.1-3.2%. Our FY13 and 3Q13 NIM projections are 3.1% and 3.2%, respectively.
3Q13 LLP-setting will be in keeping with the 2Q13 number
Although the bank already had a high loan loss coverage ratio of 145% and a low NPLs/loans ratio of 2.1% at end-June, it guides that it will maintain strict 3Q13 loan loss provisioning equal to 65 bps of gross loans—the same peg as for the previous quarter (slightly above the 60 bps peg for 1Q13). We assume 3Q13 LLPs of Bt2.6bn, flat QoQ and up 28% YoY. SCB expects an NPLs/loans ratio of 2% at end-September, close to the end-June ratio and its YE13 target of below 2%.
3Q13 cost/income ratio guidance of below 40% 
Management guides for a 3Q13 cost/income ratio of below 40%, slightly below the 2Q13 number of 39.2%, attributable to QoQ fee income growth (especially from SME clients) and good OPEX management. The bank expects 3Q13 non-net interest income growth of 12-13% YoY, which would be better than its 2Q13 Non-NII growth. Note that we project FY13 and 3Q13 cost/income ratios of 41.9% and 38.3%, respectively. SCB’s FY13 cost/income ratio guidance is 40-42%.
Anticipate new record for 3Q13 earnings, up 35% YoY
Given lending growth of 2% QoQ and 10% YTD, a NIM sustained at 3.2% and a lower headline corporate tax rate of 20%, down from 23% last year, we estimate 3Q13 earnings of Bt13.5bn, up by 35% YoY and 7% QoQ (led by fee income and ongoing loan growth). However, we expect the bank to deliver a lower profit for 4Q13 because of seasonally high OPEX spending.