Siam Commercial Bank

Siam Commercial Bank Plc (SCB)
 

3Q13 earnings were 5.8% below our model
SCB reported a 3Q13 profit of Bt12.7bn, up by 26% YoY and 1% QoQ. The result was 5.8% below our forecast and 1.4% short of the Bloomberg consensus, as the bank set very heavy loan loss provisions of Bt4.2bn (we had expected only Bt2.7bn). Pre-provisioning operating profit was Bt19.7bn, up by 31% YoY and 9% QoQ, driven by lending and fee income expansion. 9M13 earnings jumped 29% YoY to Bt38.5bn, which represents 76% of our FY13 forecast.
Results highlights
Lending grew by 1.7% QoQ and 12.7% YoY, in line with our model. SME and retail business led the expansion. Note that auto HP loans rose by 1.2% QoQ, mortgages by 3.3% QoQ and SME loans by 3.7% QoQ. However, corporate lending contracted 0.2% QoQ. NIM declined by 5 bps QoQ and 17 bps YoY to 3.10% in 3Q13, squeezed by a greater proportion of SME and mortgage business in the loan mix and price-cutting. LLPs jumped by 106% YoY and 56% QoQ to Bt4.2bn (counter-cyclical risk provisioning). The NPLs/loans ratio was 2.08% at end-Sept, up slightly from 2.07% at end-June. SCB’s loan loss cushion ratio inched up to 151.1% at end-Sept from 144.9% at end-June.
Net interest income (NII) grew by 16% YoY and 5% QoQ to Bt18.9bn, while net fee income rose by 26% YoY and 2% QoQ to Bt11.2bn. Non-NII expanded by 36% YoY and 15% QoQ to Bt13.3bn (driven by dividend income of Bt1.9bn, up from Bt370m in 2Q13). The cost/income ratio rose slightly to 41.3% in 3Q13 from 39.2% the previous quarter, as OPEX increased by 14% YoY and 10% QoQ to Bt12.4bn—a faster rate of growth than that for net interest income.
Outlook
SCB should deliver strong YoY earnings expansion for 4Q13, driven by high season for retail and corporate lending, fee income, a sustained NIM and good OPEX management.
What’s changed? 
Our FY13-14 profit forecasts stand unchanged for the moment at 50.7bn and Bt61.8bn, respectively.   
Recommendation
We are 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 2.08%. Additionally, its CAR is 16.1% (12.64% Tier-1), substantial enough for the bank to sustain swift lending expansion for some years without need for a cash call. Given its good earnings outlook for 4Q13 onward, our BUY call stands on SCB.