Banking sector

Banking sector

- Provision and expense decrease, recovering 1Q14 profit
We estimate combined net profit in 1Q14 of ten commercial banks under our
coverage at B48.3bn, growing 6.4%qoq (but dropping 5.5%yoy), thanks to
decreasing debt provision and operating expenses. The banks would show strongest
net profit growth qoq are BAY and TISCO (from lower debt provision) and BBL and
KBANK (from lower operating expense after passing the high season). On the other
hand, three banks that would face the largest decrease in net profit are KTB (no
extraordinary profit or dividend income from Vayupak Fund), KKP (from lower fee
income qoq after big deals of BTSGIF and BAY in 4Q13), and LHBANK (increasing
operating expense as a result of aggressive branch expansion). Normalized profit in
1Q14 is projected at B66.4bn, growing over 7.4%qoq since operating expense is
expected to decrease 7.5%qoq after passing the high season. Cost to income ratio in
1Q14 would decrease to 44.1% from 45.6% in 4Q13, helping alleviate pressure from
net interest income that is anticipated to drop 1.1%qoq as net loan growth is
projected to slide 0.1%qoq (still growing 8.1%yoy), in line with FY2014 net loan
growth we estimate at 6.5%yoy. Extraordinary income, which is an interest income
from debt restructuring, would also decrease from 4Q13. Moreover, most banks
have cut their loan and deposit rates in the middle of March 2014, so NIM is
projected to decline 9bp to 2.98%. Fee income in 1Q14 is also projected to decrease
2.5%qoq, in line with slack loan transactions, while there are not important deals
like in 4Q13.
- Limited growth for profit in 2014
As a result of down revisions of 2014-2015 earnings forecasts of single banks since
before 2013 earnings report and during earnings preview in 1Q14, net profit growth
of the sector is projected to decrease to only 2.4%yoy in 2014, before starting to
revive 9.0%yoy in 2015, in line with FY2014 business goal of the banks which
projected for slow growth and stricter loan quality control, under an assumption for
instability in the current political situation.
- Top picks are BBL and TISCO
We maintain UNDERWEIGHT for the sector. SETBank has risen more than 13% YTD
until 2014 PBV stood at 1.5x, higher than regional average. Consequently, this is a
time to take profit from banking stocks that have rallied significantly i.e. BAY, KKP,
TMB, and KBANK. Amidst the economic downturn, we also recommend stocks with
strong fundamental factors and attractive dividend i.e. BBL(FV@B197) and
TISCO([email protected]). Interesting international stocks are European and Japan banks,
which still have low PBV and PER, as shown in the table on the next page.