Siam Commercial Bank

Investment thesis

We attended SCB’s analyst meeting on Monday. The earnings outlook is good, led by cost control and upgraded NIM guidance. As such, we have raised our FY14 NIM assumption from 3.14% to 3.28%. However, we have cut our FY14 loan growth projection from 7% to 3%. We expect the fatter NIM to roughly offset the effect of slower lending growth, so our FY14 earnings forecast stands unchanged at Bt56.5bn, up 12% YoY. Moreover, there could be scope for upside to SCB’s FY15 lending and profit growth profiles if progress on state infrastructure projects were to beat our base-case assumption. Our BUY rating stands.

SCB expects sub-5% FY14 loan growth

Management has downsized its FY14 loan growth guidance from a range of 5-7% to below 5%, as the economic recovery has proved slower than initially anticipated. The unfavorable business environment prompted SCB to tighten its approval policy for SME and retail lending. However, the bank maintains most of its other guidance numbers for the year unchanged—a cost/income ratio of 38-40% and ROE of 17-20%—and its NIM guidance is more bullish (see below). Corporate business is driving loan growth, according to SCB, up 1.7% YTD at end-June. In contrast the SME portfolio declined by 2.3% YTD and the retail portfolio by 0.9% YTD. Based on the new information, we have cut our FY14 loan growth assumption to 3%.

FY14 NIM boosted by funding cost-cutting

Despite slow loan growth, SCB expects its FY14 NIM to be close to 3.3% (its target range was 3.1-3.3%). Competition for deposit mobilization and lending has eased, allowing the bank to cut its funding costs faster than its lending rates. Note that its funding costs are 10-15 bps higher than those of BBL, KTB or KBANK. Given a good 1H14 NIM of 3.27%, we have raised our FY14 NIM assumption to from 3.14% to 3.28%.

FY14 loan loss provisions will be set at 80-85 bps of gross loans 

Although the bank already has a high loan loss coverage ratio of 141% and a low NPLs/loans ratio of 2.1%, it guides that LLPs will be pegged to 80-85 bps of FY14 loans (though the peg may be lower next year). We maintain our LLP assumptions of Bt14.5bn for FY14 and Bt12bn for FY15. SCB has set a YE14 NPLs/loans ratio target range of 2.0-2.3%.

Strong 3Q14 earnings expected, supported by fat NIM

We estimate a 3Q14 profit of Bt13.4bn, up 5% YoY but down 9% QoQ. The assumed QoQ contraction is due to the fact that in 2Q14 SCB booked an extra investment gain of Bt1.8bn from the sale of Siam Commercial Samaggi Insurance. We expect a cost/income ratio of 38.1%, basically flat QoQ. Our model assumes a 3Q14 NIM of 3.36%, flat QoQ and up 8 bps YoY.