Siam Commercial Bank

Siam Commercial Bank Plc (SCB) 

 

Investment thesis

 

We attended SCB’s analyst meeting yesterday and gathered from its quarterly review that its profit outlook remains sound via effective cost controls and well managed NIM. Most of its FY15 financial guidance is unchanged and in line with our model. Thus, we keep our earnings growth forecasts unchanged at 14.4% to Bt61bn for FY15. There could be scope for upside to our FY15 lending and profit growth projections if it were to finance big-ticket MD&A deals this year. Also, if progress on state infrastructure projects were to beat our base-case assumption in 2H15, its loan growth would beat our expectation. Our BUY call stands.

FY15 loan growth target remains 5-7%, led by corporate borrowing

Management has retained its FY15 loan growth target of 5-7% (following 2.4% growth for FY14), assuming GDP growth of 3.0-3.5% (~0.7% last year). SCB will focus more on corporate lending in FY15 through both organic and inorganic approaches. It targets a FY15 cost/income ratio of 38-40% and ROE of 17-20% (unchanged from its last presentation). Its non-NII growth guidance is 10-14%, which is better than last year’s contraction of 7%. Note that we maintain our loan growth projections at 7% for FY15, driven by the corporate sector in 2H15. Our cost/income assumption is 38.1% in FY15

NIM sustainability for FY15 from well managed funding costs …

After the MPC cut its one-day bond rate to 1.75%, SCB expects its FY15 NIM to be 3.2-3.3% (its FY14 target was 3.3%). Vying for deposit mobilization and lending has eased, allowing it to cut its funding costs faster than its lending rates. SCB’s shift in lending focus to corporate and large SME loans will support NIM, as the big-SME loan rate is typically 7% against a corporate rate of 4.9%, a mortgage rate of 6% and auto rate of 6%. Our NIM assumptions are 3.27% for FY15.

… keeping credit cost at 75-80 bps of gross loans for the same period

Given a high loan loss coverage ratio of 138% and a low NPL/loan ratio of 2.1%, management guides that LLPs will remain at 75-80 bps in FY15, up slightly from 75 bps for loans at YE14. We maintain our LLP assumptions of Bt14bn for FY15 (or 77bps of gross loan), in line with the bank’s guidance. SCB has set a YE15 NPL/loan ratio target range of 2.1-2.3% (the YE14 NPL ratio was 2.1%).

Expect flat YoY earnings for 1Q15, due mainly to fraud case

We forecast that SCB will deliver 1Q15 earnings of Bt13.3bn, up 1.5% YoY and 9% QoQ. The YoY contribution will be derived from better fee income growth of 8% and well managed NIM of 3.39%. OPEX, however, is expected to jump 22% YoY to Bt13.5bn, as SCB plans to book in 1Q15 OPEX the extra Bt1.5bn lost as a result of the embezzlement scandal at King Mongkut’s institute of Technology Ladkrabang (KMITL). By stripping out the case, SCB might deliver 1Q15 profit growth of 11% YoY to Bt14.5bn, we believe.