Banking sector

Banking sector 

 

- Asset quality still worrying  

Total net loan in April increased 0.6%mom and 7.1%yoy, led by LHBANK, KBANK, and BAY. Consequently, 4M15 net loan growth was 3.4% when compared with end-2014, which is in line with our full-year target of 8.7%yoy. Acceleration of budget disbursement by the government and state enterprises in the remainder of the 2015 fiscal year and advance purchase and procurement for immediate contract signing and disbursement of 2016 budget when effective would rapidly inject the money into the economic system. Yet, this positive factor would be negated by concern about rising NPLs and increasing one- to three-month special mention (SM) loan outstanding from 1Q15, which might get worse into NPLs and cause 100% debt provision (from 2%). BBL and BAY faced the biggest increase in SM loans among peers in 1Q15, so they had to slash the interest rates for the second time of the year, even though it did not help boost loan growth, in order to help debtors, especially retail and SME, which were the cause of the current NPLs. 

- Profit to plunge in 2Q15, KTB in particular  

We estimate FY2015 net profit growth of the banking sector at only 3.9%yoy. The interest rate has entered a downtrend after the policy rate cut to 1.25% (one more meeting is waiting ahead); the two recent policy rate cuts would fully affect NIM in 2Q15 for yield would decrease for a full quarter. Loan rate cut since March for two months would show an effect in 3Q15 as well, under a NIM forecast of 3.05% for 2015. Moreover, credit cost has increased as a result of a strict debt provisioning policy, under an assumption of 100bp in 2015; a significant increase is anticipated in 2Q15 from KTB’s special provisioning of B3.6bn. Loan growth would still decelerate due to a low season. Accordingly, 2Q15 earnings would shrink from B52.3bn in 1Q15 and B52.2bn in 2Q14. 

- Lower investment despite substantial correction  

We reiterate to continue reducing investment although the sector has already undergone 13% correction since 1Q15 earnings report. We also downgrade the sector. Buy on weakness is recommended; top picks are KBANK(FV@B270) and BBL(FV@B209).