Banking

Banking

With asset quality worsening, banks’ 2Q15 results continued lackluster but beat expectations on pre-provision profit. The resilient NIM seen in the quarter suggests the market was overly concerned about this. Valuations are currently undemanding, already pricing in the cyclical doldrums in 2015F.  

 

2Q15: Lackluster with +ve surprise on PPP and worsening asset quality. The sector’s 2Q15 earnings fell 2% YoY and QoQ, beating both SCBS and consensus forecasts by 9% and 5%, respectively. There was a positive surprise in after-tax pre-provision profit (+14% YoY and 9% QoQ), mainly in NIM (-3 bps QoQ), non-NII (+14% YoY, +6% QoQ) and effective tax rate at KTB and TCAP. This was partly offset by higher-than-expected credit cost (132 bps vs. 102 bps for 1Q15), in line with a continued rise in NPL ratio (3.06% vs. 2.97% in 1Q15), keeping LLR coverage stable QoQ at 134%. KTB, SCB and TISCO made extra provisions for their exposure to SSI. The sector’s loan growth remained weak at 0.7% QoQ and 1.4% YTD. KTB had the largest positive surprises on NIM, non-NII, income tax and NPLs. BBL was the most disappointing with the largest NIM contraction and the highest rise in NPLs.     

 

Overdone concerns on NIM. Investor worries on the impact of interest rate cuts on NIM led to a YTD share price underperformance. However, most banks (excepting BBL) managed this better than expected in 2Q15, the quarter hit by asymmetric lending rate cuts thus with the direst NIM scenario. This indicates the market was overly concerned about NIM. Banks stepped back on deposit campaigns to soften the impact of lending rate cuts and if rates are cut again, they are expected to be done in a way that will not have a material impact on NIM, i.e. parallel cuts or even asymmetric deposit rate cuts to offset the earlier lending rate cuts. In our view, NIM bottomed in 2Q15 and will recover in 2H15 without deposit campaigns.  

 

Cyclical asset quality deterioration. Although the 2014-2015 down-cycle is not as severe as the 2008-2009 global financial crisis, this time the country’s slow economy and banks’ asset quality deterioration seems to be more prolonged than during that time, at which time there was only a single quarter in which NPLs rose, in 1Q09. We expect provisions to step up HoH in 2H15 before easing in 2016, syncing to an expected economic recovery. It is our view that the asset quality deterioration being seen this year is a cyclical issue. 

 

Continued lackluster in 2H15 but normalizing in 2016. The sector’s 1H15 earnings accounted for 53% of our full-year forecast but we expect some softening in 2H15F on a rise in provisions and opex that will outweigh a gradual recovery in NIM and loan growth (3% for 2015F vs. 1% YTD). We anticipate normalization of provisions and loan growth in 2016F, which translates to 15% earnings growth.  

 

Cyclical doldrums discounted in valuations. Since the release of 1Q15 earnings, SETBANK (-19%) underperformed the SET (-8%) by 11% on concerns on asset quality and the negative impact on NIM from interest rate cuts. Bank valuations are now undemanding, below -1SD at and 9x PER and 1.1x PBV on mid-2016, pricing in this year’s cyclical doldrums.    

 

KTB and KBANK still top picks. We keep KTB and KBANK as the sector’s picks on the back of their potential outperformance in pre-provision profit (as evident in 2Q15), particularly top line growth, which will act as a cushion for provision needs.