Banking

Banking 

 

Government provides SME support. The cabinet yesterday approved SME support measures, which we detail below. 

 

1) Bt100bn soft loans. The Government Savings Bank (GSB) will extend loans to commercial banks at an interest rate of 0.1%, which the commercial banks will then relend to SMEs at interest of no more than 4%.  

 

2) Corporate tax cut: Corporate income tax will be sliced to 10% from 15% of pre-tax profit of >Bt300,0000-Bt3mn for two accounting years.   

 

3) Increase Thai Credit Guarantee Corporation (TCG)’s coverage guarantee for SME loans with a budget of Bt100bn. The TCG will provide extra guarantee coverage of up to 22.5% of NPLs (15% for the first batch and 7.5% for the second batch). What is unchanged is the TCG’s 70% guarantee with commercial banks taking the credit risk for the remaining 30%. The loan guarantee fee has been cut to 0% for the first year, 0.5% for the second, 1.5% for the third and 1.75% for years 4 to 7.  

 

4) Bt6bn venture capital fund for SME start-ups. This will be funded equally by Government Savings Bank, KTB and SME Bank. 

 

5) Five-year corporate income tax exemption. This will apply to SMEs that start up in the period of October 1 to December 31, 2015.  

 

Impact: Eases asset quality risk. We believe the biggest benefit from these measures for commercial banks lies in the reduction in asset quality risk. With the highest proportion of SME loans to total loans, KBANK (40%) and TMB (36%) should benefit the most. The Bt100bn in soft loans amounts to less than 1% of commercial banks’ loans, assuming they lend out the entire amount. The concerns over asset quality began in 1Q15 when banks reported a rise in NPLs from SME loans. The ratio of NPLs for SME loans rose to 3.44% in 2Q15 from 3.11% in 4Q14 and SME NPLs accounted for 51% of total NPLs. Special-mention SME loans were Bt109bn (2.36% of total SME loans). These new moves by the government could lower the slip of special-mention loans into the NPL column. 

 

Stable delinquency, despite rising NPLs in 2Q15. BoT data reveals that the sector’s delinquency rate (NPLs + special-mention loans) was stable QoQ at 5.1% of total loans in 2Q15, despite a 9 bps QoQ rise in NPL ratio to 2.38% - which was less than the 14 bps QoQ rise in 1Q15. The special-mention loan ratio declined by 9 bps QoQ in 2Q15 to 2.72% after a 20 bps QoQ rise in 1Q15. NPL inflow was stable QoQ at 0.51% of total loans in 2Q15 (vs. 0.5% of total loans in 1Q15). NPL outflow rose to 0.41% of total loans at 2Q15 from 0.34% at 1Q15, reflecting a rise in restructured and rescheduled loans. A look at the details of delinquencies shows these are less of a worry than suggested by looking only at NPL movement. The SME support measures should help reduce deterioration in asset quality. 

 

KTB and KBANK still top picks. Banks are trading at cheap valuations at >1 SD below historical mean. We keep KTB and KBANK as the sector’s picks because they stand to outperform at the top line, which will act as a cushion for provision needs.