Siam Commercial Bank

Siam Commercial Bank Plc (SCB) 

 

Investment thesis

We attended SCB’s analyst meeting yesterday, at which the bank’s CFO expressed a bearish view on 2H15 performance, due to slower economic recovery than was expected. This triggers us to raise our FY15 loan-loss provisioning (LLP) 7% to Bt29bn in FY15 and cut our FY15 loan growth to 2.5% from old 5%. Hence, we cut our FY15 earnings forecast 5% to Bt49bn. Our YE15 SCB’s target price is revised down to Bt161, pegged to a PBV at 1.7x. Despite the earnings downgrade, we perceive that SCB’s performance could recover faster than peers once economic conditions rebound in FY16, driven by upcoming government projects and lower LLPs. Presently, SCB’s share price trades at a cheap PBV of 1.45x, which is far below its long-term mean of 1.7x. Our BUY rating stands.

SCB slashes loan growth to 2.5-3.0% in FY15 on prudent policy

Management expects its FY15 loan growth to be cut to 2.5-3.0% in line with the industry. Note that SCB plans to write off its loan of Bt12bn to Sahaviriya Steel Industry (SSI) in UK in 3Q15. We, thus, cut our FY15 loan growth projection to 2.5% from the former 5%. We have kept our loan growth of 6% in FY16. SCB also anticipates an NPL/loan ratio of 2.4-2.5% at YE15 from its former 2.2-2.3% in response to the SSI (Thailand) issue at YE15. Besides that, the bank cuts its FY15 NIM to 3.0-3.2% from 3.2-3.3%. We forecast that its FY15 NIM assumption is 3.15%, unchanged.

SSI will push its 3Q15 credit cost to a peak before returning to normal

SCB plans to set extra LLP of Bt11bn in 3Q15 to cope with the SSI issue. The CFO expects its credit cost could rise to 132-140 bps this year from the former 110 bps of gross loans. This causes us to raise our LLP by 7% in FY15 to Bt29bn. Given the bigger LLP and shrunken loan growth, we have cut our earnings projection for SCB by 5% in FY15 to Bt49bn. Our new LLP assumptions are based on high credit cost of 1.6% in FY15 and 1.1% in FY16. We maintain our FY16 LLP forecast of Bt19bn, down 35%.

Expect 3Q15 earnings to bottom out from large LLP for SSI

We estimate 3Q15 earnings of Bt9.8bn, down 26.4% YoY and 26.2% QoQ, due to bigger LLP as noted. Note that SCB plans to mitigate such impact from the extra gain of Bt8bn from the sale of its equities in 3Q15. We expect LLP to increase 397% YoY and 212% QoQ to Bt16bn. Our model assumes a cost/income ratio of 40% (close to the bank’s guidance). We expect 3Q15 fee income to rise 10% YoY and expected NIM of 3.17% down slightly from the previous quarter. Its 3Q15 pre-provision operating profit (PPOP) is forecast to reach Bt20bn, flat YoY but down 8% QoQ.