Siam Commercial Bank

Siam Commercial Bank Plc (SCB) 

 

 - SSI provision depresses 3Q15 profit  

SCB announced 3Q15 net profit at B9.01bn or a decrease of 31.8%qoq and 32.0%yoy, which was 11% lower than expected. The bank had to make special debt provisioning of B11.0bn in total for SSI, downgraded SSI debts to an NPL status, and entirely wrote off SSI-UK bad debts to alleviate an adverse impact on 3Q15 earning results. Moreover, the bank sold its investments in equity securities (mainly SCC shares and overseas investments), which resulted in capital gain of over B7.7bn (or B6.2bn net after tax). Excluding the abovementioned items, 3Q15 normalized profit still contracted from the prior quarter owing to decreasing net interest income (due to flat loan growth and shrinking NIM) and fee income (due to decreasing fee income from corporate finance business). Income from other operations excluding the aforementioned capital gain also plummeted as a result of lower Fx gain, net underwriting income, and other income. 

- Rebound foreseen in 4Q15 but with weaker asset quality  

We maintain 2015-2016 earnings forecast, projecting net profit to weaken 11.6%yoy in 2015 before rebounding 17.4%yoy in 2016 from the low base but with weaker asset quality as NPL would rise over 3% of total loans. Moreover, the bank still has to set aside provisioning in the next two years as its coverage ratio has declined significantly, which would suppress its earnings growth when compared with other big banks without such burden. Overall, 4Q15 earnings are projected to grow strongly from 3Q15 as debt provision expense would return to normal and thus compensate for increasing operating expense in a high season in 4Q15. 

- Hold for dividend or switch to KBANK  

We recommend only holding SCB for dividend; 2016 fair value is B167 (GGM, based on PBV of 1.63x and long-term ROE forecast of 16.6x). Investors can also switch to KBANK; although the current share price of SCB has an upside from 2016 fair value, KBANK has an advantage of better asset quality and higher coverage ratio despite their similar ROE and PBV.