Siam Commercial Bank

Siam Commercial Bank Plc (SCB)

 

Investment thesis

We attended SCB’s analyst meeting yesterday at which bank president Yol Phokasub expressed a conservative view on FY16’s financial guidance to incorporate slower economic recovery than anticipated. These figures remain on par with our model in terms of loan growth, NIM and loan-loss provisioning (LLP). Hence, we have maintained our FY15 earnings contraction of 8.1% to Bt49bn before they bounce 15.3% to Bt56.5bn in FY16. Furthermore, we perceive that SCB’s performance could recover faster than peers once economic conditions improve in 2H16, driven by upcoming government projects and lower LLP. Amid such an earnings recovery in FY16 and inexpensive YE16 PBV of 1.3x (against its mean of 1.75x), we reiterate our BUY for SCB.

SCB arrives at FY16 loan growth target of 4-6%, on par with us

Management maintained its conservative FY15 loan growth of 2.5-3.0% following its 9M15 loan growth of 2.2% YTD. Note that SCB wrote off its loan of Bt12bn for Sahaviriya Steel Industry (SSI) in the UK in 3Q15. The president sets the FY16 loan growth target of 4-6% (mostly in the SME sector), based on a GDP growth forecast of 2.5%. We retain our loan growth of 2.5% in FY15 and 6% in FY16 in line with the bank. Also, management reiterates its FY15 NIM target of 3.0-3.2% and sets FY16 NIM of 3.1-3.3%.  We forecast its NIM assumptions of 3.15% in FY15 and 3.19% in FY16, unchanged. Note that SCB’s CFO expects ROE of 17-20% in FY15 and 15-18% in FY16. We forecast ROE will be 16.3% in FY15 and 17.0% in FY16, which are more conservative than the bank’s guidance.

Declining credit cost to 105-115bps in FY16 from 140bps in FY15

SCB set huge LLP of Bt24.7bn in 9M15 (mostly for SSI). The CFO reiterates the bank’s credit cost of 140bps of gross loans in FY15 before declining to merely 105-115bps in FY16. We forecast its credit cost to be 160bps of gross loans in FY15 and down to 105bps in FY16. SCB, also anticipates an NPL/loan ratio of about 3% at YE15 and less than 3% at YE16 through fast troubled debt restructuring and NPL sales. Given the bank’s figures, we view that SCB’s LLP policy will return to its normal mode in 4Q15 onwards (about 100bps of gross loans) following 184bps in 9M15.

Long-term plan is to target SME sector and wealth management

SCB’s management has come up with a five-year long-term plan to build the foundation of its growth streams. These include expansion of its SME loans (19.6% of loans), bringing it close to the industry portion of 38% within five years. The bank also plans to double the assets under management of its wealth management via strong connections, tis nationwide branch network and new investment in state-of-the-art digital banking systems. During FY15 and FY16 period, management also expects its cost/income ratio to stay around 38-40%, with room to decline slightly after FY17. Note that we expect its cost/income ratio to be 39.3% in FY15, 40% in FY16 and 40.1% in FY17.