Banking

Banking 

 

Banks’ guidance suggests continued slow profit in 4Q15F with continued deterioration in asset quality, though this is slowing. Seasonal high opex will also take a toll on 4Q15 earnings. Thanks to the SME soft loan package and seasonality, loan growth picked up in 4Q15, but not enough to generate excitement. We expect no quick recovery in 2016 and take a cautious stance. At the same time, valuation is attractive at over -1SD below historical mean. 

4Q15F: Continued weak. We forecast a fall in sector 4Q15F earnings of 9% YoY but stable QoQ. With the exception of KTB, SCB and TISCO, who made large extra provisions for SSI loans in 3Q15, we expect to see a QoQ decrease in 4Q15F earnings due to rising provisions and seasonally high opex. Deterioration in asset quality continued in 4Q15 but at a slower pace. Thanks to SME soft loan package and seasonality, loan growth picked up in 4Q15.  NIM minimally improved QoQ, mainly on a further slide in cost of funds.  We believe banks’ cost of funds has hit the bottom in 4Q15.  We expect 2015F earnings to end with a 9% contraction, hit by rising provisions, sluggish loan growth and narrowing NIM. 

KBANK – the worst 4Q15F growth, hit by IT impairment. Blaming the one-off Bt2.4bn IT impairment, we estimate a contraction of 41% YoY and QoQ in 4Q15F. However, heavier opex than anticipated will be in part offset by lower provisions than expected. The bank guides to 2015F provisions of 1.6% of total loans in 2015, slightly below the earlier guidance of 1.7%. This is in line with its expectation of a rise in NPL ratio to 2.7% in 4Q15 from 2.62% in 3Q15, slightly below the earlier expectation of 2.8%. 

No quick recovery in 2016. We expect a gradual recovery in 2016F of 7%, in line with the expected modest recovery in Thailand’s GDP in 2016F to 2.5-3% from the low base of 2-2.5% in 2015F, mainly driven by public investment since exports are not looking exciting. Our banking sector’s 2016F forecasts reflect continued large provisions, a gradual recovery in loan growth to 5% in 2016F vs. 2% for 2015F, a slight squeeze in NIM and a deceleration in non-NII growth. 

Attractive valuation but no S-T catalyst. Since the release of 1Q15 earnings, SETBANK  (-33%) underperformed the SET (-22%) on concerns about asset quality and slow loan growth. Bank valuations are now attractive, at more than -1SD below historical mean or at 8x PER and 1x PBV, pricing in this year’s cyclical doldrums. However, there is no S-T catalyst.    

Maintain KBANK and TCAP as top picks. We keep KBANK on as a sector pick, supported by its outperforming growth in loans and non-NII as well as lower opex growth after the completion of its K-transformation this year. We expect TCAP to outperform its sector in terms of asset quality in 4Q15 and 2016, plus it had a Bt29bn tax loss carried forward from the liquidation of its investment in SCIB, which allows it to enhance its LLR coverage and ROE.