Siam Commercial Bank

Siam Commercial Bank Plc (SCB)
Investment thesis: Our BUY rating stands on SCB, premised on: 1) strong lending growth in 2Q12 onward (led by corporate and retail lending), 2) further fee income growth and 3) the lowest cost/income ratio in the sector of 41%. We expect its loan portfolio to post the swiftest rise among the big banks in 2H12; that would trigger a flow of earnings forecast upgrades for FY12 and FY13, which would facilitate greater investor interest in the stock.
Anticipate good 2Q12 earnings: Given sustained lending growth of 3% QoQ (and 18% YoY) and improved fee income, we forecast that SCB will deliver good 2Q12 earnings of Bt9.8bn, up 21% YoY (but down 5% QoQ, due to a rapid increase in OPEX). 
Strong lending growth into 2Q12: SCB guides that lending expansion momentum has been sustained QTD across all client categories—corporate, SME and retail. As such, its FY12 loan growth target of 12-14% looks comfortably achievable. We forecast that 2Q12 lending will rise by 3% QoQ and 7.6% YTD. Note that SCB’s 4M12 net loan growth was 7.3% YTD.
Asset quality remains sound: The bank will set normal loan loss provisions of Bt1.5bn per quarter, or Bt6bn for FY12, down from Bt6.7bn in FY11. Management claims that contrary to market rumors, there aren’t any troubles related to the loans to True Corporation (TRUE) and Sahaviriya Steel Industry (SSI). Neither firm is due to start making principal repayments till next year. In any case, the bank has a substantial excess LLP cushion of Bt11bn above the minimum provisioning level stipulated by the BOT.   
Efficient: SCB guides that its 2Q12 cost/Income ratio will inch up QoQ, due to heavier OPEX. As such, we assume a cost/Income ratio of 41.1% for 2Q12, up from 40.9% the previous quarter. SCB targets an FY12 cost/income ratio of 43-44%.