Banking sector analysis

Money on the spin in banking sector
Reported loan growth YTD suggests the banking sector is on course to our 11% full-year growth target. We stay Overweight with further ROE expansion as potential catalysts. Our top picks are BAY, SCB, KBANK and TCAP, in that order.
What Happened
Bank loans expanded moderately (+1% mom) in May. TISCO led the race thanks to strong car loan growth.BAY was the only bank with negative growth due to sizeable repayments
from corporate borrowers although the bank confirmed its retail lending continued to grow at a brisk pace.
The sector’s 5M12 loan growth reached 5.1%. Annualising this suggests that loan growth is on track to reaching our full-year target of 11%. The two notable growth outperformers were TISCO and SCB while KBANK, TMB and KTB were the laggards. However, growth continued to gather pace at KBANK.
On the funding side, banks continued to replace bills of exchange with deposits as taxes on
the two instruments were brought to parity. In 5M12, the sector’s deposits grew 10% while borrowings shrank 25%. Of more relevance is the third consecutive monthly rise in the
loan-to-funding ratio to 86% (on the bank-only basis; about 4% pts higher on a consolidated basis), prompting banks to start launching more aggressive deposit campaigns.
What We Think
As the middleman, what matters most for banks is the spread between
lending and funding rates. It seems inevitable that banks’ funding costs
will rise as they try to boost deposits. But they do so because borrowers are
still queuing up to get more loans.
Strong loan demand should allow banks to pass on the higher deposit rates. However, we will not go so far as saying that banks will also be able to pass on the higher funding tax, at
least in the near term. Through pricing of state-owned banks, the government could try to prevent this.
What You Should Do
Stay Overweight on the sector. Focus on the names which are more geared towards the consumer segment. BAY, SCB, KBANK and TCAP are our top picks, in that order.