Siam Commercial Bank

Siam Commercial Bank Plc (SCB)

Q2 2012’s profit growth slightly lower than expected, pressured by provision but core business remains strong
SCB reported net profit in Q2 2012 at B10bn, contracting 2.6% qoq, but still growing
23.9% yoy, slightly less than projected so the profit could not make a new high as
expected. Pressuring factor was debt provision which has increased as large as
63.5% qoq, or Bt1 bn (bank only) from a normal level of Bt 1.50 bn per quarter due to
the bank’s policy of making provision for future impairment (special mentioned
loans have increased highly in this quarter, mainly from debtors who are flood
sufferers, but the bank believes it would be able to reverse them to normal debts
in Q3 2012 so there is nothing to worry). Total debt quality in this quarter was very
strong. NPL to total loan ratio has dropped to 2%, making coverage ratio
(LLR/NPL) jump to 149.6%. However, the core business growth still beat
expectation. 1) Net interest income has thrived 7.1% qoq and 20.9% yoy –
better than expected, as driven by aggressive loan growth of 4.8% qoq and
20.2% yoy in this quarter. The growth has resulted from every type of loan,
including corporate 2%qoq (although income from agricultural loan has decreased
due to some repayment in May 2012, other types of corporate loan still show
impressive growth), SME 6.3%qoq, and retail 7%qoq, especially new car hirepurchase
loan 10.6%qoq. Overall, net loan in 1H12 has escalated robustly by 9.4%
from end-2011, very high comparing to our FY2012’s targeted growth at 14%yoy.
2) NIM in 2Q12 has increased 7bp to 3.17%, still in line with the bank’s target
of slightly higher than 3%, thanks to benefits from increasing yield and decreasing
average funding cost as a result of an increase in a proportion of cash accounts
and savings accounts (CASA) to 51% from 47% at end-2011 and a decrease of
B/E proportion to only 5.5% at end-2Q12 from 15.5% at end-2011.

Likely revise up forecast following likely better-than-expected loan growth
Although 1H12’s net profit forecast which comprises 49% of our FY2012’s net
profit forecast is in line with our target, there is a high possibility that net loan
growth in FY2012 would beat our current projection of 14%yoy. At every 1%
increase in the net loan growth from the current forecast, net profit in FY2012 will
increase by 0.6% from the current level. Now SCB is considering revising up its net
loan growth target for FY2012 from 12-14%yoy at present due to continuously
strong demands for loan in 2nd half 2012 and benefit in terms of fee income from the high
season of SME and retails loans.

Current PBV still higher than 10-year average. Risk of correction after earnings report
We recommend Buy. Fair value in 2012, using 2.89x PBV, is B185.35/share,
implying approximately 23% upside. However, in the short term we recommend
buying on price weakness to reduce risk from the price correction after 2Q12’s
earnings report. Moreover, since the beginning of the year until now the share
price has risen by 31%, while PBV of the current share price is higher than the
average PBV in the past 10 years by almost 2SD, so the share price rise might be
suppressed in the short term.