Siam Commercial Bank

Siam Commercial Bank
Investment thesis

We have revised down our FY12 and FY13 profit forecasts by 8% and 6%, respectively, to Bt40bn and Bt49bn. The cuts reflect a higher provisioning policy in FY12 and increased OPEX related to improvements to the core banking system. Hence, we have cut our YE13 target price from Bt220 to Bt211, pegged to a PBV of 2.8x. Our BUY rating on SCB stands, premised on: 1) consensus-beating loan growth of 15.6% YTD and 20.7% YoY for 9M12, 2) a big capital base with CAR of 17.5% and 3) good asset quality management—a low NPLs/loans ratio of 2.1%. These factors will push up SCB’s core profit substantially in 4Q12 and beyond.

SCB bullish about its 4Q12 outlook and beyond
Given 9M12 lending expansion of 15.6% YTD, management maintains its FY12 loan growth target range of 17-19%. The retail and SME categories will remain the drivers in 4Q12. The bank believes that 4Q12 lending growth will strengthen QoQ, led by seasonality. Thus, we are confident that our FY12 loan expansion forecast of 19% is achievable. SCB targets FY13 loan growth in double digits (but not over 20%). We project loan growth of 12% next year. The bank also targets FY12 and FY13 NIMs of 3.2%—close to our assumptions.

LLPs will rise slightly in tandem with loan growth
Although SCB already has a high loan loss coverage ratio of 135% and a low NPLs/loans ratio of 2.1%, it guides that loan loss provisioning will rise slightly in tandem with aggressive lending growth. We have, thus, raised our FY12 loan loss provisioning assumption from Bt7.5bn to Bt8.3bn. However, our FY13 LLP assumption remains Bt8.3bn.

Reiterate FY12 cost/Income ratio range of 42-43% 
The bank posted a 9M12 cost/income ratio of 42%, in line with its guidance of 42-43%. Management expects the 4Q12 cost/income ratio to exceed the earlier guidance. SCB also plans to upgrade its core banking platform in 4Q12. That is likely to push up its FY13 cost/income ratio for the year. Management claims that the FY13 cost/income ratio could have declined to 37-38% if the bank hadn’t decided to invest in network expansion and core banking system enhancement. We have, thus, raised our FY12 and FY13 OPEX forecasts by 4% and 7%, respectively, to Bt42.4bn and Bt46.4bn. As such, our new FY12 and FY13 cost/income ratio assumptions increase to 43.3% and 42.0%, respectively, from 41% and 40%.

Earnings forecast cuts for FY12 and FY13
Given heavier loan loss provisioning in FY12 and a rising OPEX trend, we have revised down our SCB FY12 and FY13 earnings projections by 8% and 6%, respectively, to Bt40bn and Bt49bn. Because of our earnings forecast downgrades, we have cut our YE13 target price from Bt220 to Bt211, pegged to a PBV of 2.8x (based on a growth rate of 5%, Ke of 10.25% and a mean FY13-14 ROE of 20%).