Banking sector

 

Interest rate cuts. SCB, BBL and KBANK took the lead in cutting interest rates in response to the BoT’s 25 bps policy rate cut to 2.75% on October 17. SCB cut fixed deposit rates by 10-55 bps and MLR by 12.5 bps. BBL lowered fixed deposit rates by 12.5-37.5 bps and all three kinds of lending rates by 12.5 bps. KBANK reduced fixed deposit rates by 5-50 bps and MLR by 13 bps. All left savings deposit rates unchanged.

Minimal impact. We believe other banks will follow suit. This will slightly be negative to NIM for large banks (TMB, KTB, BBL, KBANK, SCB and BAY, in order of negative impact) but a small positive for KK, TCAP, LHBANK and TISCO (in order of positive impact). Those banks enjoying the positive are those with a high proportion of fixed-rate earning assets (i.e. auto, personal and credit card loans and investment) and a high proportion of time deposits (rates for which were cut) such as KK, TISCO, TCAP and LHBANK. Given the 3Q12 asset and liability mix, our sensitivity analysis suggests that this move gives a small upside risk of 1-4 bps to our 2012F and 2013F NIM for TISCO, KK and TCAP and a downside risk of 2-7 bps to NIM for other banks. In our workout (Figures 1-3), we assume an interest change of -25 bps for interbank assets & liabilities, -12.5 bps for lending rates and -12.5 bps for deposit rates across all banks. 

4Q12 NIM under pressure. The change in rates will take a toll on net interest margin (NIM) in 4Q12 since the negative – the re-pricing of floating-rate loans – is immediate, with the positive - re-pricing of time deposits - coming only gradually as they mature. We expect 4Q12F NIM to fall in the range of 4-13 bps QoQ.

Downside risk from potential further rate cut. The MPC may bring rates down another 25 bps to cope with the global slowdown at its last meeting for this year on November 28. We are in the process of reviewing our 2012F and 2013F NIM assumptions in order to factor in the impact from the interest rate cuts.  

KTB and KBANK still top picks. We keep KTB and KBANK as our top picks. KTB: 1) Its recapitalization overhang is removed, giving it the ability to remove the LLR overhang, 

2) worries about asset quality have been eased by SSI’s capital call and 3) it is the best play on the theme of accelerating public investment. KBANK: 1) solid expansion in non-NII; 2) better cost to income ratio as the IT upgrade approaches completion and 3) accelerating loan growth upon SME loan demand recovery.