Siam Commercial Bank

Siam Commercial Bank Plc (SCB)

Investment thesis
We are bullish about SCB’s FY13 earnings outlook, premised on: 1) a strong loan growth profile with scope for upside, 2) efficiency improvements that will cut its cost/income ratio, 3) good asset quality with a low NPLs/loans ratio of 2.1% and 4) a big CAR of 15.7% (Tier-1 of 10.6%). Thus, our profit forecasts are unchanged at Bt50.7bn for FY13 and Bt61.8bn for FY14. Our BUY rating stands.
Sustained good 1Q13 lending growth
SCB posted 19.4% YoY and 2.8% YTD loan growth for February. Thus, its FY13 lending growth target range of 12-15% looks easily attainable. Management guides that the bank’s FY13 lending performance is likely to exceed its target range, driven by loans related to public infrastructure projects. SCB now expects an FY13 NIM of 3.1-3.2% (it was 3.2% in FY12). Intense competition for deposit mobilization and price-led competition are the main threats to NIM sustainability. Our NIM assumptions are 3.17% for 1Q13 and 3.18% for FY13. Note that SCB expects the BOT to cut its policy interest rate to 2.50% later this year from 2.75% at the moment.
FY13 loan loss provisioning policy remains unchanged
Although SCB already has a high loan loss coverage ratio of 145% and a low NPLs/loans ratio of 2.1%, it guides that loan loss provisioning will rise slightly in tandem with aggressive lending growth. The bank plans to set bigger LLPs in the range of Bt8-10bn (equal to about 60 bps of total lending in FY13). We assume LLPs of Bt8.3bn for FY13. The bank has set a YE13 NPLs/loans ratio target of below 2% (an unchanged policy).
FY13 cost/income ratio of 40-42% 
SCB’s FY13 cost\\income ratio guidance is the lowest for the sector at 40-42%. It also targets an FY13 ROE in the range of 19-22%. The bank doesn’t plan to spend heavily on either new branches or ATMs this year. Note that we forecast its FY13 cost/income ratio at 42.6%. Management expects the 1Q13 cost/income to be slightly higher than the 39.6% SCB posted for 1Q12. We estimate a 1Q13 cost/income ratio of 40%.
Anticipate record earnings for 1Q13
Assuming strong lending growth of 3.5% QoQ and 19% YoY, a NIM of 3.17%, normal loan loss provisions of Bt2bn and a lower headline corporate income tax rate of 20%, down from 23% last year, we model for a 1Q13 profit of Bt12.6bn (a new record high), up 22% by YoY and 29% QoQ. Strong earnings growth momentum should be sustained through 2Q13.