Banking Sector

Bank Sector

Policy rate cut expected from MPC meeting today
It is projected that the MPC would cut the policy interest rate (RP1) at least by 0.25%
from 2.75% at present at its meeting this afternoon (29 May) in order to deal with the
Baht appreciation and to slow down foreign fund inflow. The reason for this round of
policy rate cut is different from the recent cut in October 2012, which was to boost
domestic economy, especially consumers’ demands and investment amidst the world
economic volatility.
- No significant effect on sector. TISCO&KBANK will most benefit,
LHBANK&KTB most affected
Reactions of commercial banks providing loan and deposit services regarding their
loan and deposit rates on the RP1 rate cut today will be different depending on how
much the policy rate is cut. If the policy rate is slashed only 0.25%, most commercial
banks might not have to cut their loan and deposit rates accordingly; but if the policy
rate is slashed 0.50%, the loan and deposit rates might be cut less than 0.50%, with
the deposit rate being reduced more than the loan rate in order to alleviate the affect.
However, the loan and deposit rate cannot be cut equally to the policy rate because of
the very tight liquidity at present that has reflected from the loan to deposit ratio or
LDR (B/E excluded) which was as high as 96% at end-2013 (or 93% with B/E
included). Liquidity surplus in the system dropped to a 6-year low of B699bn at end-
1Q13, versus B716bn at end-2012 and B954m at end-2011. Loan demands would be
very strong at 12.9%yoy in 2013 and 12.8%yoy in 2013 due mainly to mega
investment projects of the government (water management) and private sector (3G
network and overseas business acquisition and investment expansion). Consequently,
with the high funding cost as a result of the fierce competition of deposit raising
among commercial banks, the interest rate cut would have only limited effect on the
commercial banks. According to our study, at every 25bp cut in the loan and deposit
rate, NIM of the sector in 2013 will decrease 9bp from the current assumption of
2.99%, which would make the sector’s net profit in 2013 decrease by 1.7% from
previously. For the rest 7 months of the year, the banks that will benefit the most
from the policy rate cut are TISCO and KBANK; TISCO from its large fixed-rate loans
and KBANK from its large floating-rate deposits that will help alleviate the effect.
LHBANK and KTB, on the contrary, will be adversely affected by the policy rate cut the
that would not be able to offset the decrease of the income.
- Share prices already undergo correction, time to accumulate.
Top picks are BBL, KK
We maintain OVERWEIGHT for the banking sector. Although SETBANK has begun to
undergo correction in the short term after a continuous rally, the PBV (prospective) of
1.9x is very low compared with the average PER of regional peers, such as Indonesia
and the Philippines, at above 2x. Additionally, 2013-2014’s net profit growth of the
sector is estimated high at 30.6%yoy and 11.9%yoy, respectively. Top picks are BBL
for big banks and KK (aggressive EPS growth foreseen in 2013) for medium and small
banks.