Siam Commercial Bank

Siam Commercial Bank Plc (SCB)
What’s new?
Yesterday, SCB announced both lending and deposit rate cuts after the BOT cut its policy interest rate by 25 bps to 2.25% on Wednesday. The bank’s minimum lending rate (MLR) and minimum retail rate (MRR) were cut by 0.25% and 0.10%, respectively to 6.75% and 8.0%. Likewise, its 3- to 12-month fixed deposit rates were trimmed by 0.05-0.15% to 1.70-1.90% and its saving rate was cut by 0.125% to 0.625%.
1Q14 NIM will be impacted by cut; NIM expansion in 2H14
The cut makes no real difference to our FY13 earnings forecast because it is now almost the end of the year. But we expect SCB’s 1Q14 NIM to decline slightly to 3.0% (our FY14 NIM assumption is 3.2%). We anticipate that the bank will raise its lending rates by 0.50% in 2H14, contingent on economic and political conditions improving. Note that fixed deposits comprised 25% of its funding mix at end-Sept 2013. Morgan Stanley forecast that the BOT’s policy interest rate will be 2.75% by YE14 and 3.00% by YE15. We maintain our SCB FY14 NIM forecast at 3.2%.
0.25% MLR cut will enable SCB to facilitate new lending
The bank’s lower MLR should help enable it to lend more, especially to SME clients. Note that SCB aims to expand the SME proportion of its total loan portfolio from 20% at end-Sept to 50% within two years. The lending rate cut should make it to easier to achieve that target.
Investment thesis
We are confident in SCB’s FY14 earnings outlook, premised on: 1) a strong loan growth profile with scope for upside, 2) efficiency improvements that have squeezed its cost/income ratio to the lowest in the sector, 3) good asset quality management (an NPLs/loans ratio of 2.1% with a loan loss coverage ratio of 152%) and 4) a high CAR of 15.9% (Tier-1 of 12.4%).  Thus, our profit forecasts are unchanged at Bt50.7bn for FY13 and Bt61.8bn for FY14. We have a BUY rating on the stock.