Siam Commercial Bank

Siam Commercial Bank Plc (SCB)

Investment thesis
We have adjusted down our SCB’ FY14 and FY15 lending assumptions to 10% and 10%, respectively, from 12% and 12%, due to the current unfavorable domestic political and economic environment. Thus, our profit forecasts decline by 2.9% to Bt60bn for FY14 and by 4.2% to Bt69bn for FY15. The lower FY14 bottom-line projection prompted us to cut our YE14 target price by 7.2% to Bt189, pegged to a justified YE14 PBV of 2.1x. Our BUY rating stands.
SCB now not quite so bullish over the FY14 outlook
10M13 lending expansion was 12.7% YoY, in line with the bank’s FY13 loan growth target range of 12-15%. The retail and SME categories are driving 4Q13-to-date business growth, according to management. Thus, we are confident that our FY13 lending expansion estimate of 15% is achievable. SCB conservatively guides for FY14 loan growth in the range of 7-10% (it previously guided for 11-12%). The lending focuses are SME and retail (which pay higher yields than corporate business). Note that we have revised down our FY14 loan growth forecast to 10% from 12%.
SCB says that non-interest income (NII) will rise from 12-14% this year to 12-15% in FY14, boosted by non-lending businesses, such as sales of retail financial products and commissions on FX and trade finance.
Maintain FY14 NIM targets at 3.1-3.3%
Given a stable interest rate trend and anticipation of further loan growth, the bank now expects an FY14 NIM of 3.1-3.3% (it guides for 3.1-3.2% for FY13). Competition for deposit mobilization and lending business are the main threats to NIM sustainability. Our FY13 and FY14 NIM forecasts are 3.1% and 3.2%, respectively. SCB expects the BOT’s one-day Repurchase Rate to stay at 2.25% till about mid-2014.
FY14 loan loss provisions will be set at 65-70 bps of gross loans
Although the bank already has a high loan loss coverage ratio of 152% and a low NPLs/loans ratio of 2.1%, it guides that LLPs will rise slightly in tandem with lending growth. SCB will set bigger LLPs in the range of Bt8bn-10bn (equal to at least 65 bps of FY14 lending)next year. It will also set an extra provision in 4Q13 using a gain of about Bt1bn from the winding up of Vayupak Fund 1. Thus, we have raised our LLP assumptions by 18% to Bt9.8bn for FY13 and by 4.8% to Bt8.7bn for FY14. SCB has set a YE14 NPLs/loans ratio target range of 2-2.3%.
Strong FY14 ROE guidance of 19-21% 
Management guides for ROE of 19-21% (the highest among the big banks), to be achieved as the result of a well-managed NIM, moderate loan growth and good OPEX control. The bank aims for cost\\income ratios of 40-42% for FY13 and 39-41% for FY14. We model for FY13 and FY14 cost/income ratios at 42% and 40%, respectively.