Banking sector

Banking sector

- 1Q14 beats projection
Ten commercial banks under our coverage posted 1Q14 combined net profit at
B50.3bn, growing 11.0%qoq or 4.3% better than projection, though still shrinking
1.4%yoy. Debt provisioning decreased 20.3%qoq – better than expected. Credit cost
dropped from 105bp in 4Q13 to 83bp. NPL increased more than B12.7bn to 2.55%
of total loans. Operating expense decreased 8.9%qoq after passing the high season,
making the normalized profit grow 8.7%qoq – as expected. The banks that showed
the strongest net profit growth qoq were BAY, KBANK, BBL, TISCO, and SCB, thanks
to a decrease in debt provisioning (BAY, TISCO, SCB) and lower operating expense
(BBL, KBANK, SCB, BAY). The other banks showed lower net profit, led by KKP (debt
provisioning increased whereas income from the core business remained weak), KTB
(no extraordinary income and no Vayupak Fund dividend), and TCAP (income from
the core business remained weak and NIM contracted). Total loan increased only
0.6%qoq but 8.7%yoy – slightly better than projected, the lowest quarterly growth
in the past five years but still consistent with FY2014 net loan growth we estimate at
6.5%yoy. Net interest income weakened 1.4%qoq. Extraordinary income also
declined due to the interest income from debt restructuring booked by many banks
in 4Q13. Moreover, in mid-March most banks had revised down their loan and
deposit rates, making NIM fall 10bp to 2.96%. Fee income decreased 2.0%qoq, in
line with the sluggish loan transaction and capital market. In addition, there were
not important deals like in 4Q13.
- Weakness foreseen in 2Q14
After 1Q14 earnings were reported, we revise down our earnings forecast only for
TISCO. After the down revision, FY2014 net profit would still grow 2.4%yoy, while
earnings in 2Q14 has a good chance of declining since overall loan growth is still flat
as a result of the inactive economy. NIM tends to contract as a result of the interest
rate raise in late March 2014. As asset quality is still an important factor of banks,
continuously high debt provisioning is expected.
- Buy on weakness. Top picks are BBL and TISCO
We assign UNDERWIEGHT for the banking sector. As SETBANK has rallied 16% since
the beginning of the year, it is the time to take profit and buy again when the share
prices undergo correction. We still like BBL(FV@B197) and TISCO ([email protected]),
which are big and small banks with strong fundamental factors and attractive
dividends. Interesting international banking stocks are those in Europe and Japan of
which the 2014 PBV and P/E ratio are low, as shown in the table on the next page.