Banking

Profit still in a stall in 3Q14. Led by TISCO, banks will release 3Q14 results over 13-21 October. We expect net profit to be stagnant both YoY and QoQ. Key takeaways from 3Q14 guidance generally reflect: 1) modest loan growth; 2) QoQ stable net interest margin (NIM); 

3) a small QoQ pick-up in non-interest income (non-NII); 4) QoQ easing in cost to income ratio; and 5) QoQ stable or minimal rise in provisions for large & mid-sized banks but small QoQ fall in provisions for banks that focus on auto loans (TISCO and TCAP) with a slight rise in NPLs.  

SME-driven loan growth. Because of their focus on SME loans, KBANK and TMB are the only two banks for which loan growth in 3Q14 was okay. Corporate loans also had some growth, but retail loan growth remained the most sluggish, particularly auto loans – which continued to contract. We expect moderate recovery in loan growth from 4Q14 onwards, triggered by release of pent-up demand and progress of infrastructure projects. We maintain our loan growth forecast of 5% for 2014F and 10% for 2015F.  

Still good NIM but rising pressure from deposit competition. After a solid expansion in 2Q14 (+13 bps QoQ on average), net interest margin (NIM) is expected to remain good in 3Q14 as deposit competition remained low. However, we expect rising deposit competition from 4Q14 as banks stock up on cash to fund loan growth, pressuring NIM down. 

Provisions at HP banks stepping down. The deterioration in used car loans was at its worst in 2Q14 and provisioning for auto loans is expect to start coming down in 3Q14 for two reasons. First, market prices for used cars have stabilized after plunging 30-40% over the past two years. Second, nearly all used car NPLs came from loans extended in 2012 and 1H13, and since borrowers will have paid off more than half of their loans by now they will be more willing to continue to pay down their loans. Note that borrowers earlier gave up their cars because of the sharp fall in used car prices rather than because of debt-servicing ability. With the remaining debt likely to be less than the market value of the car, there is less incentive to walk away from the loan. 

Reiterate BBL, TISCO as the sector’s top pick as laggard plays. With the strongest balance sheet in all respects, BBL is in the best position to emerge strongly out of the poor 1H14 and do well in the coming investment up-cycle triggered by infrastructure projects. TISCO is trading at the lowest PER of 8x 2015F, a large discount to its superior 18% ROE (3rd highest) and strong 2015F earnings recovery, supported by normalizing credit cost and a turnaround in loan growth.