Banking

4Q14: Recovery starting. The key takeaway from banks’ 4Q14 results is a small positive surprise in asset quality as a result of their proactive NPL resolution (i.e. via selling and debt restructuring) and tamed NPL inflow that led to easing provisions and rising LLR coverage. There was no surprise in the sector’s pre-provision profit (-1% YoY and -9% QoQ), which reflected a gradual recovery in loan growth and non-NII that was then wiped out by seasonally back-loaded opex. The sector’s loan growth picked up 2.5% QoQ (partly on seasonality) and 4% YoY driven by corporate, SME, housing and government loans at KTB with continued contraction in auto loans. Banks that actively pursued deposits in 4Q14 (KTB, BBL and SCB) experienced a QoQ squeeze in NIM from rising cost of funds, but other banks were able to continue to expand NIM.   

 

More positive view on KTB. Following the release of 4Q14 results, we are more positive on KTB, as this showed a larger decrease in NPLs than anticipated (-17% or Bt11bn QoQ), lifting its LLR coverage by 19 percentage points QoQ to 127%. This relieves its provisioning overhang and eases credit cost risk. We conservatively maintain our forecast of stable credit cost at 70 bps in 2015, despite the lower 4Q14 NPLs.   

 

Gradual recovery on the way. We expect a gradual recovery in banks’ EPS growth at 9% in 2015F vs. +3% in 2014, mainly off an expected pick-up in loan growth to 7% from 4% in 2014 and in non-NII to 10% from -5% in 2014. We expect the hurdles faced by asset quality last year – particularly from auto loans - to ease this year. The thrust from infrastructure projects and consumption (partly capped by high household debt) is expected to come gradually, mostly in 2H15. 2016 paints a better picture with infrastructure projects moving ahead full steam, underwriting accelerating loan growth (9%) and earnings growth (14%). 

 

Inexpensive valuation. SETBANK has retreated by 7% since December 2014 in response to downward revisions in 2015 GDP forecasts that led the market to fear a slower recovery in 2015 than hoped. The sector was also at an unattractive valuation (though not yet overvalued) at close to +1SD above historical mean. It is now back to historical mean, which includes the 2009 crisis outlier. SETBANK generally trades at +1SD. We believe a share price weakness offers the chance to accumulate as the sector is currently trading at an inexpensive valuation of 9x PER and 1.2x PBV for 2015 (excluding irrational valuation of BAY and LHBANK). 

 

Top pick: Replace BBL with KTB, keep TISCO. We remove BBL from our top pick as we see rising risk that corporate clients – where BBL is strongest - will shift their financing from bank borrowings to issuing bonds to lock in low cost of debt in the low interest rate environment. We expect KTB to do best in loan growth at 12% for the next couple of years as it is in the best position to benefit from accelerating public investment, both from government loans and loans to contractors. The completion of the SME and retail transformation program will be another catalyst for outperforming top line growth. TISCO is trading at 7.6x PER 2015F and 1.3x PBV, a large discount to its superior 17-18% ROE and good 15% 2015F earnings recovery, supported by normalizing credit cost and a strong NIM.