Banking

Banking 

 

Bank 1Q15 earnings are expected to reflect modest loan & fee income growth, stagnant NIM and stable asset quality. We forecast modest 1Q15 profit growth at 4% YoY and 7% QoQ. The sector’s YTD share price weakness makes valuation undemanding and offers a chance to accumulate. 

1Q15F: Modest recovery. We expect banks' 1Q15 earnings to show a small recovery with average growth of 4%YoY and 7% QoQ (mainly seasonal). If we exclude BAY, which had inorganic growth from its merger with the Bank of Tokyo-Mitsubishi UFJ’s Bangkok branch in January, the sector’s 1Q15 earnings growth would be a modest 2% YoY and 6% QoQ. 1Q15F results are expected to reflect 1) a sluggish QoQ loan growth, 2) QoQ stagnant NIM, 3) QoQ flat non-interest income (NII) and 4) stable asset quality with easing NPL formation, smaller losses on repossessed cars and continued prudent credit cost. We expect KBANK to exhibit the most solid results in 1Q15. 

Fragile loan growth no surprise, expect pickup after 1Q15. The sector’s organic 2M15 YTD loan growth was negative at -0.2% (+2.1% if BAY’s inorganic growth is included), in the main driven by corporate and SME loans. We expect loan growth to pick up in March, chiefly corporate loans, ending the quarter with a little loan growth. This will be no surprise to anyone since first quarter is typically low season, plus the economy is still slow. Loan growth is expected to pick up gradually in 2Q15 before getting into high gear in 2H15, led by progress in public investment, the return of inventory restocking upon the end of a destocking cycle and a pickup in domestic consumption. Auto loans continued contracting in 1Q15 and are expected to see no growth in 2015 due to high repayment of loans extended during the unusual peak in 2012-2013. We continue to expect sector loan growth of 7% vs. 4% in 2014.  

Sustainable NIM despite interest rate cuts. We expect no change in net interest margin (NIM) in 1Q15. Despite interest cuts in March in response to the 25 bps policy rate cut, we expect to see a negligible hit on 2Q15 NIM for large and mid-sized banks and better NIM for TISCO, TCAP and KKP, all of whom have high exposure to fixed-rate auto loans. We expect banks to sustain loan yield despite the cut in MLR. A narrower gap between time deposit rates and savings deposit rates should prompt migration to savings, which will ease funding cost. We maintain our forecast of a slight improvement in NIM in 2015F on easing cost of funds and improving loan to deposit ratio.    

Still prudent provisioning despite easing NPL formation. We expect banks to remain cautious with regards to provisioning in 1Q15, despite the slowing in NPL formation, largely on lower losses on repossessed cars in 1Q15. Although HP-focused banks expect lower credit cost this year, they will continue to make high provisions in 1Q15 before stepping back later on this year.  

Change top picks to KTB and KBANK. KTB is our top buy: we expect it to enjoy outperforming loan growth for the next couple of years, positioned to get the greatest 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. We replace TISCO with KBANK after KBANK’s share price retreated to an inexpensive level. We believe KBANK will continue to exhibit outperforming top line growth, particularly in terms of non-NII.