Banking sector

Banking sector  

 

- 1Q15 profit improves from decreasing expense, rising fee income  

Ten commercial banks under our coverage announced 1Q15 net profit at B52.3bn, growing 6.1%qoq and 3.8%yoy, slightly better than expected, thanks to decreasing operating expense after passing a high season and increasing fee income from mutual fund selling and insurance underwriting. Income from other operations also showed good growth, i.e. Fx gain and capital gain, especially from bonds and debt instruments. Other core businesses, e.g. loan, still posted slowing growth, which is normal for the beginning of the year. Excluding BAY’s integration with BTMU, the sector’s loan growth was thin at only 0.52%qoq and 7.84%yoy. NIM shrank a bit by 2bp to 3.03%; as deposits have grown at a faster rate than loans, banks have managed their excess liquidity by issuing interbank loans and investing for short-term yield, which turned out low. In addition, average loan and deposit interest rates have been slashed by 0.125-0.25% in mid-March 2015. Fee income showed flat growth. Asset quality worsened due to more-than-expected increase in NPL, especially from KTB’s housing loans, while NPLs of other banks came mostly from small SME loans. As a result, debt provision expense increased more than expected from the prior quarter. In conclusion, KKP, KBANK, and BAY showed the most outstanding net profit growth in this quarter whereas TMB, TISCO, and KTB’s net profit contracted most. 

- Profit from core business to lower in 2Q15  

We revise down FY2015-2016 net profit forecast respectively by 1.6% and 0.5%, solely by cutting KTB’s forecast in order to reflect the disappointing business growth and our underestimation of debt provision expense. After the revision, the sector’s net profit growth is estimated at 7.7%yoy in 2015 and 14.2%yoy in 2016; net loan growth is projected at 6.7%yoy and 8.1%yoy, respectively. NIM is anticipated to improve in 2H15 for banks will have fully benefited from lower cost of fund, as a result of the new policy rate, after maturity of long-term deposits; NIM is targeted at 3.14% (in case that the policy rate is not cut further). For the rest of 2015, disbursement of the government budget, both regular expenditure and investment budget, within the budget year and stimulus measures are the hope. Earnings in 2Q15, however, may weaken because a benefit from decreasing debt provision will be offset by NIM hitting the year’s low and rising operating expense. 

- Top picks are KBANK, BBL  

We maintain NEUTRAL for the banking sector. Top picks are KBANK(FV@B300) for its highest ROE among peers with potential for notable fee income growth and BBL(FV@B210) for its better asset quality management than KTB.