Banking

Banking

 

Hit by a cyclical deterioration in asset quality and NIM, 2Q15F earnings are expected to fall 10% both YoY and QoQ. Following 2Q15 preview meetings, we have lowered the sector’s 2015F earnings growth to a contraction of 7% from growth of 3% to reflect worse asset quality and loan growth than expected. The downturn in 2015 has to a large extent been priced in in a 20% share price correction since 1Q15 results were released to valuation of -1SD. 

 

2Q15F: Hit by worsening asset quality and NIM. We forecast a fall of 10% both YoY and QoQ in the sector's 2Q15F profit, mainly on a >10 bps QoQ squeeze in NIM (excepting HP-focused banks) resulting from the asymmetric cut in lending interest rates and a QoQ rise in provisions (excepting HP-focused banks) necessitated by rising NPLs, greater prudence and a more bearish view on 2H15 asset quality. Loan and non-interest income growth is expected to be modest in 2Q15.  

 

Worse cyclical NPLs than expected. The big banks expect the rise in NPLs to continue into 2H15, meaning there is a good chance NPLs for the year will be higher than earlier expected. Guidance suggests a worst-case rise in 2015F NPL ratio of ~55 bps to 2.8% for KBANK, ~40 bps to 2.5% for SCB and ~40 bps to 2.6% for BBL. KBANK lifted its 2015 credit cost estimate to up to 150 bps (103 bps for 1Q15, 120 bps for 2Q15F) from the earlier 100 bps. SCB raised its 2015 credit cost to 92-98 bps (85-87 for 1H15F and 100-110 bps for 2H15F) from the earlier 75-80 bps. BBL raised its 2015 provisions from Bt9bn to Bt10bn, split into Bt3bn in 1Q15, Bt3bn in 2Q15 and Bt4bn in 2H15. We have raised the sector’s 2015F credit cost to 110 bps from 95 bps. 

 

NIM to hit bottom in 2Q15 and recover in 2H15 driven by easing cost of funds as deposit campaigns run their course.  

 

Slower loan growth recovery than expected. Following the 2Q15 preview, we lowered the sector’s 2015F organic loan growth to 4% from 6% to reflect a slower than expected 5M15 growth of 1% and to fine tune with big banks’ more bearish guidance as they incorporate a slower recovery in the economy. We however continue to expect loan growth to accelerate in 2H15, underpinned by a big push in public investment plus seasonality. 

 

Cut 2015F earnings growth to contraction; raise 2016F earnings growth. Following the 2Q15 preview, we have lowered the sector’s 2015F earnings growth to -7% from 3%, mainly to allow for worse asset quality than expected. However, we stand by our 2016F forecast of recovering loan growth driven by rising investment as infrastructure projects progress plus a return to normal provisions that will reduce overall provisions. The lower base in 2015F led to a rise in 2016F earnings growth to 17% from 12%.   

 

HP-focused banks, the sector’s contrarian. On the other side of the coin, HP-focused banks (TCAP, TISCO and KKP) will do better, with positive 2015F earnings growth driven by falling provisions on easing used car NPLs following a stabilization of used car prices and widening NIM as they benefit from interest rate cuts. 

 

2015 downturn in the price. We believe the downturn this year is already reflected in the 20% share price correction to -1SD below historical mean since 1Q15 results were released. We keep KBANK and KTB as top picks, shored up by outperforming top line growth and the strongest earnings recovery in 2016 after emerging from the cyclical 2015 downturn.