Banking

Banking

 

We expect to see a 21% YoY and 17% QoQ fall in the sector's 3Q15F earnings, dragged down by continued deterioration in asset quality; pre-provision profit is expected to be little changed. TCAP is expected to show the best growth and KTB the least.   

3Q15F: Continued deterioration. We forecast a fall of 21% YoY and 17% QoQ in sector earnings, pulled down by a QoQ rise in provisions, particularly for SSI loans at KTB, SCB and TISCO. Deterioration in asset quality continued in 3Q15, mainly on SME loans but also as the loans to SSI were reclassified as NPLs. We expect 3Q15F pre-provision profit to be fairly flat QoQ with minimal loan growth and stable NIM.    

TCAP – the best 3Q15F earnings growth. Big thanks for this goes to the tax loss benefit from the liquidation of its investment in SCIB. This will give TCAP the highest growth in 3Q15 earnings at 23% YoY and 6% QoQ. It will also outdo peers in terms of improving asset quality as a result of the sale of NPLs worth Bt3.6bn (12% of 2Q15 NPLs) and fewer auto loan NPLs.  

KTB – the worst 3Q15F earnings growth. To blame is the additional provisions against loans to SSI: we estimate contraction of 43% YoY and 36% QoQ in its earnings. KTB will make another Bt6bn in provisions out of the Bt9bn needed for its Bt22.9bn exposure to SSI and its UK subsidiary and is transferring Bt3bn of its excess reserve as specific provisions for the SSI loans. We factored in provisions of Bt10bn - Bt6bn extra provision for SSI loans plus the Bt4bn normal consolidated provisions. We expect stagnant net interest income on the back of QoQ slippage in loan growth and stable NIM.  

Continued lackluster in 2H15 with a new normal for 2016. We expect some softening in 2H15F on a rise in provisions and opex that will outweigh a gradual recovery in NIM and loan growth (3% for 2015F vs. 1.5% YTD). We expect provisions and loan growth to get back to normal in 2016F, bringing 14% earnings growth. Note that we believe that normalized provisions in 2016-2017 will be higher than in 2012-2014 both in absolute amount and credit cost, as banks have to rebuild LLR coverage and factor in a shift toward higher-risk higher-return loans. We expect the sector’s loan growth to recover from 2% in 2015F to 5% in 2016F. A modest recovery in 2016F GDP growth exerts downside risk on our loan growth forecast.    

Undemanding valuation but no S-T catalyst. Since the release of 1Q15 earnings, SETBANK (-22%) underperformed the SET (-10%) by 12% on concerns about asset quality and the hit on NIM by the interest rate cuts. Bank valuations are now undemanding, below -1SD at and 9x PER and 1.1x PBV, pricing in this year’s cyclical doldrums. However, there is no S-T catalyst.    

KBANK still the sector’s top pick. We keep KBANK as the sector pick because 1) it is expected to continue with outperforming growth in loans and non-NII, 2) it should benefit the most from the government’s SME support measures, 3) the completion of K-transformation this year is expected to usher in a better cost to income ratio.