Banking

Banking

 

4Q15 results reflected a small positive surprise on NIM with improving asset quality. We see the first signs of easing NPL formation but maintain our expectation of continued rise in NPLs in 2016, though at a slower pace than in 2015. We maintain our expectation of a modest recovery in 2016F earnings of 8%, in line with the expected gradual recovery in Thailand’s GDP. Bank valuations are now undemanding, below -1SD at and 9x PER and 1.1x PBV, pricing in this round of cyclical doldrums. KBANK is still the sector’s top pick. 

 

4Q15 recap: Small positive surprise on NIM with improving asset quality. The sector’s 4Q15 earnings fell 12% YoY and 3% QoQ, in line with SCBS forecast but above consensus by 9%. Overall 4Q15 results reflected: 1) QoQ improvement in asset quality with lower NPLs (-6% QoQ, mainly from write-offs), lower credit cost (-56 bps, mainly from the absence of extra provisions for SSI loans) and rising LLR coverage (130% vs. 122% at 3Q15); 2) a pickup in loan growth (+2.4% QoQ) mainly from the SME soft loans and retail loans; 3) QoQ weakening in non-interest income (-14% QoQ), mainly on net insurance income; 4) QoQ rise in cost to income ratio due to seasonality and KBANK’s extra expense from IT impairment.  

 

Easing NPL formation. Mainly because of write-offs, the sector’s NPLs fell 6% QoQ in 4Q15, after three consecutive quarters of rising NPLs (+6% QoQ in 1Q15, +4% QoQ in 2Q15 and +15% QoQ in 4Q15). Adding back estimated write-offs shows a 4% QoQ rise in the sector’s NPLs, slower than the past three quarters (+13% QoQ in 1Q15, +9% QoQ in 2Q15 and +24% QoQ in 3Q15). We believe that easing NPL formation was mainly due to rising debt restructuring. KBANK and BAY were only two banks with rising NPLs in 4Q15. Banks also prudently added to provisions in 4Q15, leading to a rise in LLR coverage to 130% from 122% at 3Q15 after a steady fall in LLR coverage from the 4Q13 peak at 138%. We maintain our expectation of a continued rise in NPLs in 2016, but at a slower pace than in 2015. 

 

Modest recovery in 2016. We continue to expect a modest recovery in 2016F EPS of 8% (vs.  -9% in 2015), in line with the expected gradual recovery in Thailand’s GDP in 2016F to 2.5-3.5% from the low base of 2-2.5% in 2015F, mainly driven by public investment since exports are not looking exciting. Our banking sector’s 2016F forecasts reflect continued large provisions, a gradual recovery in loan growth to 5% in 2016F vs. 4% for 2015, a stagnant NIM and a deceleration in non-NII growth. 

 

Cyclical doldrums discounted in valuations. Since the release of 1Q15 earnings, SETBANK  (-28%) underperformed the SET (-18%) by 10% mainly on concerns over asset quality. Bank valuations are now undemanding at below -1SD at and 9x PER and 1.1x PBV on 2016, pricing in this round of cyclical doldrums.        

 

KBANK still the sector’s top pick. We keep KBANK on as a sector pick, supported by its outperforming growth in loans and non-NII as well as lower opex growth after the completion of its K-transformation last year.