Banking

Banking 

1Q16 was as bad as expected, showing a further deterioration in asset quality and flattish pre-provision profit. We cut 2016F earnings and TP by 5% on average to capture the negative impact from lending interest rate cuts and fine-tune with 1Q16 results. Bank valuations are now undemanding, at around -2SD at and 9x PER and 1x PBV, pricing in this round of cyclical doldrums. KBANK is still the sector’s top pick. 

 

1Q16 recap: Rising NPLs with flattish pre-provision profit. The sector’s 1Q16 earnings fell 9% YoY but rose 9% QoQ, in line with SCBS and consensus forecasts. Banks missing 1Q16 forecasts were SCB (on one-off negative impact from SCB Life’s accounting changes) and KTB (on worse asset quality than expected). KKP beat forecasts, mainly on lower provisions than anticipated. Overall 1Q16 results reflected: 1) a deterioration in asset quality with a 16 bps QoQ rise in NPL ratio (+6% in amount) and a 14 bps QoQ hike in credit cost to keep LLR coverage stable at 130%; 2) zero loan growth (-0.3% QoQ) on high repayment from corporate and government loans and tightening credit policy; 3) a 5 bps QoQ squeeze in NIM; 4) flattish non-interest income; 5) easing cost to income ratio due to cost control policy.  

 

Cut 2016 earnings forecast to factor into lending rate cuts. We cut banks’ 2016F earnings by 5% on average to factor in a 25 bps cut in lending rates (MLR cut at the beginning of April followed by MOR and MRR cuts in the past few days by large & medium sized banks). The new forecast uncovers stagnant 2016 earnings (+7% under the old forecast) with a 6% fall in 2016F EPS (0% under the old forecast) We revised the sector’s 2016 NIM forecast downward by 10 bps from the old forecast, translating to an expectation of an 8 bps fall in the sector’s 2016F NIM. Among large banks, we expect KBANK to have the largest 2016 NIM squeeze at 15 bps as it has the smallest room to further ease cost of funds, considering its highest mix of CASA and the lowest cost of funds. We maintain our forecast of a modest recovery in loan growth to 5% in 2016F from 4% in 2015, slowed non-NII growth, and continued high provisioning. 

 

Cut TPs; Keep KBANK as the sector’s top pick. We cut target prices for BBL, KTB, KBANK, BAY and TMB by 5% on average. We believe the sector’s undemanding valuation at ~9x PER and 1x PBV in 2016F (-2SD) already discounts the asset quality concerns and slowing top line growth. We expect the deterioration in asset quality to be worst this year (1H16) and look for a moderate earnings recovery next year. 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.