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Published on March 28, 2008

Brokerage houses recommend "buy" on banking shares, particularly in the current quarter before the stocks enjoy a rally in the third, thanks to strong fundamentals and improving domestic demand.

February loan growth was as strong as 1.9 per cent month on month and 8.6 per cent year on year.

Banks' non-performing loans for the fourth quarter last year were Bt41.7 billion, down by 16 per cent quarter on quarter and 3 per cent year on year. NPL re-entry also declined 13 per cent quarter on quarter and 9 per cent year on year to Bt16.5 billion.

KGI Securities (Thailand) said despite the better prospects for the domestic economy and the solid fundamentals of banks in the second quarter this year, the near-term upside is likely to be capped or further weakened due to an overhang from the political situation and poor sentiment from the US recession.

However, KGI Securities said valuations were near the bottom ahead of an anticipated US economic recovery in the third quarter.

"Therefore, we recommend investors accumulate during the second quarter and enjoy the rally into the third quarter. Share-price weakness, if any, should be seen as a buying opportunity," KGI Securities said in its recent report.

The broker has selected Bank of Ayudhya, Kasikornbank and Siam Commercial Bank as its top picks.

During the second quarter, KGI Securities said it would recommend going for banks with high exposure to the retail and SME segments, underpinned by the government's stimulus policy for the grass-roots economy and improved confidence, strong fee-income prospects and good asset quality as well as laggard performance. These traits have relatively higher potential to add upside surprises to the forecast with a decent return in the second half.

The industry continues to show positive momentum with strong loan growth. The Consumer Confidence Index is also recovering and rose for the fourth straight month to 72.6 in February. Moreover, the government is willing to spend more to fully stimulate the economy, while credit costs are declining as most banks have already come into compliance with the new IAS 39 standard. Profitability is expected to turn around through multi-year recovery, KGI Securities said.

Kim Eng Securities (Thailand) recommends "buy" for Kasikornbank, Bangkok Bank and Bank of Ayudhya with fair values of Bt97.50, Bt146 and Bt24.80 per share, respectively.

It says Kasikornbank has the highest loan growth year to date and also has many strengths compared to its peers, such as the highest net interest margin and accelerating growth of fee income. Bangkok Bank is the largest bank focusing on corporate lending with ample liquidity and will also benefit from an anticipated acceleration in 2008 investment growth. Bank of Ayudhya is a turnaround stock with strong long-term prospects in retail banking after acquiring GE Capital Auto Lease.

Tisco Securities recommends "maintain its overweight rating" for the banking sector and continues to prefer Bangkok Bank and Krung Thai Bank, which have been laggards but now offer substantial upside potential.

One key risk for Thai banks is regulators continuing to upgrade standards for the industry. Another risk relates to rising NPLs if the economy fails to recover as strongly as anticipated this year, Tisco Securities said.

The loan growth of 10 banking stocks under Tisco's coverage in February was 1.9 per cent month on month and 8.6 per cent year on year.

"This was primarily because of higher demand for corporate loans on top of loan growth in the SME segment. With agricultural commodity prices having risen sharply over the past three months, the working capital requirements of agriculture-based businesses have increased," Tisco Securities said.

Tisco Securities forecasts loan growth will accelerate to 12 per cent year on year.

Citibank said in its Thailand Investment Daily publication dated March 24 that it believed further interest-rate cuts would help lift domestic confidence and translate into improved demand in 2008.

In its Credit Research Update of March 26, Standard Chartered Bank expects the Bank of Thailand to cut the benchmark policy interest rate 2 per cent by the end of the year, from 3.25 per cent currently.

The new government is eager to make a quick and positive impact but its stimulus measures are likely to take some time to bring in the desired results, especially as the global environment remains unsupportive, the bank said.

Therefore, based on the expectation of 4-per-cent growth in gross domestic product this year - compared to 4.8 per cent in 2007 and a predicted 5.1 per cent in 2009 - Standard Chartered Bank expects banks' loan growth to be modest this year.

The Nation