Banking stocks overweight

According to the Bank of Thailand, the L/D ratio was 89.8 per cent in June, increasing from 84.9 per cent in March. Excluding bills of exchange (B/E), the ratio reached 98.5 per cent in the first quarter, compared with 90.7 per cent in the previous quarter.

Nawaporn Maharagkaga, director of the Financial Institutions Policy Group, said although the tightening liquidity was evident, commercial banks' liquidity management remained sound.

The central bank has asked com¬mercial banks to keep an eye on a shift in funding costs and to develop effi¬cient risk management after they issued B/E aggressively.

In the second quarter, the banks had issued Bt168 billion worth of B/E.

"The excess liquidity remains but was lower than in the first quarter. However, the banks have reacted to the situation smoothly by raising deposit interest rates," she said.

Before the financial crisis, the L/D ratio jumped to 120 per cent, reflect¬ing demand for money was astro¬nomically higher than the supply.

Nawaporn said the current tight¬ened liquidity was a result of the accel¬eration of loan growth for three con¬secutive quarters.

Total loans expanded by 11 per cent in June, compared with 7.3 per cent in March and 4.6 per cent in last December.

It was driven by a 16percent growth in consumer loans, which accounted for 23.9 per cent of total loans.

Moreover, corporate loans, which accounted for 76.1 per cent of total loans, have continued to grow for three quarters in a row, with a 9.5percent hike in June.

Loans for the manufacturing sec¬tor expanded 7.4 per cent, commerce rose 11.5 per cent, property and con¬struction sectors increased 4.2 per cent but the service sector contracted 4.3 per cent.

Nawaporn said credit growth in the second half of the year depended largely on the economic outlook

The banks could manage asset quality efficiently with enough capi¬tal adequacy ratio, she said.

As a result, nonperforming loans were 6.4 per cent of total loans, lower than 6.8 per cent in the first quarter.

The capital adequacy ratio was 15.2 per cent in the second quarter, com¬pared with 14.7 per cent in the previ¬ous quarter.

Meanwhile, KGI Securities (Thailand) recommended "over¬weight" for the banking sector, with big banks like Bangkok Bank, Siam Commercial Bank, Bank of Ayudhya and Kasikornbank, at target prices of Bt156, Bt112, Bt32.30, and Bt114 respectively, being its top picks.

In the near term, KGI Securities expects Kasikornbank and Bank of Ayudhya to be in focus as they have relatively more upside and room for mean reversion. Although the com¬pany is less positive about small banks, falling oil prices and a better political situation should open shortterm opportunities to trade in small banks like Tisco Bank and Thanachart Capital whose valuations have already been hammered, such as Tisco Bank with a target price of Bt27.20 and Thanachart Capital with a target price of Bt15.60.

During the past month, quantita¬tive analysis indicated that the down¬side was limited to only 45 per cent and the sharp fall of over 20 per cent in the prices of banking shares since April was overdone. Now, the tide has turned to a more positive outlook as political tensions ease and falling oil prices bring renewed hope that infla¬tion could peak this month.

SCB Securities also maintains "overweight". Kasikornbank with a target price of Bt96 and Bangkok Bank with a target price of Bt140 are its top picks. The broker said the downside risk is overly discounted in current share prices.

Meanwhile, there is little impact from the Deposit Protection Agency Act as the reduction in the insurance blanket begins to be phased in, but do look for an eventual rerating for large banks and a derating for small banks in the long run in response to: a wider gap in the cost of deposits, a wider gap in optimal capital funds, migration of deposits to other sav¬ings choices - favourable to banks with a solid platform, a wider gap in insurance premiums between lowrisk and high-risk banks if a differential premium rate is applied.