Mixed response from brokers on local banks' Lehman exposure

Citi Thailand has downgraded Bangkok Bank (BBL) and Siam Commercial Bank (SCB) from "buy" to "hold" but maintained its buy rating on Bank of Ayudhya (BAY).

Banking stocks yesterday were the centre of a heavy Stock Exchange of Thailand selloff for a fifth trading day in a row since news of Lehman's probable collapse broke, sparking a major selling spree that sent the SET into a tailspin.

The SET Index lost 3.11 per cent yesterday to close at 605.14 points.

BBL slumped 3.4 per cent to Bt99.50, SCB was off 4.29 per cent at Bt67, Kasikornbank plunged almost 4 per cent to Bt60.50, Krung Thai Bank was off 4.32 per cent at Bt6.65 and BAY lost 3.89 per cent at Bt17.30.

The Bank of Thailand said on Monday that local banks had outstanding investment exposure to Lehman totalling Bt4.3 billion, and another Bt5.3 billion worth of foreignexchange contracts. This represents merely a combined 1.3 per cent of overall assets in the Thai banking sector.

BBL revealed that it has senior unsecured bond exposure to Lehman to the tune of about Bt3.5 billion, the highest level among its industry peers.

SCB did not disclose the level of its investment exposure to Lehman, but said the investment had already been sold out at a loss this quarter.

Kasikornbank said it had extended Bt330 million in a fully collateralised loan to Lehman's subsidiaries, while BAY and KTB have minimal exposure to Lehman's collateralised debt obligations (CDOs) of less than 1 per cent of their overall investments in CDOs of $85 million and $160 million, respectively.

Other banks do not have any exposure to the collapsed US institution.

Citi Thailand has lowered its 2008 earnings estimates for BBL by 12 per cent to Bt9.61 billion and cut the target price for the stock from Bt120 to Bt115, assuming a total writeoff on the investment.

SCB's 2008 earnings forecast has been slashed by 2.4 per cent to Bt5.94 billion, assuming that loss from the investment could be Bt700 million.

The brokerage has cut the target price for SCB from Bt77 to Bt74.

Although Citi Thailand has not downgraded the recommendation on BAY's stock, it has cut the target price from Bt27.8 to Bt25 and its 2008 earnings prediction by 6.3 per cent to Bt7.4 billion.

"BAY has indirect exposure to both Lehman and AIG [American Insurance Group] through its $85 million in CDOs. We expect the bank to write down another 25 per cent of CDOs in the third quarter [it has already written down 51 per cent]," the broker said.

DBS Vickers Securities (Thailand) has cut the target prices for BBL and SCB from Bt133 and Bt83 to Bt130 and Bt82.50, respectively, to reflect the impairment loss of their investments in Lehman's debt instruments.

DBS estimates that SCB has the secondhighest Thai exposure to Lehman at about Bt1 billion, against BBL's Bt3.5 billion.

In the worst-case scenario, BBL and SCB would need to book impairment losses for of Bt3.5 billion and Bt800 million, respectively, in the current quarter.

Based on this assumption, DBS has trimmed its 2008 earnings forecasts for BBL and SCB by 12 per cent and 3 per cent, respectively.

However, it has maintained its "buy" recommendation on both stocks and three other large banks. It believes Lehman's collapse will have a minimal impact on the 14 Thai commercial banks due to the limited overall exposure.

"The overall impact will be minimal, considering the small amount of total exposure of local banks," the broker said.

Tisco Securities remains upbeat Thai banking stocks, saying they would feel a minimal impact from Lehman's collapse.

"BBL is expected to be the bank that will get the biggest hit from the Lehman Brothers fiasco, yet the effect on this year's bottom line is only 11 per cent, while Kasikornbank and SCB are expected to be impacted by 1.5 per cent and 3.7 per cent, respectively, at the maximum," Tisco said.

"KTB and BAY are expected to have an indirect impact from the reduction in the CDO price, while Siam City Bank, TMB Bank, Kiatnakin Bank and Thanachart Capital are immune from the Lehman Brothers turmoil."

The broker has reiterated its "buy" rating for bank stocks, with SCB and BBL as its top picks. However, it told investors now was not the right time to snap up banking stocks as the debacle surrounding US financial institutions might cast a dark cloud over banking stocks in the short run.