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Bangkok Bank

1Q14: Vigilant NIM management shows results BUY

Bangkok Bank Plc (BBL)

- 1Q14A net profit in line with expectations, down 1% YoY and 17% QoQ to Bt8.97bn, in line with SCBS' Bt8.6bn and consensus' Bt8.8bn. Overall, BBL had a flat 1Q14, as expected. We would like remark that the smallness of the NIM slide QoQ indicates that BBL is now more resilient in managing NIM than it used to be. BBL has historically been hit hard by downtrending interest rates as it has always had the highest excess liquidity. Key points:

1. Loan growth: In line with estimates, -0.4% QoQ, similar to the sector but the negative loan growth in the first quarter is really just "business as usual" for BBL as its customers traditionally make repayments in first quarter: its 1Q13 QoQ loan growth was also negative (-0.75% QoQ). We expect loan growth to resume a growth trend over the rest of year.

2. Net interest margin: In line with guidance, -2 bps QoQ to 2.21%. As a result of interest rate cuts, yield on earning assets fell 8 bps QoQ and cost of funds eased 6 bps QoQ. With the highest exposure to money-market rates, BBL is typically hit hardest by interest rate cuts, but this time the extent is less - proof that BBL is more vigilant in managing NIM than it in the past. BBL claims it was able to negotiate with some clients to change interest charge terms so that these loans are not affected by interest rate cuts. We expect its NIM to continue to slip minimally in 2Q14 on the expectation of another 25 bps cut in policy rate and then slowly recover in 2H14 upon deposit re-pricing.

3. Non-interest income: As expected, -3% YoY (lower gain on investment and NPAs) and +6% QoQ. Fee income was stagnant YoY and up a small 2% QoQ. We expect a QoQ rise in fee income in 2Q14, mainly from bancassurance fees.

4. Cost to income ratio: As expected, easing both YoY and QoQ to 43.1%.

5. Asset quality: As anticipated, NPLs by amount rose 4% QoQ on a qualitative reclassification, bringing NPL ratio up to 2.58percent from 2.47% at 4Q13. Provisions rose 21% YoY and QoQ, equivalent to a credit cost of 48 bps. We expect provisions to be fairly stable for the remainder of the year. Loan loss reserve (LLR) coverage came down to 210percent from 214% at 4Q13. We expect a further slip in LLR coverage in 2Q14 on continued a rise in NPLs against stable provisions. Its highest LLR coverage allows BBL to stabilize provisioning.

- Maintain flat 2014F with insignificant damage from the economic downturn. Factoring in the hit to the economy from the prolonged political unrest, we reduce our 2014F by a small 1% to a contraction of 1%. We cut net interest income growth to 3percent from 4% (vs. +2% in 2013) after reducing loan growth to 5percent from 6% (vs. 9% in 2013), accompanied by a small 1 bps downward revision in NIM (equivalent to -5 bps YoY for 2014F vs. -21 bps YoY for 2013) to factor in the negative implication of the expected 50 bps cut in policy rate in 1H14 (already cut 25 bps in 1Q14). We slash 2014F non-interest income growth to 5percent from 6% (vs. +17% in 2013), mainly reflecting lower fee income. We maintain 2014F credit cost at 49 bps (the same as 2013) and cost to income ratio at 46% (normalizing from the unusually low 44% in 2013 on the reversal of the TAMC loss sharing).

- Maintain as top Buy. We keep BBL as our top buy with unchanged target price of Bt228 (1.35 x 2014F BVPS). We see BBL as the most defensive play as it is most able to withstand an economic downturn in two respects. 1) By all parameters - 210% LLR coverage, 16.9% capital adequacy ratio and the highest liquidity at one-third of total assets, BBL has the strongest balance sheet, giving it the softest cushion to weather the economic downturn brought by the political turmoil. Representing a flight to quality, BBL shares have historically initially outperformed during economic downturns. 2) BBL has the highest exposure to corporate loans, which are positioned to be least damaged by the economic downturn in terms of both growth and asset quality.

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