Bank sector

Q4 2012's profit sinks qoq. LHBANK, KK, TCAP most outstanding. Strong recovery foreseen in Q1 2013 Overweight

Banking sector

Q4 2012's profit shrinks 28.2%. Provision increases; norm profit remains bright

10 commercial banks under our coverage posted total net profit in 4Q12 at B31.8bn,

contracting 28.2%qoq but growing 50.7%yoy, worse than our projection for a

contraction of only 9.4%qoq and the growth of 90.3%yoy. Norm profit in 4Q12 grew

9%qoq and 34.9%yoy. Top 3 banks that showed the largest net profit growth in this

quarter were LHBANK (NIM increased; loan grew aggressively; cost to income ratio

decreased), KK (fee income from PTTEP and TESCO deals), and TCAP (provision

decreased; NIM increased; loan grew aggressively). The only big bank that showed

robust growth in this quarter was BBL (tax expense decreased; fee income grew

remarkably). On the other hand, the banks that showed severely contracting net profit

were KTB (provision was increased substantially more than expected in order to

increase coverage ratio) and KBANK (cost to income ratio and provision increased).

Overall, the factors depressing the sector's net profit in 4Q12 are as follows. 1) Debt

provision expense skyrocketed 123.2%qoq and 17.4%yoy - higher than

expected, not from an increase of NPL but a stricter policy of each bank. KTB

announced the largest debt provision increase; other banks also set higher provision

from their conservative method amidst the economic fluctuation in 2013; only TCAP

and KK posted lower provision in this quarter. 2) Cost to income ratio in 4Q12

shifted to 48.3percent from 45.7% in the previous quarter - in line with projection,

mainly from an increase of seasonal expenses and investment expense (KBANK). On

the other hand, positive factors on earnings in this quarter are the following. 1) Net

interest income thrived 4.3%qoq and 13.6%yoy - as expected, in line with the

loan growth of 3.4%qoq and 11.5%yoy to the year's peak, especially for SME and retail

loans (new-car hire-purchase, housing, and credit card). At the same time, NIM in

4Q12 still stabilized qoq at 3.18% despite an impact from the policy rate cut in the

past. 2) Fee income grew 7.9%qoq and 36.2%yoy - higher than expected, in

line with the loan growth on seasonal effects. At the same time, fee income from other

retail transactions such as Bancassurance, mutual fund, and credit card has grown

more aggressively qoq. However, these positive factors still could not offset the

pressuring factors, so a decrease in net profit is seen in this quarter. For overall

FY2012, the sector's net profit stood at B161bn in total, growing 25.1%yoy, lower than

expected but still hitting a year's high.

2013's profit to grow 18.5%yoy, led by corporate loans

We believe net loan growth would remain aggressive in 2013 with the growth of

12.2%yoy expected. The mix of growth will shift from SME and retail loans (57% of

total loans) in 2012 to corporate and retail loans (67% of total loans) in 2013 due to

the government investment in mega utilities projects including water management

project and rail mass transit system which will benefit contractors and construction

material manufacturers. Moreover, the an arrival of the AEC in 2015 is another positive

factor to boost demands for related loans such as those for logistics and retail

operators, especially for customers in provincial areas. All these factors will help

strengthen the loan growth in 2013, particularly for big banks. Net profit in 2013 of the

sector is projected to grow significantly by 29.2%yoy. Excluding extraordinary profit of

TCAP, the net profit growth would be 18.5%yoy.

2013, a year of banking sector and investment. Top picks are KBANK, BBL, TCAP

We maintain Overweight for the bank sector. Although SETBank has been rallying

gradually in the past, PBV at only 1.8x is still very low comparing to regional average

such Indonesia, Malaysia, and the Philippines as these countries still have magnificent

GDP growth as benefiting from the government's stimulus packages. Top picks are

KBANK(FV@B237.33), BBL (FV@B244) and TCAP (FV@B49.14) which have shown

notable EPS growth in 2013 and have high upside.