Banking

Q4 2012A: Prudent provisioning to lift 2013F

Banking

Q4 2012A results recap - surprise on precautionary provisions. The key element in

bank 4Q12 reports was the surprisingly large precautionary provisions, particularly at TMB

and KTB. We view this as a positive move, and comes partly from the BoT policy to

encourage banks to build up excess reserve as a cushion for any downturn. Excluding the

extra provisions, bank 4Q12 results were pretty much in line with our estimates. Key

points for the sector overall:

1. Loan growth: +3.8% QoQ, up seasonally from 3% QoQ in 3Q12, bringing 2012 loan

growth to 14%. Growth was led by retail loans (largely auto, from the tax incentive for

first-car buyers) followed by SME and corporate loans. There was a surprise on the

upside for TCAP (19percent for 2012) but on the downside for KTB (7percent for 2012).

2. Net interest margin: -2 bps QoQ with the direction mixed among banks. Most saw a

QoQ squeeze in NIM due to the negative implication from the earlier interest rate cut

(excepting banks that focus on fixed-rate auto loans) and aggressive fund raising since

late 3Q12. The positive surprise was TMB (+10 bps QoQ) and the negative TISCO (-15

bps QoQ). 2012 NIM slipped 11 bps YoY, mainly due to a hike in the FIDF charges.

3. Non-interest income: +4% QoQ, mainly driven by seasonal rise in fee & insurance

income (+7% QoQ). 2012 fee & insurance income growth was strong at 19%.

4. Cost to income: Seasonally rose to 51.6percent from 47.8percent for 3Q12. 2012 cost to income

ratio fell to 47.3percent from 48.8percent for 2011.

5. Asset quality: NPL ratio inched down to 3percent from 3.3% at 3Q12. Credit cost rose

sharply to 1.38percent from 0.64percent for 3Q12 due to extra precautionary provisions with big

surprises at TMB and KTB. LLR coverage edged up to 128percent from 116% at 3Q12.

Extra provisions lift 2013F, give upside risk to NIM. The greater precautionary

provisions than anticipated in 4Q12 will ease future provision needs, particularly for TMB

and KTB. We thus cut 2013F provision estimates for both. We preliminarily raise 2013F

earnings growth to 23percent from 20%, vs. 25percent for 2012. We stand by our view of slightly

slower loan growth of 12% in 2013 from 14% in 2012 on slower private investment growth

and domestic car sales after the expiration of tax incentives. We also expect lower fee &

insurance income growth of 15percent for 2013F from 19percent for 2012 due to base effect. We do

see upside risk to our 2013F NIM forecast (-4 bps), as there is now a lower chance of a

further 25 bps cut in the policy rate as the risk of a global slowdown now appears lower

and the risk of inflation higher. Also providing a boost will be bank gearing more to highyield

loans.

TP raised for KTB and LHBANK. KTB to Bt24, LHBANK to Bt1.4 to fine tune with 4Q12A.

KTB and KBANK as the top picks. We keep KTB and KBANK as our top picks. KTB: 1) Its

recapitalization overhang is gone, giving it the ability to remove the LLR overhang, 2)

Lower asset quality risk following SSI's capital call and 3) the best play on the theme of

accelerating public investment. KBANK: 1) strongest growth in fee & insurance income; 2)

improvement in cost to income ratio as the IT upgrade reaches completion and 3) best

play on SME loan demand recovery.