Banking

Coasting on strong investment cycle

Banking

Upgraded to sustainable strong 2013F-2015F loan growth. We have changed our view

on loan growth for 2013-2015 to "strong sustainable growth" from "slowing growth" on the

back of: 1) more optimism towards the investment cycle and 2) the BoT's relaxation of the

single lending limit. These changes led us to raise our loan growth forecast to 14percent from 12%

for 2013F and to 13percent from 10percent for 2014F-2015F. KTB and BBL, the two largest banks, are best

situated to get high loan growth from this investment cycle, led by public investment.

More optimistic on investment cycle. Our increased optimism towards the investment

cycle for 2013-2015 arises out of two factors. First, there will be more stability in the actuality

of government projects, backed by Bt2trn National Infrastructure Investment Act. Second,

the BOI is seeing unusually high applications for its investment promotions.

Relaxation on single lending limit. Effective April 1, 2013, the BoT will selectively allow

commercial banks to extend loans to large business enterprises in excess of the single lending

limit of 25% of capital funds, but to no more than 20% of each bank's total loans. This

indicates high demand for large corporate loans.

Raised 2013F-2014F NIM on more favorable environment. We raised 2013F-2014F NIM to

a stable level for 2013F and a slight increase for 2014F, backed by two factors. 1) Thailand is

reporting better-than expected economic figures and there is now lower external risk and

higher inflation risk brought by wage hikes and these led us to adjust our assumption on the

policy rate trend to "stable in 2013 and slight uptrend in 2014" from "another 25bps cut in

2013 and stable in 2014". 2) We believe that the strength of loan demand could allow banks

to price them better.

Slower fee & insurance income growth. We maintain our forecast for slower growth in

net fee & insurance income from 19percent for 2012 to 16percent for 2013F (14% if excluding the full

materialization of the KK-PHATRA merger) and 14percent for 2014F-2015F. We see no new growth

areas for fee income and slower improvement in cross-selling ratio on bancassurance and

mutual funds.

Stable normalized provisions as counter-cyclical buffer. Despite the sector's high loan

loss reserve coverage of 128% at YE2012, most banks will maintain or slightly increase

normalized provisions in 2013F-2015F as a counter-cyclical buffer to line up with Basel III.

TP hikes with new top picks - BBL and KTB. We have raised bank target prices by 9% on

average. We switched our top picks to "KTB and BBL" from "KTB and KBANK" as investment

cycle plays. In line with our investment cycle theme - and the assumed end of the downtrend

for interest rates - we prefer large banks with most of their loans made to businesses over

the small retail-oriented banks. We downgrade TISCO and TCAP to Neutral and KK to Sell.

Raised 2013F-2015F loan growth to strong, sustainable level

Greater optimism. We are now more optimistic that the investment cycle will continue,

with government projects proceeding as planned without interruption by political factors and

this plus the BoT's relaxation of its single lending limit has changed our view on loan growth

prospects for 2013-2015 to "strong, sustainable growth" from "slowing growth on a base

effect". This has led us to raise our forecast loan growth to 14percent from 12percent for 2013F and 13%

from 10percent for 2014F-2015F.

Raised loan growth forecast. We lifted the loan growth forecast for large and mid-sized

banks by 2-4 percentage points as these banks are weighted more towards business loans

(corporate, government and SMEs) and thus better positioned to gain from a strong

investment cycle than retail-oriented banks like TCAP, TISCO and KK.

KTB, BBL top of the list. We see KTB and BBL, the top two largest banks, as best positioned

to get in on the opportunities for loan growth from this investment cycle, particularly since it

will be led by public investment.

Flood protection loans in 1H13. The government has set out a timeline to draw down the

remaining Bt340bn of the Bt350mn budgeted for flood protection loans by this June, the

deadline in the Flood Protection Loan Act. In 2012, only Bt10bn was drawn down - from KTB -

due to delays in the flood protection projects.

Auto loan growth simmering down. Auto loan growth is shifting down into lower gear in

2013, mainly in 2H13, from the record high in 2012, as there will be no repeat of last year's tax

incentive for first-car buyers. Auto loans are expected to remain buoyant in 1H13 as the autos

booked in 2H12 are delivered (300,000-500,000), largely to first-car buyers who hurried to get

the tax incentive before expiration at YE2012. We forecast a 3% decrease in domestic car sales

in 2013 vs. +81% (1.436 mn units) in 2012.More optimistic on investment cycle

Two factors encourage greater optimism with regards to the investment cycle in 2013-2015.

- Greater certainty public infrastructure will be built, backed up by the Bt2trn National

Infrastructure Investment Act. The enactment of this Act will increase the private

sector's confidence in the actuality of infrastructure projects: It lays out the investment

plan for development of the Bt2trn infrastructure transportation system over 2012-2020,

details the budget and financing for the projects and removes uncertainty generated by

changes in government. The increased certainty of infrastructure projects is expected to

give upside risk to private investment related to public investment. The Act is expected to

be sent to parliament in March and enacted by June.

- BOI reports super-high applications for promotions in terms of investment value. The

investment value of applications for BOI promotions in 2012 was close to double 2011's in

terms of applications received, applications approved and promotion certificates issued.

More importantly, the 2012 figures were far above all previous highs.

More optimistic on investment cycle

Two factors encourage greater optimism with regards to the investment cycle in 2013-2015.

- Greater certainty public infrastructure will be built, backed up by the Bt2trn National

Infrastructure Investment Act. The enactment of this Act will increase the private

sector's confidence in the actuality of infrastructure projects: It lays out the investment

plan for development of the Bt2trn infrastructure transportation system over 2012-2020,

details the budget and financing for the projects and removes uncertainty generated by

changes in government. The increased certainty of infrastructure projects is expected to

give upside risk to private investment related to public investment. The Act is expected to

be sent to parliament in March and enacted by June.

- BOI reports super-high applications for promotions in terms of investment value. The

investment value of applications for BOI promotions in 2012 was close to double 2011's in

terms of applications received, applications approved and promotion certificates issued.

More importantly, the 2012 figures were far above all previous highs.



Relaxation of single lending limit

Strong demand leads to relaxation. From April 1, 2013, the BoT will allow commercial

banks to extend loans to selected large businesses in excess of the single lending limit of 25%

of capital funds, but to no more than 20% of each bank's total loans. This signals that there is

strong demand for large corporate loans for capex expansion and M&As.

Specific type of loans only. To qualify for the relaxed single lending rule, the loans must be

related to the country's development plans or have the potential to expand abroad, i.e. food,

auto & auto parts, energy, textile, electrical & electronic parts. The entity to which the loan is

made must have at minimum a BBB+ rating on at least 50% of its debt instruments. It must

also have positive earnings for at least two consecutive years.

Bank treatment. Banks are required to deduct the "capital add-on" for the portion of

lending that exceeds 25% of capital funds from capital funds when calculating their capital

adequacy ratio, as below.

Capital add-on = Loans exceeding 25% of capital funds x 50% risk weight x 11% capital charge

Capital adequacy ratio = (Capital funds minus the capital add-on)/Risk-weighted assets

- Banks must incorporate the "capital add-on" in pricing loans that exceed the single

lending limit and do a stress test on the borrower to ensure the loan will not have an

adverse effect on the company's financial position.

- The relaxation is on a case-by-case basis: banks have to submit a request to the BoT at

least 30 days in advance.

Raised 2013F-2014F NIM on more favorable environment

More favorable environment. We raised 2013F-2014F NIM to a stable level for 2013F and a

slight increase for 2014F for large and mid-sized banks for two reasons.

1) A change in our assumption on the policy rate trend to "stable in 2013 and 50bps hike"

in 2014 from "another 25bps cut in 2013 and stable in 2014". This is backed by Thailand's

better-than expected economic figures, lower external risk and higher inflation risk

brought by wage hikes.

2) We believe that strong loan demand could lead to better pricing.

Raised NIM for large and mid-sized banks. This is positive for large and mid-sized banks

but negative for small banks whose focus is on fixed-rate auto loans. We therefore raise

2013F NIM for large and medium sized banks by 2-5bps and cut NIM forecast for TISCO and KK

by 5-7bps.

Slower fee & insurance income growth

Slower growth. We maintain our forecast for slower growth in net fee & insurance income

from 19percent for 2012 to 16percent for 2013F (14% if excluding the full materialization of the KKPHATRA

merger) and 14percent for 2014F-2015F. We see no new growth areas for fee income and

slower improvement in cross-selling ratio on bancassurance and mutual funds. This leads to a

forecast moderate growth in non-NII of 12-13percent for 2013F-2014F, on par with 2012.

Securities business income raised. For KK, TISCO and TCAP, we raise our forecast of their

securities business income as we increase our assumption of average daily market turnover

to Bt30bn from Bt26bn and investment gain (mainly for KK from PHATRA's high exposure to

equity investment) to reflect the YTD stock market performance.

Stable, normalized provisions as counter-cyclical buffer

Normalized provisions may rise. Despite the sector's high loan loss reserve coverage of

128% at YE2012, most banks will maintain or slightly increase normalized provisions in 2013F-

2015F as a counter-cyclical buffer to be in line with the implementation of Basel III.

Drop for those making extra provisions last year. KTB and TMB, which booked huge extra

provisions in 2012, are expected to see a sharp fall in provision in 2013.

Lesson learned, NPLS touching bottom. We view that banks' NPLs are bottoming out

with both NPL inflow and NPL outflow at low levels. The majority of remaining NPLs are 1997

legacy NPLs, which are waiting for either the courts or write-off process. Learning well the

lessons forced on them by the 1997 crisis, Thai banks are now far more stringent in credit

approval standards, leading to low new NPLs, even after the 2011 flood catastrophe.

Raised TP, BBL and KTB as new top picks, downgraded HP banks

TPs raised on better loan growth prospects. We raised banks' target price by 9% on

average to factor in stronger loan growth prospects underpinned by a more optimistic

investment cycle and the BoT's relaxation of the single lending limit.

Switch top picks to KTB, BBL. Our investment cycle theme and ending of the downtrend of

interest rates has led us to change our top picks to "KTB and BBL" from "KTB and KBANK" as

investment cycle plays. We prefer large banks with the majority of their loans made to

business to small retail-oriented banks on this theme.

KTB still in top picks. KTB continues to be our lead sector pick on: 1) its recapitalization that

gives flexibility to get in on expansion opportunities and also build up LLR coverage to

cushion against downturns, 2) easing asset quality risk after SSI's capital call and 3) its

position as a government bank that puts it at the top of the heap to get in on accelerating

public investment.

BBL makes the list. BBL is our other choice, supported by: 1) it has largest excess liquidity

and capital funds to capture loan growth opportunities trigged by the investment cycle, 2) it

has the largest exposure to corporate loans, which will benefit the most from the investment

cycle and 3) it has the highest LLR coverage.

Downgrade TISCO, TCAP, KK. We downgrade TISCO and TCAP to Neutral and KK to Sell.