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4Q13F no worries, but downside risk for 2014F

Banking

4Q13F: Weaker bottom lines, but expected on seasonality. We expect bank results to

repeat the usual QoQ weakening in bottom lines on seasonality: In the fourth quarter, opex

and provisions go up QoQ to a extent that overwhelms the strong loan from the high season

for working capital loans. We see small upside risk to our sector 2013F loan growth of 10% (vs.

9.1% YTD for 11M13) from the seasonally strong loan growth in December. 4Q13F NIM is

expected to slip due to the negative implication of the interest rate cuts. We forecast a 50%

increase YoY and 6% decrease QoQ in the sector's 4Q13F earnings, with limited downside risk

to 2013F earnings forecast.

Downside risk in 2014. We see the political unrest as bringing downside risk to our 2014F

earnings forecast (+5%), mainly in the areas of loan growth and NIM. We expect a slowdown

in sector loan growth to 7% in 2014F from 10% in 2013F. The political unrest clouds the fate of

public investment and erodes private sector confidence in business expansion. We thus

believe 2014F loan growth prospects are to a great extent dependent on successful formation

of a new government and recovery in exports. Downside risk to GDP growth from the political

unrest could trigger more policy rate cuts, which would have a negative impact on NIM. We

forecast a 7 bps squeeze in the sector's 2014 NIM even without more interest rate cuts.

Top picks - KBANK and KTB. We maintain KBANK and KTB as out top picks. KBANK has the

highest non-interest income to cushion against downside risk to loan growth plus the most

small SME loans, which seems to be the segment with the strongest growth potential. KTB

remains a top pick on: 1) lowest valuation in terms of PBV/ROE of large banks; 2) rising

market share of loans and fee income as a result of a more proactive strategy and better

service after reorganization by the new CEO; 3) benefit from L-T acceleration in public

investment.


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