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Upside risk from revival of investment up-cycle

Banking sector

Upside risk from revival of investment up-cycle

Revival of investment up-cycle? Infrastructure upgrade projects, with a focus on

those deemed crucial to hone Thailand's L-T competitiveness and private investment,

top the list on the roadmap for economic recovery as written up by the National

Council for Peace and Order (NCPO). The Ministry of Transport has worked up an 8-year

(2015-2022) infrastructure development plan with total budget of Bt3.2trn. Of this,

Bt2.4trn (excluding the Bt800bn high-speed train) will be sent to the NCPO for approval

on June 19. Actuality of this and other NCPO pro-investment stimulus measures would

trigger an L-T investment up-cycle, sustain L-T recovery for banks' top line growth and

provide upside risk to our 2015-2016F loan and non-interest income growth.

We expect a moderate pickup in loan growth in 2H14 on seasonality and export

recovery, followed by strong recovery in 2015 on release of pent-up demand and revival

of infrastructure projects. Growth is expected to continue good through 2016 on a

sustained capex cycle and post-election restoration of private consumption. We

maintain our forecast of sector 2014 loan growth of 5% (vs. 0.6% 4M14 YTD) but see

upside risk for loan growth in 2015-2016 of up to double digits from the current

forecast of 8%. We see the same trend for non-NII growth. We maintain our sector

non-NII forecast of a contraction of 2percent for 2014 (vs. -5% YoY in 1Q14), with upside risk

to our 2015-2016F of +12%.

Past seven months of political uncertainty. Banks have cut their 2014 loan growth

targets and we believe the difference between the new and old targets represents

pent-up demand that will be released in 2015. The NCPO's appointment of the BoI

board on June 6 will begin to unlock pent-up demand for investment, since about

Bt700bn in projects are waiting to be approved after seven months without a board. In

4M14, the BoI received applications with a combined investment value of Bt308bn (-4%

YoY), largely contributed by Eco-car Phase ll plus petrochemical, paper and plastic

manufacturing projects and electronics and electrical appliance projects. The

Department of Industrial Works is also speeding up its approval of authorization to set

up new plants to 30 days.

Historically, loan growth spiked into double digits after small S-T economic downturns,

more or less attributable to pent-up demand. This is seen in the strong loan growth of

11% in 2010 and 15% in 2011 after the financial crisis in the US and EU, and 14% in 2012

after Thailand's floods (mixed with post-flood reconstruction). Our 2015F and 2016F

loan growth of 8% thus seems too conservative relative to historical pent-up loan

demand. We place our 2015 and 2016 forecasts under review pending solidification of

the economic stimulus measures.

SME stimulus measures. The MoF has proposed soft loan and credit guarantee

facilities via Specialty Financial institutions (SFIs) in total worth Bt343bn. The MoF

expects these measures to stimulate 2015 GDP by 0.8-1%. As the largest player in the

SME market, particularly small SMEs, KBANK is at the head of the line to benefit from

these stimulus measures, specifically the guarantee facility by the Thai Credit

Guarantee Corporation. The Thai Credit Guarantee Corporation has proposed a 1styear

waiver of the guarantee fee on the Bt119bn guarantee blanket for 15,000 SMEs to

borrow from commercial banks under Portfolio Guarantee Scheme #5, which we

expect to create ~Bt200bn in new SME loans.

Need for eased monetary policy. Consensus expects the MPC to leave the rate

unchanged at the June 18 meeting. We see upside risk to our NIM forecast for large

banks (and downside for small banks dealing primarily in hire-purchase), in view of our

current assumption of another cut in policy rate of 25 bps in June and no change in

2015. We expect NIM to bottom out in 2Q14 and pick up in 2H14 upon deposit repricing.

We anticipate a further recovery in NIM for 2015F, underpinned by rising loan

to deposit ratio.

Asset quality under control. Deterioration in asset quality has been minimal in this

year's economic downturn, with the damage lessened by proactive measures taken

last year in terms of tightening credit standards and setting aside extra countercyclical

provisions. We confirm our forecast of an easing in the sector's credit cost from

0.97% in 2013 to 0.91% in 2014F, 0.79% in 2015F and 0.75% in 2016.

Recovery not priced into valuations. Share price outperformance since the trough

at the beginning of this year (+31% YTD vs. +20percent for the SET) curtails banks' S-T share

price upside, based on 2014 valuation at 1 standard deviation above the historical

mean. At the same time, in our view, share prices do not fully reflect a medium-term

recovery, with 2015 valuation at the historical mean and below up-cycle valuations -

with 2015 positioned to see an up-cycle.

Unchanged top picks - BBL and KBANK. As the economic recovery is expected to be

driven by infrastructure-led investment rather than consumption, which is hampered

by high household debt, we stick to our preference for large banks with primarily

business clients. The means our top picks are unchanged: BBL as the key beneficiary of

an investment up-cycle and KBANK as the main beneficiary of a capex cycle plus SME

stimulus measures along with its improving cost to income ratio after the completion

of K-transformation in 2015.

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