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Banking Sector

KTB, BBL, TISCO to get most impact if MPC and banks slash interest rate further Underweight

Banking Sector

MPC likely to cut policy rate again

We believe there is a good chance that the MPC might cut a 1-day repurchase rate

(RP1) by another 0.25% to 2% at its coming meeting on 22 January, which will be

the first cut of 2014 and the third since early 2013. An easy monetary policy by the

BOT is still necessary for boosting the fragile domestic economy as a result of the

political unrest and for encouraging consumers spending and investment. If the BOT

cuts the policy rate again, commercial banks would also cut their loan and deposit

rates, like what happened last year, in which the loan rate was cut less than the

deposit rate in order to reduce an effect on NIM as much as possible. In the previous

round, SCB was the first bank to cut the policy rate, and then followed shortly by

other banks.

- To depress 2014 profit by 2.49%, but already included in forecast

We have already included an impact from the possible 25bp policy rate cut in our

FY2014 earnings forecast, under 2014 NIM forecast of 3.20%, down 3bp from 3.23%

forecast in FY2013. If the policy rate is slashed more than 25bp, NIM and FY2014

net profit forecast of the sector might enter a downtrend. According to our study, for

every 25bp decrease in the loan and deposit rate, 2014 NIM will decrease 3.82bp

from the current assumption of 3.20% and 2014 net profit will decrease by 2.49%

from the previous forecast (combined with an effect from the recent policy rate cut,

the banking sector's net profit has already declined by 5percent from the previous

forecast). The banks that will be impacted the most by the policy rate cut are KTB,

BBL, and TISCO. As big net lenders in the money market with high floating rate

loans, KTB and BBL would be immediately affected when the policy rate is cut. For

TISCO, despite an advantage from its high fixed rate lending portfolio, the benefit

will be partially offset by its high fixed rate deposits and loans as well. Moreover,

with its position of a net lender (the highest among small banks), TISCO will

inevitably get a significant effect from the policy rate cut. On the contrary, the banks

that will get the least impact from this round of policy rate cut are LHBANK, KBANK,

and SCB. For KBANK, as a net borrower in the money market, the net impact from

its floating rate loans and deposits will be substantially negated. For KBANK and

SCB, despite being net lenders, the adverse impact will be compensated by a

positive factor from lending and deposits, thanks to their high floating rate deposits.

- Maintain UNDERWEIGHT. SETBANK drops substantially but risk

remains

We maintain UNDERWEIGHT for the banking sector, projecting the sector's EPS

growth in 2014 to be lower than the market EPS growth. Although share prices of

most banking stocks have already declined substantially, they still lack supporting

factors for the next three to six months, while there is also a risk of fundamental

factor downtrend in case that the GDP growth fails to meet our projection. We

recommend inexpensive big-cap banking stocks with attractive dividend:

BBL(FV@B197) and KBANK(FV@B185) as their share prices can rebound

aggressively when the market picks up.


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