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Banking Sector

Loan drops due to dreadful economy Underweight

Banking Sector

- February 2014 loan sluggish


Nine commercial banks under our coverage (except KTB) declared a summary

statement of assets and liability as of February with outstanding loan (after

allowance for doubtful accounts) of B7.24tr net, dropping for the second consecutive

month by 0.08%mom but growing 8.09%yoy. We did not expect loan growth in

February as it was an off-season period and the domestic political situation has been

pressing confidence in investment and domestic consumption. Most banks reported

lower net loan, except KBANK and BBL that could still show monthly growth, mainly

from short-term working-capital corporate loan, while retail loan declined due to low

season. Other banks’ loan contracted; LHBANK and TISCO posted the largest decline

in net loan because of high repayment of retail loan in car leasing business. For

TISCO, corporate loan and SME loan also shrank. Overall, the sector’s 2M14 net loan

growth is still in line with the FY2014 net loan growth target at 6.8%yoy. In terms of

deposit (including funding for small banks), outstanding deposit in February 2014

was B8.05tr, growing 1.20%mom and 9.42%yoy. Most banks reported deposit

growth. KKP, BAY and TMB were with the strongest deposit growth, while TCAP and

SCB (declining for three consecutive months after reducing cost of deposit close to

peers’) showed the largest decline in deposit this month.

- Earnings forecasts with downside

We hold a negative outlook for fundamental factors and profitability of the banking

sector in 1H14. Held back by the economic slowdown as a result of the prolonged

political problem, there is only slim hope about benefits from the government and

private's mega investment projects. If the political turmoil continues, 1H14 GDP

growth and loan growth forecast would be revised down further, so the sector's

earnings forecast would be slashed again. Meanwhile, retail loans have become more

worrying. Banks have to adopt stricter policy of loan issuing, and NPL situation has

begun to show clearer negative sign. Another risk is decreasing interest rate; our

study shows that for every 25bp decrease in the loan and deposit rate, 2014 NIM will

drop by 1.90bp from the current assumption of 3.12%, which would thus depress

2014 net profit of the sector by 2.71%. However, we have already included a 25bp

interest rate cut in our forecast (previously slashed interest rate forecast by 12.5bp).

- Selective play: BBL and TISCO

We maintain UNDERWEIGHT. 2014 EPS growth is projected to decrease to only

3.4%yoy. We still like BBL (FV@B197, 1.17x PBV, long-term ROE forecast of

13.3%), which has the lowest PBV among big-cap banks and gives 4% yield on

average. We also favor TISCO(FV@B47.41) for its 6%p.a dividend yield as its

recovery is the fastest in car leasing sector.


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