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Banking Sector

Underweight Loan recovery to exceed projection in 2Q14, limited benefit on profit though

Banking Sector

- Banks agree to join loan bidding to pay rice farmers

The Ministry of Finance has invited 32 local financial institutions to join the bidding

for bridge loans of totaling B90bn to pay rice farmers who pledged their paddy under

the rice pledging scheme for the 2013/2014 main crop. The three-year program of

bridge loans are divided into two phases, the first phase of B50bn and the second of

B40bn (minimum loan bidding amount is B2bn; the first batch of loan bidding of not

exceeding B3bn is scheduled within June 6, 2014 and the second batch of not

exceeding B2bn within June 13, 2014) and the Finance Ministry will start disbursing

money from the banks that offer the lowest loan rate first. Most banks have

reportedly agreed to join the bidding, since this measure is not against the law as

previously concerned.

- Loan recovery to exceed projection in 2Q14, limited benefit on profit though

The effects of the rice-pledging payments are as follows: 1) It would boost net

loan growth in 2Q14 and 3Q14 (not included in our forecast). The total loan

amount of B90bn makes up 0.95% of total loan at end-1Q14 of ten commercial

banks under our coverage. The loans must be paid within three years, but the

Ministry of Finance would be able to repay them earlier, so they are more likely

short-term loans with repayment in the remainder of 2014. 2) This is not likely to

boost 1Q14 net profit significantly. The loans would grant return by only a half

or a full month. Though total income from the loans would be fully booked in 3Q14,

the loan rate is very low (for low risk and the bidding system) and the income will be

distributed to many banks, so net return of each commercial bank would be

insignificant when compared to our FY2014 earnings forecast. At NIM of 100-150bp

for the loan amount of B50bn, it will provide net interest income (net after tax) of

only B400-600m in total or only 1% of FY2014 net profit forecast of the sector. 3) A

benefit from this measure is more likely indirect psychological sentiment on

investment since it will help rebuild confidence of retail consumers, especially

farmers, thus helping stimulate spending and alleviate concerns about NPL.

However, these consumers are not commercial banks’ target clients since they still

lack required financial documents and their income is unpredictable.

- Focus on big banks. Top pick is BBL

We reiterate UNDERWEIGHT for the sector. Top pick is BBL(FV@197B); its business

strategy can efficiently maintain its profitability and asset quality among the slowing

economy. Interesting international stocks are European and Japan banks, which still

have low PBV and P/E ratio, as shown in the table on the next page.


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