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Banking sector

Not a year for growth Underweight

Banking sector

- Provision and expense decrease, recovering 1Q14 profit

We estimate combined net profit in 1Q14 of ten commercial banks under our

coverage at B48.3bn, growing 6.4%qoq (but dropping 5.5%yoy), thanks to

decreasing debt provision and operating expenses. The banks would show strongest

net profit growth qoq are BAY and TISCO (from lower debt provision) and BBL and

KBANK (from lower operating expense after passing the high season). On the other

hand, three banks that would face the largest decrease in net profit are KTB (no

extraordinary profit or dividend income from Vayupak Fund), KKP (from lower fee

income qoq after big deals of BTSGIF and BAY in 4Q13), and LHBANK (increasing

operating expense as a result of aggressive branch expansion). Normalized profit in

1Q14 is projected at B66.4bn, growing over 7.4%qoq since operating expense is

expected to decrease 7.5%qoq after passing the high season. Cost to income ratio in

1Q14 would decrease to 44.1percent from 45.6% in 4Q13, helping alleviate pressure from

net interest income that is anticipated to drop 1.1%qoq as net loan growth is

projected to slide 0.1%qoq (still growing 8.1%yoy), in line with FY2014 net loan

growth we estimate at 6.5%yoy. Extraordinary income, which is an interest income

from debt restructuring, would also decrease from 4Q13. Moreover, most banks

have cut their loan and deposit rates in the middle of March 2014, so NIM is

projected to decline 9bp to 2.98%. Fee income in 1Q14 is also projected to decrease

2.5%qoq, in line with slack loan transactions, while there are not important deals

like in 4Q13.

- Limited growth for profit in 2014

As a result of down revisions of 2014-2015 earnings forecasts of single banks since

before 2013 earnings report and during earnings preview in 1Q14, net profit growth

of the sector is projected to decrease to only 2.4%yoy in 2014, before starting to

revive 9.0%yoy in 2015, in line with FY2014 business goal of the banks which

projected for slow growth and stricter loan quality control, under an assumption for

instability in the current political situation.

- Top picks are BBL and TISCO

We maintain UNDERWEIGHT for the sector. SETBank has risen more than 13% YTD

until 2014 PBV stood at 1.5x, higher than regional average. Consequently, this is a

time to take profit from banking stocks that have rallied significantly i.e. BAY, KKP,

TMB, and KBANK. Amidst the economic downturn, we also recommend stocks with

strong fundamental factors and attractive dividend i.e. BBL(FV@B197) and

TISCO(FV@B47.41). Interesting international stocks are European and Japan banks,

which still have low PBV and PER, as shown in the table on the next page.


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