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Banking sector

Time to decrease investment Underweight

Banking sector

- 1Q14 beats projection

Ten commercial banks under our coverage posted 1Q14 combined net profit at

B50.3bn, growing 11.0%qoq or 4.3% better than projection, though still shrinking

1.4%yoy. Debt provisioning decreased 20.3%qoq - better than expected. Credit cost

dropped from 105bp in 4Q13 to 83bp. NPL increased more than B12.7bn to 2.55%

of total loans. Operating expense decreased 8.9%qoq after passing the high season,

making the normalized profit grow 8.7%qoq - as expected. The banks that showed

the strongest net profit growth qoq were BAY, KBANK, BBL, TISCO, and SCB, thanks

to a decrease in debt provisioning (BAY, TISCO, SCB) and lower operating expense

(BBL, KBANK, SCB, BAY). The other banks showed lower net profit, led by KKP (debt

provisioning increased whereas income from the core business remained weak), KTB

(no extraordinary income and no Vayupak Fund dividend), and TCAP (income from

the core business remained weak and NIM contracted). Total loan increased only

0.6%qoq but 8.7%yoy - slightly better than projected, the lowest quarterly growth

in the past five years but still consistent with FY2014 net loan growth we estimate at

6.5%yoy. Net interest income weakened 1.4%qoq. Extraordinary income also

declined due to the interest income from debt restructuring booked by many banks

in 4Q13. Moreover, in mid-March most banks had revised down their loan and

deposit rates, making NIM fall 10bp to 2.96%. Fee income decreased 2.0%qoq, in

line with the sluggish loan transaction and capital market. In addition, there were

not important deals like in 4Q13.

- Weakness foreseen in 2Q14

After 1Q14 earnings were reported, we revise down our earnings forecast only for

TISCO. After the down revision, FY2014 net profit would still grow 2.4%yoy, while

earnings in 2Q14 has a good chance of declining since overall loan growth is still flat

as a result of the inactive economy. NIM tends to contract as a result of the interest

rate raise in late March 2014. As asset quality is still an important factor of banks,

continuously high debt provisioning is expected.

- Buy on weakness. Top picks are BBL and TISCO

We assign UNDERWIEGHT for the banking sector. As SETBANK has rallied 16percent since

the beginning of the year, it is the time to take profit and buy again when the share

prices undergo correction. We still like BBL(FV@B197) and TISCO (FV@B47.31),

which are big and small banks with strong fundamental factors and attractive

dividends. Interesting international banking stocks are those in Europe and Japan of

which the 2014 PBV and P/E ratio are low, as shown in the table on the next page.


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