Banks

Not all that glitters is gold NEUTRAL - Maintained

Banks

Thai banks reported 25% profit growth and 1.5% pt ROE expansion in 2012, and boast an equally positive outlook for 2013. However, what differ from last year are sentiments and valuations, which now suggest a much less attractive risk/reward profile. The sector has kicked off this year in a bullish mood, leaving little room for alpha. We keep our Neutral call, preferring to build positions on dips. Just a few names still offer value, of which we highlight KTB and BAY as our preferred picks. At the other spectrum, BBL and TMB look increasingly pricey.

Sector themes revisited

After the results season, we redefined our banking sector theme for 2013: 1) consumer lending should sustain its superior growth pace vs. business lending. Management's loan growth

targets substantiate this view; 2) regardless of near-term hiccups in business lending on the back of a fragile export recovery, its medium-term outlook is quite positive, underpinned by active

inward and outward FDIs, and the government's infrastructure investment programmes; 3) the

provincial markets offer vast growth opportunities for banks; 4) banks' non-interest income should continue to grow robustly. We highlight bancassurance, cards and foreign exchange businesses as the likely key contributors; 5) upward pressures on the sector's credit costs could continue, in light of the Bank of Thailand's preference for banks to build up their asset quality buffers during this profitable time.

Stay selective

We estimate a 25% profit growth and a 1.4% pt ROE expansion for the sector in 2013. While these sound decent, we believe that valuation will become stretched if the sector's forward P/BV re-rates beyond the current level of 1.8x. That said, KTB and BAY still offer value, by virtue of the prevailing cautious consensus views over the former's earnings outlook and the ownership change at the latter.