Siam Commercial Bank

Q4 2012's profit in line with projection. To focus on retail/small SME, boosting ROE BUY

Siam Commercial Bank Plc (SCB)

Q4 2012's profit weakens qoq as projected. Loan grows; NIM shrinks; provision rises

SCB declared Q4 2012's net profit at B9.77bn, shrinking 2.5%qoq but growing

45.1%yoy as expected due to following reasons. 1) NIM contracted significantly

by 9bp to 3.12% - worse than expected. Although loan yield increased against a

12.5bp decrease in MLR in October 2012, continuously increasing cost of deposit

from aggressive deposit raising of 3.8%qoq in this quarter made NIM in 4Q12

fall beyond our projection. However, NIM in FY2012 stood at 3.17%, still in line

with the bank's target of 3.1-3.2%. Net loan growth in 4Q12 remained strong at

3.9%qoq and 19.7%yoy, mainly from the growth of small SME loans which have

high yield and retail loans including housing, credit card, and car hire-purchase.

On the other hand, corporate loans did not show remarkable growth. 2) Debt

provision expense hiked 74.7%qoq and 15.5%yoy in 4Q12 - higher than

expected. Credit cost rose significantly to 92bp from 55bp in 3Q12 and was also

higher than the policy level of B1.5bn/quarter, in line with NPL that increased

more than B1.62bn in this quarter to 2.01percent from 1.90% of total loans at end-

3Q12. Coverage ratio (LLR/NPL) shifted to 153percent from 147.7% at end-3Q12. 3)

Operating expense in 4Q12 increased 9.6%qoq and 12.6%yoy as expected,

mainly from an increase in seasonal expenses. Cost to income ratio in this

quarter rose to 43.2percent from 41.5% in the previous quarter. Despite a positive

factor from significant growth of 9.2%qoq and 20.3%yoy in fee income as a

result of a high season for retail loan, Bancassurance, and mutual fund

transactions, it still could not offset the pressuring factors. Consequently, overall

profit in 4Q12 still declined. However, FY2012's profit was able to make a new

high at B40.2bn or the growth of 10.9%yoy.




To focus on retail and SME loans in 2013, boosting ROE to 19-22%

For the business outlook in 2013, the bank's CEO still has a vision for continuous

aggressive growth from the prior year. Although net loan growth in FY2013

might weaken to 12-15%yoy, lower than our projection of 20%yoy in 2013 and

17-19% in 2012 (but we project the growth to end at 21.6%yoy), SCB keeps its

goal to boost ROE to the peak at 19-22% (excluding non-recurring profit in

2011). For the loan business, the bank will still focus on its strong point, retail

loans (42% of total loans), by dividing retail customers into 3 groups to facilitate

proper product and service introduction (customer-centric products). At the

same time, for SME loans, the bank will increase market share in small SMEs

(B20-50m) which still have further growth potential, reflecting from NIM in 2013

which is targeted to stabilize from 2012 at 3.1-3.2%. For fee income and noninterest

income, continuous growth of not less than 12-14% is still targeted,

mainly from the growth of fee income from retail loan transactions including

Bancassurance and profit from insurance business. SCB will keep its cost control

policy the same as that in 2012; cost to income ratio is assigned at only 40-

42%. Moreover, the bank has also revealed its strategy for business growth in

the region. SCB sees an opportunity for the business growth from the AEC, from

financial transactions of both local and foreign customers in making transactions

in regional countries. In terms of asset quality, the bank is confident about a

decrease of NPL to lower than 2% of total loans, with credit cost targeted at

60bp or an average of B2.6-2.7bn/quarter.

Buy. EPS growth in 2013 estimated at 17.5%yoy with ROE of above 22%

We confirm our BUY recommendation, projecting that in the long run the share

price will be re-rated to be close to PBV of leading banks in 3 regional countries,

which are Indonesia, Malaysia, and the Philippines, at above 2x on average.

2013's fair value, at 2.86x PBV (GGM) is B213.4/share, with average ROE of

above 20%.