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Siam Commercial Bank

Loan to weaken in 2014, but still keep ROE target high Hold

Siam Commercial Bank Plc (SCB)

- 2014 business to decelerate along with economy, but still keep ROE target high

SCB's management revealed the vision for 2014 with a more cautious business

strategy than 2013 amidst the current economic deceleration that has resulted from

both local and international pressing factors. FY2014 net loan growth is targeted at 7-

10%yoy, versus 12-15%yoy in FY2013, which is in line with FY2014 GDP growth of

the market that has been gradually cut (no forecast from SCB reported), but still

lower than FY2014 net loan growth we projected at 12%yoy. SCB is hopeful that

demands for SME loans would grow better than contracting demands for corporate

and retail loans (car leasing and housing). The bank views that the net loan growth in

2014 is not a key target to measure the KPI and will instead focus on generating

profit in order to keep ROE high at 19-22% with a strategy of cost reduction and

control, including both interest expense (to be lower than rivals') and operating cost

(to be strict about cost to income ratio target in 2014 at 39-41%). Moreover, SCB

would also boost the growth of fee income, especially that relating to SME and

corporate loans which still have room to grow further despite not as remarkably as in

2013.

- 4Q13 profit to weaken qoq. Loan to meet target but expense and provision rise

We estimate 4Q13 net profit at B12.1bn, softening 4.2%qoq but still growing strongly

21.7%yoy. 1) Net interest income is projected to grow 1.1%qoq and

15.0%yoy, in line with the net loan growth forecast in 4Q13 of 3.2%qoq and

12.0%yoy, thanks to SME and housing loans that have grown at a more accelerated

rate this quarter. NIM is projected to contract 4bp to 3.18% as a result of the loan

rate cut. 2) Fee income is projected to stay flat qoq but grow 16.0%yoy. The

bank is going to book an advisory income from TRUEGIF deal in this quarter, while

fee income from non-loan related transactions such as credit card and bancassurance

would grow robustly on the seasonal effect. 3) Other operating income is

anticipated to decline 4.1%qoq but still increase 23.4%yoy, mainly because

dividend income from equity portfolios has decreased while there would not be a

dividend income from Vayupak fund in this quarter. However, although there would

be a profit of B800m from selling of investment in Vayupak fund in this quarter, the

bank would use the money for making additional debt provision. Accordingly, credit

cost would decrease from 100bp to 83bp in 4Q13. NPL (gross) to total loans at end-

2013 would still be in line with the target of 2%. 4) Operating expense in 4Q13 is

projected to grow 9.3%qoq and 14.0%yoy. Cost to income ratio would increase

to 42.11percent from 38.45% in the previous quarter. We revise our FY2013-2015

earnings forecast slightly as shown in the table on the next page in order to reflect

the changes in the targets.

- Reiterate HOLD. Cut 2014 fair value to B182.83, implying little upside

We reiterate to hold SCB to receive dividend. Although the share price has

substantially undergone correction, the upside is little when compared with new

FY2014 fair value at B182.83, from B204.53 previously (GGM, at new PBV of 2.17x

from 2.43x). ROE is expected at 19.8%, while there is no new supporting factor due

to the sluggish industry's outlook .under ROE forecast of 19.8% is B205.69.




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