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Siam Commercial Bank

FY14 loan growth guidance trimmed Investment thesis

Siam Commercial Bank Plc (SCB)

We have cut our SCB lending assumptions to 7percent for FY14 and 9percent for FY15 from 10% and 10%, respectively, due to the current unfavorable domestic climate (both political and economic). Furthermore, our loan loss provisioning peg rises to 80 bps of total loans from 65 bps. Thus, our profit forecasts drop by 5.8% to Bt56.5bn for FY14 and by 4.4% to Bt66bn for FY15. The lower FY14 bottom-line projection prompted us to cut our YE14 target price by 5.3% to Bt179, pegged to a justified YE14 PBV of 2.1x. Our BUY rating stands.

SCB cut FY14 loan growth guidance range to 5-7percent from 7-10%

The cut was prompted by the deteriorating economy, which has been exacerbated by political conflict and government dysfunctionality. It goes without saying that SCB also revised down its official 2014 GDP growth projection from 3.0percent formerly to just 2.4%, prompted by the unfavorable outlooks for consumption and government spending. The lending focuses are currently SME and corporate business.

The bank also reduced its FY14 non-interest income (NII) expansion guidance from 12-14% to 7-10% in FY14, due to a diminished expectation for loan growth and anticipation of less activity in the capital and debt markets. Commission income growth tied to sales of retail financial products, such as bancassurance and mutual funds, are also likely to slow.

FY14 NIM target range remains 3.1-3.3%

SCB still expects an FY14 NIM of 3.1-3.3%—a lower interest rate environment and eased competition for deposit mobilization should roughly offset the effect of slower loan growth. Our FY14 NIM assumption is unchanged at 3.16%. Management anticipates that the Repo Rate will drop further to 1.75% later this year from 2% currently.

Heavier FY14 LLP policy prompts profit projection cut

Although SCB already has a big loan loss coverage ratio of 150% and a low NPLs/loans ratio of 2.1%, it guides that it will provision more heavily this year, given the weak economy. It has upped its LLP peg to 80-85 bps of loans (Bt14.5-15.5bn for FY14). As such, we have raised our LLP assumptions by 60% to Bt14.5bn for FY14 and by 26% to Bt12bn for FY15. SCB's YE14 NPLs/loans ratio target range is 2-2.3%.

Cost-cutting and more recurring fee income

The bank guides that it will seek to reduce operating costs and will implement a deposit rate cut-led growth strategy. It also aims to generate more recurring fee income from SME and corporate business, such as cash management, trade finance and sales of bundled product offerings (such as BI insurance and/or forward FX contracts with loans). That could keep its FY14 cost/income ratio down to 38-40percent from 38% last year. We assume an FY14 cost/income ratio of 38.6%.

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