In light of the prevailing weak economic environment, exacerbated by political unrest, BBL stands out as having the most resilient earnings profile of any Thai bank. It also has the highest loan loss coverage ratio of 214% and biggest capital adequacy ratio of 16.9% (Tier-1: 14.4%) in the sector, so we have no concerns of capital-raising being necessary in the foreseeable future. Additionally, its 16% offshore loan portfolio is spread across numerous nations and jurisdictions, which limits country risk (including political risk). BBL trades at a low YE14 PBV of 1.1x against a regional mean of 1.5x. Our BUY rating stands.
1Q14 loans flat QoQ, but will expand in 2H14
Management said that 1Q14 loans will be reported flat QoQ, due to slow business, especially with small SME and retail clients. However, the bank stands by its FY14 lending growth target range of 5-7% (we assume 6%), following 9.2% expansion in FY13. Business will improve in tandem with the easing of political tension and the global economic recovery. BBL expects an FY14 NIM of 2.3-2.4%; it posted 2.4% for FY13. Management guides for a 1Q14 NIM of 2.3%, flattish QoQ. However, if the BOT were to cut its policy interest rate again this year, it would squeeze NIM slightly, so our FY14 NIM assumption is 2.35%.
Asset quality is good—corporate lending entails less risk
BBL targets a YE14 NPLs/loans ratio of 2.2%, close to the YE13 number, through heavy LLP-setting of Bt8-8.5bn in FY14. Note that 61% of its lending is to corporates, who as a group entail less risk than SME or retail clients. We expect the bank to manage its asset quality comfortably compared with its competition. Our model assumes LLPs of Bt8.5bn in both FY14 and FY15. We expect the bank to set 1Q14 LLPs of Bt2bn, up 15% YoY.
Good OPEX control to make for a cost/income ratio of 43-44%
BBL anticipates a cost/income ratio of 43-44% for FY14 following a ratio of 44% in FY13, supported by loan growth, a sustained NIM, fee income expansion (more cross-selling of financial products, both in Thailand and abroad) and by controlling OPEX. Management guides that FY14 OPEX will rise 7-8% YoY against a fee income growth target of 10%.
1Q14 earnings will dip YoY on lower investment gains
We forecast that BBL will deliver 1Q14 earnings of Bt8.8bn, down 2.4% YoY, due mainly to lower gains on investments (the bank posted a 1Q13 investment gain of Bt1.1bn). 1Q14 LLPs are expected at Bt2bn, up 15% YoY. Nevertheless, we estimate a 1Q14 pre-provision operating profit of Bt12.8bn, up 11% YoY, supported by loan growth of 10% YoY, a sustained NIM, fee income expansion of 5% YoY and good OPEX management (up 2% YoY but down 7% QoQ).