Upside risk from revival of investment up-cycle
Revival of investment up-cycle? Infrastructure upgrade projects, with a focus on
those deemed crucial to hone Thailand’s L-T competitiveness and private investment,
top the list on the roadmap for economic recovery as written up by the National
Council for Peace and Order (NCPO). The Ministry of Transport has worked up an 8-year
(2015-2022) infrastructure development plan with total budget of Bt3.2trn. Of this,
Bt2.4trn (excluding the Bt800bn high-speed train) will be sent to the NCPO for approval
on June 19. Actuality of this and other NCPO pro-investment stimulus measures would
trigger an L-T investment up-cycle, sustain L-T recovery for banks’ top line growth and
provide upside risk to our 2015-2016F loan and non-interest income growth.
We expect a moderate pickup in loan growth in 2H14 on seasonality and export
recovery, followed by strong recovery in 2015 on release of pent-up demand and revival
of infrastructure projects. Growth is expected to continue good through 2016 on a
sustained capex cycle and post-election restoration of private consumption. We
maintain our forecast of sector 2014 loan growth of 5% (vs. 0.6% 4M14 YTD) but see
upside risk for loan growth in 2015-2016 of up to double digits from the current
forecast of 8%. We see the same trend for non-NII growth. We maintain our sector
non-NII forecast of a contraction of 2% for 2014 (vs. -5% YoY in 1Q14), with upside risk
to our 2015-2016F of +12%.
Past seven months of political uncertainty. Banks have cut their 2014 loan growth
targets and we believe the difference between the new and old targets represents
pent-up demand that will be released in 2015. The NCPO’s appointment of the BoI
board on June 6 will begin to unlock pent-up demand for investment, since about
Bt700bn in projects are waiting to be approved after seven months without a board. In
4M14, the BoI received applications with a combined investment value of Bt308bn (-4%
YoY), largely contributed by Eco-car Phase ll plus petrochemical, paper and plastic
manufacturing projects and electronics and electrical appliance projects. The
Department of Industrial Works is also speeding up its approval of authorization to set
up new plants to 30 days.
Historically, loan growth spiked into double digits after small S-T economic downturns,
more or less attributable to pent-up demand. This is seen in the strong loan growth of
11% in 2010 and 15% in 2011 after the financial crisis in the US and EU, and 14% in 2012
after Thailand’s floods (mixed with post-flood reconstruction). Our 2015F and 2016F
loan growth of 8% thus seems too conservative relative to historical pent-up loan
demand. We place our 2015 and 2016 forecasts under review pending solidification of
the economic stimulus measures.
SME stimulus measures. The MoF has proposed soft loan and credit guarantee
facilities via Specialty Financial institutions (SFIs) in total worth Bt343bn. The MoF
expects these measures to stimulate 2015 GDP by 0.8-1%. As the largest player in the
SME market, particularly small SMEs, KBANK is at the head of the line to benefit from
these stimulus measures, specifically the guarantee facility by the Thai Credit
Guarantee Corporation. The Thai Credit Guarantee Corporation has proposed a 1styear
waiver of the guarantee fee on the Bt119bn guarantee blanket for 15,000 SMEs to
borrow from commercial banks under Portfolio Guarantee Scheme #5, which we
expect to create ~Bt200bn in new SME loans.
Need for eased monetary policy. Consensus expects the MPC to leave the rate
unchanged at the June 18 meeting. We see upside risk to our NIM forecast for large
banks (and downside for small banks dealing primarily in hire-purchase), in view of our
current assumption of another cut in policy rate of 25 bps in June and no change in
2015. We expect NIM to bottom out in 2Q14 and pick up in 2H14 upon deposit repricing.
We anticipate a further recovery in NIM for 2015F, underpinned by rising loan
to deposit ratio.
Asset quality under control. Deterioration in asset quality has been minimal in this
year’s economic downturn, with the damage lessened by proactive measures taken
last year in terms of tightening credit standards and setting aside extra countercyclical
provisions. We confirm our forecast of an easing in the sector’s credit cost from
0.97% in 2013 to 0.91% in 2014F, 0.79% in 2015F and 0.75% in 2016.
Recovery not priced into valuations. Share price outperformance since the trough
at the beginning of this year (+31% YTD vs. +20% for the SET) curtails banks’ S-T share
price upside, based on 2014 valuation at 1 standard deviation above the historical
mean. At the same time, in our view, share prices do not fully reflect a medium-term
recovery, with 2015 valuation at the historical mean and below up-cycle valuations –
with 2015 positioned to see an up-cycle.
Unchanged top picks – BBL and KBANK. As the economic recovery is expected to be
driven by infrastructure-led investment rather than consumption, which is hampered
by high household debt, we stick to our preference for large banks with primarily
business clients. The means our top picks are unchanged: BBL as the key beneficiary of
an investment up-cycle and KBANK as the main beneficiary of a capex cycle plus SME
stimulus measures along with its improving cost to income ratio after the completion
of K-transformation in 2015.