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Thailand banks
SECTOR REVIEW
A slow recovery
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We believe that bank stocks are at or near their bottom, but that a
share price recovery will come slowly.
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The macro outlook is at best Neutral for banks. The improved political
climate and stimulus package will probably be insufficient to offset
damage from sliding exports. We are increasingly hopeful the economy
will bottom in 2Q or 3Q, but expect a slow, U-shaped recovery.
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Although we do not expect NPLs to peak until 3Q at the earliest, we
still believe provisions will not deplete book value. It remains extremely
difficult to forecast provisions and NPLs, but low loan growth to highrisk
sectors in recent years indicate that asset quality could
outperform the broader economy.
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Operating income should be flat. Margins could contract marginally, as
asymmetric lending and deposit rate cuts offset the damage of falling
interest rates. Loan and fee income growth should stagnate. We
foresee flat 0.9% YoY growth in sector pre-provision operating profit.
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Despite the poor earnings outlook, valuations seem to have discounted
the likely damage to asset quality. Key multiples remain well below all
historical levels (excluding the low point of the 1997-98 Asian financial
crisis), and our target prices point to potential upside.
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Investors running Thailand funds should weight banks more heavily
than the other large sector – energy. However, until a catalyst for
banks appears, we favour mid-caps in other Thai sectors for investors
able to invest in less liquid stocks.
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Our top picks are BBL, KBANK and TISCO. Our asset quality scoring
model ranks these banks well and valuations are appealing. Our top
sell call is TMB which has both operational and asset quality problems.
A slow recovery
Valuations point to fundamental upside for banks and the stabilisation of the economy
looks increasingly possible for 2Q or 3Q, but we still expect a slow recovery for bank
shares.
Macro still banks’ biggest enemy
Macro factors are unlikely to boost bank stocks significantly in the near term, in our view.
Correlations with global bank stocks are likely to stay high, and the deterioration in the
health of US and UK banks is likely to place downward pressure on Thai banks despite the
lack of a clear financial linkage. Although the Thai government’s stimulus package looks
significant from a macro-economic perspective, banks are not well positioned to benefit.
Our macro expectations imply that Thai bank stocks could be bottoming now but that the
recovery in share prices will be U-shaped.
NPLs expected to peak in 3Q at earliest
We expect NPLs will not peak until two quarters after the economy bottoms, implying that
NPLs will increase until 3Q09 or beyond. The lack of a clean accounting history and poor
disclosure make it unusually difficult to forecast NPLs in Thailand, but we believe that
provisions will not deplete book value. The conservative lending of the past few years
should allow credit costs to rise less than the severity of the economic downturn would
have suggested. We estimate that provisions as a percentage of loans will rise from
93 bps last year to 125 bps this year and 116 bps in 2010.
Flattish operating income
Operating income looks resilient but remarkably flat and dull. Although an unfavourable
asset-liability duration mismatch usually leads to contracting margins in a falling rate
environment, banks are showing a healthy capacity for protecting loan yields. As a result,
we only expect marginal contraction in margins. Loan growth should also be essentially
flat, failing to match our forecasted nominal GDP growth of 3.1%, and we expect marginal
growth in fee income. Unsurprisingly, flat forecasts on key operating inputs lead to flat preprovision
operating profit (PPOP) forecasts for the sector.
Valuations supportive
Despite the negative earnings and NPL outlook, the bad news appears to be in the price.
The sector P/B looks fairly valued at worst, and the P/PPOP looks inexpensive, in our
view. The P/B discount to the rest of the region is at a post-2000 low despite the
improvement in the political situation in the past month. A lack of catalysts and the global
outlook pose serious problems for bank shares, but valuations do not.
Our top picks: BBL and KBANK
We consider asset quality and valuations the key share price drivers for individual stocks
this year. Our updated asset quality scoring model rates the three-largest Thai banks (by
market cap) roughly equally as having the lowest risk in the sector. With little
distinguishing the three banks on asset quality, we prefer the two with the best valuations
– Bangkok Bank and Kasikornbank. KBANK appears the better bank fundamentally,
although sentiment could continue to favour BBL over the near term. Among small caps,
we like Tisco Financial Group, which has a favourable NPL risk profile, benefits from
interest rate trends and carries attractive valuations.
Stabilisation of the economy
looks increasingly possible
for 2Q or 3Q
Banks not well positioned to
benefit from government
stimulus packages
NPLs likely to peak in 3Q
Banks show capacity to
protect loan yields…expect
flat PPOP
P/B looks fairly valued at
worst, and P/PPOP looks
inexpensive
Best valuations are BBL and
KBANK
Among small caps, we like
TISCO
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