Loan growth forecast for Thai banks halved on rising political turmoil

Risk high on earnings.

According to Maybank Kim Eng, it cuts its 2014 loan growth forecast for Thai banks by 50% on each bank and raised the credit cost by 10bps for banks with a high ratio of consumer loans (BAY, KKP, SCB, TCAP & TISCO) and by 5bps for other banks.

Maybank notes that it currently forecast the sector provisions to total loans ratio to drop to 87bps in 2014 from 99bps last year as the strong reserve coverage ratio could mitigate the provisioning risk. CAUTION on consumer loans! Further economic slowdown could escalate NPL formation in consumer loans, especially for the autos, credit cards and personal loans – hence our stress test on banks that focus on the retail loans with higher credit cost.

Here's more:

What’s Our View
Risk is on earnings but not balance sheets. KBANK and BBL are the more resilient with earnings to fall 2.9% and 3.5% from the base case.

Their high proportion of non-net interest income to net operating income and low retail loan exposure partly insulate earnings.

TCAP and BAY were more impacted, down by 8.2% and 8.4%. The weak insulating factors on these names are because of their low fee income to net operating income ratio. However, banks’ balance sheets remain solid.

Their strong capital ratios and high loan-loss reserves (LLR) cushion the potential impact of an economic downturn. BBL’s and TMB’s balance sheets are better cushioned than peers on a LLR to gross loan and NPLs basis.

Maintain Neutral: top picks KBANK, KTB & BBL. The banking sector has outperformed the SET by 3% YTD, partly recouping the 8% underperformance in 2013. While it appears the current valuation for Thai banks is attractive, some headwinds are still apparent so there is no clear catalyst for now.

We like KBANK (for its diversified loan portfolio, high NIM and high ROE) and KTB (for improving operations, undemanding valuation and high yield). We also like BBL due to asset quality and having the lowest provisioning risk due to the strong coverage ratio and minimal exposure to retail loans.