Bangkok Bank. Thailand Company Guide. HOLD (downgrade) Last Traded Price ( 4 May 2017): Bt182 (SET : 1,573.05) Price Target 12-mth: Bt190 (4% upside)

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1 Thailand Company Guide Version 7 Bloomberg: BBL TB Reuters: BBL.BK Refer to important disclosures at the end of this report DBS Group Research. Equity 5 May 2017 HOLD (downgrade) Last Traded Price ( 4 May 2017): Bt182 (SET : 1,573.05) Price Target 12-mth: Bt190 (4% upside) Potential Catalyst: Investment resumption; asset quality improvement Where we differ: N/A Analyst Thaninee SATIRAREUNGCHAI, CFA thaninees@th.dbsvickers.com What s New Hope for loan demand to recover in 2H17 Stellar fee income growth in 1Q17 is not a trend NPL to rise further but expected to peak this year Downgrade to HOLD; TP maintained at Bt Price Relative Bt May-13 May-14 May-15 May-16 May-17 (LHS) Relative SET (RHS) Relative Index Forecasts and Valuation FY Dec (Btm) 2015A 2016A 2017F 2018F Pre-prov. Profit 57,492 55,256 60,143 62,016 Net Profit 34,181 31,815 35,072 37,684 Net Pft (Pre Ex.) 34,181 31,815 35,072 37,684 Net Pft Gth (Pre-ex) (%) (5.9) (6.9) EPS (Bt) EPS Pre Ex. (Bt) EPS Gth Pre Ex (%) (6) (7) 10 7 Diluted EPS (Bt) PE Pre Ex. (X) Net DPS (Bt) Div Yield (%) ROAE Pre Ex. (%) ROAE (%) ROA (%) BV Per Share (Bt) P/Book Value (x) Earnings Rev (%): (1) (2) Consensus EPS (Bt): Other Broker Recs: B: 20 S: 3 H: 6 Source of all data on this page: Company, DBSVTH, Bloomberg Finance L.P NPLs to rise further Infrastructure investment is the only hope for loan demand recovery. Loan demand should recover in 2H17 should the government infrastructure investment projects and the resumption of private investments materialise. However, this does not mean that we would see sizeable loan growth from such investments; rather, the management believes loan demand recovery will take time. We maintain our 4% loan growth assumption for FY17F, vs. the bank s target of 4-6%. Stellar fee income growth in 1Q17 was related to government project bidding. Stellar fee income growth in 1Q17 was driven mainly by front-end loan-related fees, thanks to some of the government infrastructure investment projects that were in the bidding process during that quarter. BBL expects such investment projects (bidding) to continue to drive its fee income growth in 2Q17, while the growth should be weaker in 2H17, when the earnings driver should change to stronger loan demand to support those investments (bidden earlier). We maintain our FY17F fee income growth assumption of 5%, in line with the bank s target. NPL to rise further and coverage ratio will fall. NPLs increased 13% q-o-q, pushing NPL ratio up to 3.5% at end-1q17. This was due mainly to SME clients, and those NPLs mostly relapsed. Management signals that NPL would continue to rise in 2Q17 but probably peak in 4Q17. However, it maintains its guidance for provision expenses, and our assumption is just in line with the bank s guidance. These will drive the coverage ratio down. Valuation: While we maintain our FY17F estimates for BBL, we downgrade BBL to HOLD, from BUY, given the limited upside to our TP of Bt190, as well as the uncertainties over the asset quality of the bank. Our TP is based on the Gordon Growth Model, implying 0.9x FY17F BV. Key Risks to Our View: If the investment cycle is delayed, there could be downside risks to loan and earnings growth. At A Glance Issued Capital (m shrs) 1,909 Mkt. Cap (Btm/US$m) 347,409 / 10,055 Major Shareholders (%) Thai NVDR 30.8 Chase Nominees Limited 3.3 State Street Bank And Trust Company 3.3 Free Float (%) m Avg. Daily Val (US$m) 18.2 ICB Industry : Financials / Banks ed: CK / sa: CS, PY

2 WHAT S NEW Post-results meeting: The bank seeing its NPL to rise further Hope for loan demand to recover in 2H17. BBL s loan portfolio contracted by 1% in 1Q17, as credit demand was weak, while there were some loan repayments during that period. Management believes the demand in 2H17 will be better, thanks to the government infrastructure investment projects, as well as the resumption of private investments. However, this does not mean that we would see sizeable loan growth from such investments; rather, management believes loan demand recovery will take time. We maintain our 4% loan growth assumption for FY17F, vs. the bank s target of 4-6%. Stellar fee income growth in 1Q17 is not a trend. Recall that 1Q17 earnings were driven by strong fee income growth (but dragged by high provisions). Stellar fee income growth, however, is not a trend, according to management. It was driven by mutual fund fees and front-end loan-related fees, thanks to some of the government infrastructure investment projects that were in the bidding process during the quarter. BBL expects such investment projects to continue to drive its fee income growth in 2Q17, while the growth should be weaker in 2H17, when, as mentioned above, the earnings driver should change to stronger loan demand to support those investments (bid earlier). Besides, while the adoption rate of promptpay remaining low at the moment, the bank expects to see some impact to its net fee income in 2H17. With that, we maintain our FY17F fee income growth assumption of 5%, in line with the bank s target. NPL to rise further but expected to peak this year. NPLs increased 13% q-o-q to Bt77.8bn, pushing NPL ratio up to 3.5% at end-1q17 (vs. 3.2% at end-2016). Management revealed that those NPLs came mainly from SME clients, in broad-based industries, and believed such an increase (13%) is not alarming, as those NPLs relapsed, while the momentum of new NPL formation has in fact moderated, and the restructuring process has improved. Nonetheless, as NPL inflows were more than outflows, net NPLs increased in 1Q17. Meanwhile, management signals that NPL would continue to rise in 2Q17 but probably peak in 4Q17. However, it maintains its guidance for provision expenses (Bt16bn), and our credit cost assumption is just in line with the bank s guidance. Page 2

3 Margin Trends CRITICAL DATA POINTS TO WATCH Earnings Drivers: NIM to be stable. NIM expansion in 2016 was thanks mainly to a lower interest rate environment. Funding costs declined, as the bank s high-rate fixed deposits that expired in 2016 were rolled over only partially and at lower interest rates, while yields were quite stable. We expect policy rate to remain stable in 2017 and, from our understanding, there are not a lot of highrate fixed deposits to expire in 2017, compared with With that, there is limited room for funding costs to go lower. Meanwhile, asset yields should remain relatively stable, as most of the loan demand expected in 2017 is from the same segments, compared with 2016 s. Loan growth to recover along the investment cycle. Following the government s 8-year infrastructure investment projects ( ), Thailand s new investment cycle has actually already begun. We expect to see more investments to start in 2H17, and this should be the key driver for corporate loan demand revival. With the bank s large exposure to business loans (40% corporate + 30% SME), BBL should see its loans to grow along with the cycle. Fee and non-interest income to grow with loans. With stronger loan growth expected in 2017, we believe BBL s fee and non-nii should improve accordingly. Note that the decline in non-nii (- 7% y-o-y) in 2016 was exceptional, because in 2015, BBL booked a raft of sizeable gains from sales of investments, which helped drive its non-nii growth to 20% y-o-y. We do not expect such transactions in ,000 50,000 40,000 30,000 20,000 10,000 0 Bt m 2,000,000 1,500,000 1,000, , ,000,000 1,500,000 1,000, ,000 0 Bt m Bt m Net Interest Income Gross Loan & Growth Customer Deposit & Growth Net Interest Income Margin Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS) Customer Deposits (LHS) Customer Deposits Growth (%) (YoY) (RHS) 2.4% 2.4% 2.3% 2.3% 2.2% 2.2% 2.1% 2.1% 2.0% 2.0% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Credit cost to remain the same level as in BBL set aside high provisions to cope with rising NPLs in 2016, while maintaining its coverage ratio at a high level. The bank expects its NPL ratio to rise further in 2017 but guides for the same level of provision expenses as 2016 s, at the expense of coverage ratio. We assume an 81bps credit cost for FY17F, compared with 82bps in Loan-to-Deposit Ratio Trend Bt bn 2,725,087 2,525,087 2,325,087 2,125,087 1,925,087 1,725,087 1,525,087 Loans Deposit Loan-to-Deposit Ratio (RHS) 94% 92% 90% 88% 86% 84% 82% 80% 78% 76% 74% Cost & Income Structure Bt m 100,000 80,000 60,000 40,000 20, % 48% 47% 46% 45% 44% 43% 42% 41% Net Interest Income Non-interest Income Cost-to-income Ratio Source: Company, DBSVTH Page 3

4 Balance Sheet: NPL ratio to rise in BBL has guided for NPL ratio to rise further in 2017, given the vulnerability of those small businesses amid the slow economic improvement. In the meantime, BBL maintains its provision expenses at the same level as 2016 s. This should drive its coverage ratio down. Large exposure to corporate and overseas loans. BBL has the largest exposure (in size and percentage) to corporate (40%) and overseas (16%) loans among other Thailand banks. With that, the bank is in a good position to benefit from the new investment cycle and the regionalisation opportunities. Capital ratio remains robust. Capital adequacy remains sufficient to support business growth, and its CAR is the strongest among other banks. Its CAR ratio is higher than the 9.125% required by the Bank of Thailand, while CET 1 capital and Tier 1 capital remain well above the minimum requirements of 5.125% and 6.625%, respectively. Share Price Drivers: Execution of the government s infrastructure projects. With its largest exposure to business loans (40% corporate + 30% SME), BBL should be one of the banks to capture the opportunity to grow along with the investment cycle. 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 19.0% 18.5% 18.0% 17.5% 17.0% 16.5% 16.0% 15.5% 15.0% 10.0% 8.0% Asset Quality NPL Ratio Provision Charge-Off Rate Capitalisation (%) Tier-1 CAR Total CAR ROE (%) Growing international economic activities. BBL s large exposure to overseas credit demand makes it a key beneficiary of the regionalisation trend (AEC & EEC). This would help boost not only the bank s loan growth, but also its non-interest income. Key Risks: Prolonged weakness of the economy. If the economy takes too long to recover, or the investment cycle is delayed, there could be downside risks to loan and earnings growth. Company Background Public Company Limited (BBL) provides various banking and financial services including commercial, consumer, credit card, and mortgage lending, international trade financing, investment banking, and securities services. The bank s core strength is in corporate lending. 6.0% 4.0% 2.0% 0.0% Forward PE Band (x) (x) sd: 11.5x sd: 10.7x Avg: 10x 9.6-1sd: 9.2x 8.6-2sd: 8.5x 7.6 May-13 May-14 May-15 May (x) PB Band (x) sd: 1.42x +1sd: 1.23x Avg: 1.04x -1sd: 0.85x -2sd: 0.66x 0.5 May-13 May-14 May-15 May-16 Source: Company, DBSVTH Page 4

5 Key Assumptions FY Dec Gross Loans Growth Customer Deposits Growth Yld. On Earnings Assets Avg Cost Of Funds Income Statement (Btm) FY Dec Net Interest Income 58,997 57,510 63,998 65,963 69,329 Non-Interest Income 37,678 45,041 41,777 42,317 43,428 Operating Income 96, , , , ,757 Operating Expenses (43,087) (45,059) (50,519) (48,136) (50,741) Pre-provision Profit 53,589 57,492 55,256 60,143 62,016 Provisions (8,687) (14,654) (15,728) (16,148) (14,503) Associates Exceptionals Pre-tax Profit 45,084 43,030 39,624 44,077 47,513 Taxation (8,593) (8,630) (7,556) (8,701) (9,503) Minority Interests (159) (220) (254) (304) (327) Preference Dividend Net Profit 36,332 34,181 31,815 35,072 37,684 Net Profit bef Except 36,332 34,181 31,815 35,072 37,684 Growth (%) Net Interest Income Gth 5.6 (2.5) Net Profit Gth 1.2 (5.9) (6.9) Margins, Costs & Efficiency (%) Spread Net Interest Margin Cost-to-Income Ratio Business Mix (%) Net Int. Inc / Opg Inc Non-Int. Inc / Opg inc Fee Inc / Opg Income Oth Non-Int Inc/Opg Inc Profitability (%) ROAE Pre Ex ROAE ROA Pre Ex ROA Source: Company, DBSVTH Page 5

6 Quarterly / Interim Income Statement (Btm) FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Net Interest Income 16,033 15,596 16,066 16,303 16,277 Non-Interest Income 10,612 9,306 10,837 11,022 10,856 Operating Income 26,645 24,901 26,903 27,325 27,134 Operating Expenses (12,856) (12,599) (12,095) (12,968) (11,082) Pre-Provision Profit 13,789 12,302 14,808 14,357 16,052 Provisions (3,644) (3,542) (4,946) (3,596) (5,806) Associates 60.8 (55.4) Exceptionals Pretax Profit 10,206 8,705 9,912 10,802 10,328 Taxation (1,828) (1,473) (1,785) (2,469) (1,951) Minority Interests (60.3) (62.7) (65.6) (65.3) (72.0) Net Profit 8,317 7,169 8,061 8,267 8,305 Growth (%) Net Interest Income Gth 2.7 (2.7) (0.2) Net Profit Gth 8.3 (13.8) Balance Sheet (Btm) FY Dec Cash/Bank Balance 59,899 61,432 66,338 53,850 72,842 Government Securities Inter Bank Assets 532, , , , ,563 Total Net Loans & Advs. 1,694,541 1,768,995 1,826,227 1,910,313 2,007,641 Investment 382, , , , ,639 Associates 1,156 1,280 1,327 1,409 1,409 Fixed Assets 31,455 46,108 45,231 44,759 44,759 Goodwill Other Assets 58,516 66,479 63,872 60,536 60,536 Total Assets 2,759,890 2,835,852 2,944,230 3,027,752 3,245,400 Customer Deposits 2,058,779 2,090,965 2,178,141 2,254,800 2,440,668 Inter Bank Deposits 140, , , , ,580 Debts/Borrowings 151, , , , ,840 Others 85, , , , ,975 Minorities Shareholders' Funds 323, , , , ,592 Total Liab& S/H s Funds 2,759,890 2,835,852 2,944,230 3,027,752 3,245,400 Source: Company, DBSVTH Page 6

7 Financial Stability Measures (%) FY Dec Balance Sheet Structure Loan-to-Deposit Ratio Net Loans / Total Assets Investment / Total Assets Cust. Dep./Int. Bear. Liab Interbank Dep / Int. Bear Asset Quality NPL / Total Gross Loans NPL / Total Assets Loan Loss Reserve Coverage Provision Charge-Off Rate Capital Strength Total CAR Tier-1 CAR Source: Company, DBSVTH Target Price & Ratings History Bt S.No. Date of Report 14 1: 24 Jun BUY 12 2: 04 Jul BUY : 08 Jul BUY : 22 Jul BUY 4 5: 25 Jul BUY : 30 Sep BUY : 21 Oct BUY 7 8: 25 Oct BUY : 23 Nov BUY 10: 10 Jan BUY 11: 23 Jan BUY : 01 Feb BUY May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 13: 10 Apr BUY 14: 21 Apr BUY Note : Share price and Target price are adjusted for corporate actions. 15: 24 Apr BUY Closing Price 12-mth T arget Price Rating Source: DBSVTH Analyst: Thaninee SATIRAREUNGCHAI, CFA THAI-CAC Corporate Governance CG Rating 2016 Certified THAI-CAC is Companies participating in Thailand's Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorised into: Score Declared Certified Description Companies that have declared their intention to join CAC Companies certified by CAC. Corporate Governance CG Rating is based on Thai Institute of Directors (IOD) s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria in five categories including board responsibilities (35% weighting), disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of shareholders (15%). The IOD then assigns numbers of logos to each company based on their scoring as follows: Score Range Number of Logo Description Excellent Very Good Good Satisfactory Pass <50 No logo given N/A Page 7

8 DBSVTH recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 5 May :11:34 (THA) Dissemination Date: 5 May :38:00 (THA) Sources for all charts and tables are DBSVTH unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''). 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