Industry Outlook Banks (Thailand)

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1 Refer to important disclaimers at the end of this report DBS Group Research Asian Insights Office 30 March 2017 Overall Outlook GDP growth likely to tick up, yet downside risks remain Thailand s GDP growth may tick higher to 34 and 35 in 2017 and 2018, respectively, from 32 in 2016 Downside risks remain, as private-sector demand stays sluggish However, with supportive fiscal policies, stronger-than-expected export growth will help offset the drag Recent export data has been encouraging, while higher oil and agricultural crop prices will continue to support the outlook for export growth going forward We have previously forecast export growth to come in at an above-consensus 57 in 2017 but now expect it to come in even faster at 66 Public spending remains supportive Public spending remains highly expansionary as the government is committed to supporting the economic recovery Government consumption growth came in at an underwhelming 16 in 2016, the slowest in three years, but government investment growth was a robust 99 in 2016, even after the 29 jump in 2015 We believe public investment growth will remain in double digits in 2017 and 2018 Another supplementary budget is already underway The government continues to ramp up infrastructure works at the provincial level The size of this supplementary budget may reach about 50 of the current target for overall financing, set at THB390b for FY2016/17 Private-sector demand to stay soft The drag from the private sector remains Given that the private sector is three times the size of the public sector, the pace of growth in the private sector plays a bigger role in determining overall GDP growth momentum The private sector grew 24 in 2016, which is decent considering that it had grown by an average of 05 in But this was still some way off the 4 pace registered between 2008 and 2012 Despite headline inflation picking up pace since late-2016, the persistently low core inflation is yet another indication of the weak underlying domestic demand Consumer confidence has continued to tick higher but it hasn t translated into a faster pace of consumption growth as yet The debt overhang persists, even if household debt/gdp might have slipped to just below 80 at the end of 2016 Until we get a significant rise in wage growth, the household debt overhang may continue to be a drag on consumption growth Nominal wage growth was just slightly higher than 1 at the end of 2016, and we may only see a marginal improvement in 2017 Growth in agriculture and manufacturing, which employ close to 50 of the labour force, is still weak at 06 and 14, respectively, in 2016 Private investment to grow at an even slower pace than consumption Despite the aggressive fiscal spending, private investment is growing at an even slower pace than consumption The anticipated recovery in exports of manufactured goods may help boost capacity utilisation in the sector Whether this will immediately trigger an increase in investment remains to be seen Accommodative monetary policy to stay; expect stable policy rate and weak baht Even if the recovery in exports and supportive fiscal policies are likely to support GDP growth outlook ahead, the domestic economy remains some quarters away from returning to potential growth We believe the Bank of Thailand (BOT) is looking beyond rate cuts alone to provide support for the economy and expect the policy rate to remain at 15 for a little longer than previously expected One way that the BOT attempts to lift GDP growth is by keeping a relatively weak THB, in a bid to boost export competitiveness We reckon this policy stance will be maintained and the BOT will continue to talk down the THB going forward Whether a weaker THB helps boost export growth still seems uncertain Page 1

2 F Industry Outlook Sector loan growth to recover in 2017, but risks remain on the speed of rollout of infrastructure projects and the resumption of private investments Loan growth has been slow for the past three years, due to the weak economy and poor loan demand For small banks, loans had contracted with the multiple-year decline in domestic car sales However, as auto sales are expected to recover in 2017, thanks to better economic conditions, a recovery in private consumption, and the end of the five-year holding period under the first-car policy (in September 2016), we expect loan growth to be positive for small banks For big banks, loan growth will come from the resumption of private investments, as well as from government infrastructure projects For the sector, we expect loan growth to pick up to 4-5 in 2017 Thailand banks: Loan growth to pick up (20) (01) Positive loan growth for small banks for the first time in three years 2 Expect overall loan growth to improve; downside risks stem from delays in execution of government investment projects Thailand banks: Big banks have large exposure to corporate loans The Big 4 (Krungthai Bank, Bangkok Bank, Kasikornbank, and Siam Commercial Bank) control 72 of the corporate loan market BAY BBL KBANK KTB SCB TMB TCAP TISCO KKP Corporate SME Retail Others Page 2

3 Key Industry Trends 1) Capital: Strong capital base under Basel III As at the end of December 2016, the average Common Equity Tier-1 (CET 1) and Tier-1 capital at Thai banks were strong at 1399, and the average capital adequacy ratio (CAR) stood at 1766 significantly higher than the Bank of Thailand s minimum requirements under Basel III of 5125 for CET 1, 6625 for Tier 1 and 9125 for CAR Most Tier-1 ratios of the Thai banks are equivalent to their CET-1 ratios as they do not have hybrid securities in Tier-1 capital However, Krungthai Bank s CET-1 ratio is lower than its Tier-1 ratio As at end-december 2016, Krungthai Bank s CET-1, Tier-1 and CAR were 1275, 1281, and 1660, respectively Thailand banks: Capital ratios Capital ratios are strong and largely stable BAY BBL KBANK KKP KTB SCB TISCO TCAP TMB Tier I Tier II 2) Asset quality: NPL cycle approaching its end; credit costs to remain high for big banks The non-performing loan (NPL) cycle had already ended for small banks and should be over for most banks by 1H17 For big banks in general, new NPL formation has stabilised, though some special mention loans may be classified as NPLs in the next quarter or two for some banks Credit costs are expected to remain high to build up or maintain their coverage ratios, as well as to cushion against domestic and external uncertainties that may further erode their asset quality in the years to come For small banks, credit costs should continue to decline, in line with improving asset quality over the past several quarters However, we do not expect NPLs to fall significantly but to stabilise in 2017 Besides, we believe banks in general need to set aside more provisions, according to the new accounting policy regarding the credit-cost calculation under IFRS9, which will take effect in January 2019 Thailand banks: Asset quality trends Bt bn Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1 Asset-quality issues appear to be contained at this juncture, with expectations that the NPL ratio will peak in 1H17 Page 3

4 Thailand banks: Credit costs F 1 Credit costs are likely to remain high to build up/maintain coverage ratios 3) Management and strategy: Moving towards digitisation Banks are now moving towards digital banking Kasikornbank remains the leader in this arena TMB Bank is the runner-up, with its pure online banking product, called ME Other banks, like Siam Commercial Bank, Bangkok Bank, Bank of Ayudhya, and Krungthai Bank, have also made some headway in digital banking Meanwhile, a smaller bank like Thanachart Bank has already stepped up its digitisation phase by starting Internet banking in 2015 Thanachart Bank launched its mobile banking application, similar to that of others, in April ) Earnings: Another year of sluggish earnings for the sector The sector s earnings contracted in 2015, due to a sluggish domestic economy and weak exports, resulting in poor loan demand and deterioration in asset quality With the demand-supply distortion in the auto market after the government implemented the first-car policy in 2012, small banks have experienced rising NPLs and credit costs since 2013, while their loan portfolios have continued to contract since 2014 Asset quality is no longer an issue for the small banks, and their loan portfolios are on the verge of expanding again However, for big banks, their asset-quality cycle started later, due to the overall unfavourable economic environment, which also resulted in slow loan growth The asset-quality problems for the big banks have eased, but not ended yet, at least in terms of credit costs With that, we expect small banks to report decent earnings growth, while sector earnings growth will be weighed down by earnings contraction from Kasikornbank and Krungthai Bank The expansion in net interest margins (NIM) at big banks in 2016, in general, was a function of the lower-interestrate environment and shrinking deposit portfolio, as the high-rate fixed deposits that expired in 2016 were only partially rolled over and at lower rates We expect Thailand s policy rate to remain stable in 2017 and, from our understanding, there are not a lot of high-rate fixed deposits expiring in 2017 compared with 2016 With that, there is limited room for funding costs to go lower Meanwhile, asset yields have limited room to improve, as most of the loan demand expected in 2017 is from the low-yield corporate segment Hence, NIM could be under pressure in 2017 For small banks, however, we see some room for funding costs to go lower, thanks to the increasing CASA (or current account, savings account) portion of their deposit portfolios Page 4

5 Thailand banks: NIM trends F 1 NIMs are likely to ease at big banks but expand at small banks Thailand banks: Thai policy rate to stabilise at 15 in F 1 Stable policy rate expected for 2017 Thai banks: Sector earnings to expand only 16 in 2017 Bt bn (100) 1 We forecast sector earnings to expand only 16 in 2017, dragged by high provisioning at some big banks F 2018F Net profit Net profit growth (200) Page 5

6 5) Liquidity: Ample liquidity amid slow loan demand During , banks reduced their excess liquidity amid slow loan demand They let fixed deposits mature without renewals or with partial renewals, which shrank the level of deposits at most banks during the period Currently, banks are more focused on the liquidity coverage ratio (LCR), as per Basel III capital requirements As at the end of 2016, Thai banks liquidity coverage ratios (LCRs) had already exceeded the 60 minimum requirement set by the Bank of Thailand, with most already meeting the 100 level required by 2020 Thailand banks: Loan-to-deposit ratio Jan- 02 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan Banks have played down on the deposit side during , as loan demand was sluggish LDR LDR + borrowings 6) Sensitivity to interest rates: Neutral With the stable policy rate, ample liquidity in the banking system, and stillweak loan demand, we do not see risks of deposit competition in the banking system, and thus we do not expect an upward pressure on funding costs, though there also is limited room for funding costs to go lower On the yield side, as loan demand in 2017 is expected to improve from 2016, asset yields should improve accordingly Meanwhile, we also see limited upside for yields, as most of the loan demand is expected to come from the lowyielding corporate segment Net-net, we believe the impact from interest rates is neutral Page 6

7 Risks and Regulations 1) Basel III capital requirements Thai banks started to adopt a transitional approach to Basel III CET 1 capital ratio requirements on 1 January 2013; this will be phased in until full implementation on 1 January 2020 In addition, banks have had to maintain a minimum LCR of no less than 60 since 2016, with an additional 10 percentage points required per annum until full implementation in 2019 At present, all Thai banks meet the requirement, with most exceeding it We do not expect any deposit competition with respect to this requirement 2) IFRS9: Calculation of credit costs Effective from 1 January 2019, IFRS9 will likely result in higher credit costs for banks in general So far, banks have not made any comments regarding the numerical impact on their financial statements; however, most banks expect the impact to be higher credit costs With that, we believe banks may opt to continue setting aside high credit costs in preparation for this new accounting standard, regardless of the NPL levels, which is expected to peak in 1H17 3) National e-payment Initiated by the Thai Bankers Association and the Bank of Thailand, PromptPay the first stage of the government s national e-payment policy will be implemented some time in 2017 Normally, interbank money transfers attract a charge of THB25 per transaction for transactions of up to THB10,000; and THB35 per transaction of between THB10,001 and THB50,000 Under the PromptPay scheme, there will be no charges on money transfers of up to THB5,000, while there will be a charge of THB2 per transaction for money transfers of between THB5,001 and THB30,000, THB5 per transaction for those involving THB30,001-THB100,000, and THB10 for anything above THB100,000 This will be negative for banks earnings, especially for the Big 4 banks Page 7

8 We Cover Bangkok Bank Kasikornbank Kiatnakin Bank Krungthai Bank Siam Commercial Bank Thanachart Capital TISCO Financial Group TMB Bank Our In-House Expert Thaninee Satirareungchai, CFA Please note that DBS Bank Ltd may have research coverage in the companies mentioned in this industry report, that have been produced prior to or subsequent to its publication Please refer to the links below for the latest specific equity research reports published on below-mentioned companies and the accompanying disclaimer/disclosure of DBS interest in the companies mentioned in the respective reports Page 8

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