Bank April 23, Flat 1Q18 earnings, as expected; mild recovery ahead SECTOR RESEARCH

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1 YE01 YE02 YE03 YE04 YE05 YE06 YE07 YE08 YE09 YE10 YE11 YE12 YE13 YE14 YE15 YE16 YE17 YE18 RESEARCH SECTOR Bank April 23, 2018 Flat 1Q18 earnings, as expected; mild recovery ahead Sector: Bank NEUTRAL Bank sector profit will recover in 2H18 on a strong investment upcycle that will drive loan growth. Meanwhile, we expect aggregate NPLs to peak in 2Q18, allowing the banks to cut their LLPs to offset the effect of fee waivers. Hence, we project that the FY18 earnings of our coverage will recover to Bt194bn, up 5.4% YoY, after a drop of 7.3% last year. Our sector call is NEUTRAL with BBL and KKP as our favorite picks. Most 1Q18 results as expected (except TISCO, KTB, and TCAP) The nine big banks posted an aggregate 1Q18 profit of Bt51.6bn, down 0.1% YoY but up 21.5%% QoQ. The number was 2.1% below our estimate, with the slippage concentrated in KTB, due mostly to NIM squeeze because the bank lent heavily to SOEs and state agencies, business that carries a slim yield. The earnings of TISCO and TCAP beat our models on oversized trading gains of Bt450m and B200m, respectively. The profits of BBL, KBANK, SCB, BAY, TMB, and KKP were in line with our estimates. NPLs rose only 3% QoQ, LLPs declined Coverage lending totaled Bt11.1trn at end-march 2018, up by 0.6% QoQ and 5.6% YoY. The aggregate NPLs of the nine banks totaled Bt427bn, up by 3.0% QoQ and 10% YoY, driven by a jump in bad debts among SMEs and some corporate clients. The NPLs/loans ratios of TCAP, TMB, and KTB all increased. The NPLs/loans ratios of TISCO and KBANK were flat QoQ. In contrast, BAY, BBL, SCB and KKP posted modest QoQ declines in their NPLs/loans ratios. Aggregate loan loss provisioning dived 21% QoQ to Bt38.9bn for 1Q18 from a peak of Bt49bn in 4Q17. If the macro-economic climate were to fail to improve substantially in 2H18, we would expect most of the banks to maintain relatively heavy LLPs (we expect a much more favorable macro-economic environment in 2H18). Selective BUYs Our Thai Bank coverage trades at PBVs of 1.2x for YE18 and 1.1x for YE19 (the regional YE18 mean is 1.3x). And our coverage s 2018 PER is 10.9x, which is lower than the regional mean of 11.6x. Valuations are relatively cheap in the face of strong drivers in 2H18 tied to the acceleration of a Bt1.9trn slate of state infrastructure projects and lighter LLP-setting. We prefer TMB, TISCO, KKP, and BBL (set to be the least impacted by the retail online banking fee waiver war, as fees comprise only small proportions of their respective revenues). Because SCB, KTB, and KBANK will be more impacted by the retail mobile/internet banking fee waivers, their respective earnings profiles are exposed to downside risk. We forecast the aggregate FY18 earnings of our Bank coverage at Bt194bn, up 5.4% YoY, after dropping 7.3% YoY to Bt184bn for FY17. TMB, TISCO, KBANK, BAY, and KKP should post strong profit recoveries. We expect coverage lending to rise by 4.7% in 2018 and 5% in Sector comparison FY18E Div Target PER (x) PBV (x) ROE (%) yield (%) Rec. (Bt) FY18E FY18E FY18E FY18E BBL BUY KTB SELL KBANK HOLD SCB HOLD BAY SELL TMB BUY TCAP HOLD TISCO BUY KKP BUY Bank sector - PBV Band x +2.5 SD = 1.97x +1.5 SD = 1.73x LT-average = 1.35x -1.5 SD = 0.98x -2.5 SD = 0.73x -3.5 SD = 0.48x Price performance relative to SET 1M 3M 12M BBL (2.5) (3.0) (4.4) KTB (9.5) (9.0) (22.1) KBANK (11.5) (11.7) (8.8) SCB (6.5) (8.5) (28.4) BAY (5.3) (12.6) (8.4) TMB (8.7) (17.3) 1.5 TCAP (2.8) (5.6) 1.1 TISCO KKP (4.0) (7.6) (7.0) Suwat Bumrungchatudom Securities Fundamental Investment Analyst suwat@bualuang.co.th See disclaimer at the end of report

2 Outlook 1Q18 coverage profit dipped 0.1% YoY, led down by KTB: Aggregate 1Q18 earnings totaled Bt51.6bn, down 0.1% YoY but up 21.5% QoQ. The number was 2.1% below our estimate, due mainly to heavier LLPs and slimmer NIM than assumed for KTB and KKP. The earnings of TMB, BAY, KBANK, SCB, BBL, and KKP were in line with our projections. The bottom-lines of TCAP and TISCO beat our models. We forecast our Bank coverage s FY18 bottom-line at Bt194bn, up 5.4% YoY. TMB, BAY, KKP, and TISCO look set to outperform with profit growth of 16.3%, 14.6%, 13.3%, and 13.3%, respectively. The drivers will be lighter loan loss provisioning and ongoing loan growth (see Figure 3). KBANK, SCB, BBL, and TCAP are forecast to deliver moderate earnings growth of 6.3%, 3.1%, 1.5%, and 1.4%, respectively. Only KTB is expected to post an earnings contraction, down 2.4% this year, squeezed by heavy LLPs and a decline in fee income. Aggregate LLPs climbed 6% YoY but dived 21% QoQ for 1Q18, led by KKP, TCAP, BBL, BAY, and TISCO (see Figure 2). The aggregate loan loss coverage ratio rose slightly to 143% at end-march 2018 from 142% at YE17. We expect BBL, TISCO, KKP, BAY, and TCAP to set lighter YoY LLPs in 2Q18 onward, based on their respective guidance. Our aggregate LLP assumption for 2018 is Bt163bn, down 7.4% YoY. Figure 1: Bank coverage earnings review for 1Q18 (Btm) Profit 1Q18 1Q17 %YoY 4Q17 %QoQ FY18E % YoY BAY 6,215 5, , , BBL 9,005 8, , , KBANK 10,766 10, , , KTB 6,787 8, , , SCB 11,364 11, , , TMB 2,280 2, , , TCAP 1,899 1, , , TISCO 1,766 1, , , KKP 1,513 1, , , Total 51,593 51, , , Sources: Company data and Bualuang Research Figure 2: Loan loss provisioning assumptions for 1Q18 (Btm) LLPs 1Q18 1Q17 %YoY 4Q17 %QoQ FY18E % YoY BAY 6,683 5, , , BBL 7,322 5, , , KBANK 7,818 9, , , KTB 6,908 7, , , SCB 5,012 5, , , TMB 2,305 2, , , TCAP 1, , , TISCO , , KKP , Total 38,863 36, , , Sources: Company data and Bualuang Research Bank - 2

3 Slow lending in 1Q18 with an even slower rise in NPLs: The aggregate 1Q18 lending growth of the nine banks under our coverage was 0.6% QoQ (and 5.6% YoY), slightly below our expectation. BAY, KBANK, KKP, and TISCO posted 1Q18 YoY lending growth in excess of the trends necessary to achieve their respective 2018 guidance. Meanwhile, SCB and TMB delivered YoY loan growth in-trend with their respective guidance. In contrast, the loan growth performances of BBL, KTB, and TCAP were below the trends necessary to achieve their respective targets. In sum, the aggregate loans of the nine banks grew 5.6% YoY in 1Q18. Aggregate NPLs at end-march 2018 totaled Bt427bn, up by 3.0% QoQ and 10.0% YoY. TISCO and BAY posted QoQ NPL declines of 2% and 0.3%, respectively. In contrast, TCAP, BBL, KTB, KBANK, TMB, SCB, and KKP reported QoQ NPL rises of 5.6%, 5.4%, 4.6%, 2.1%, 2.0%, 0.4%, and 0.3%, respectively. Assuming that economic conditions improve in 2H18, we would expect bank lending growth to accelerate and NPLs to ease. Figure 3: 2018 net loan growth QoQ, YTD and YoY Loan growth Mar-18 BLS Bank guidance Result % %QoQ %QoQ %YoY FY18E FY18E YoY 3M YTD 12M Growth YoY BAY 1.5% 1.5% 9.8% 5.5% 6-8% Above BBL -1.3% -1.3% 2.8% 4.0% 5-6% Below KBANK 2.1% 2.1% 8.1% 6.0% 6-8% Above KTB -0.5% -0.5% 0.8% 4.0% 6-7% Below SCB 1.4% 1.4% 5.7% 4.0% 6-8% In line TMB 0.4% 0.4% 7.9% 8.0% 8-10% In line TCAP 0.1% 0.1% 4.6% 3.0% 5% Below TISCO -1.9% -1.9% 11.8% 0.0% 0-3% Above KKP 5.7% 5.7% 13.6% 8.0% 8% Above Total 0.6% 0.6% 5.6% 4.7% 5-6% In line Sources: Company data, Bualuang Research estimates Figure 4: NPL movements in 1Q18, QoQ and YoY comparisons Con NPLs 1Q18 4Q17 %QoQ 1Q17 % YoY BAY 37,515 37, , BBL 92,165 87, , KBANK 71,106 69, , KTB 107, , , SCB 64,817 64, , TMB 17,870 17, , TCAP 19,959 18, , TISCO 5,712 5, , KKP 9,673 9, , Total 426, , , Bank - 3

4 Figure 5: Loan loss coverage ratios (%), end-march 2018 against YE17 and end-march 2017 Loan loss coverage (Btm) 1Q18 4Q17 %QoQ 1Q17 % YoY FY18E BAY 58,910 55, , ,341 BBL 146, , , ,529 KBANK 106, , , ,760 KTB 129, , , ,055 SCB 93,443 89, , ,990 TMB 25,293 24, , ,675 TCAP 25,443 24, , ,020 TISCO 11,667 11, , ,133 KKP 10,691 10, , ,151 Average 608, , , ,653 Figure 6: NPLs/loans ratios (%), end-march 2018 and history NPL ratio% 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 QoQ Status from 3Q16 BAY Down Normal BBL Down Not KBANK Flat Not KTB up Not SCB Down Nearly normal TMB up Normal TCAP up Normal TISCO flat Normal KKP Down Normal Total NPL ratio down Nearly normal Figure 7: Credit cost (%), 1Q18 compared with 4Q17 and 1Q17 Credit cost (%) 1Q18 4Q17 +/-QoQ 1Q17 YoY FY18E YoY FY17 BAY BBL KBANK KTB SCB TMB TCAP TISCO KKP System Figure 8: New NPL formation (Btm) end-march 2018 and history New NPL formation 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 %QoQ Less TDRs & W/O BAY 3,946 3,802 7,239 4,760 5,070 3,880 6,107 3, BBL 5,694 5,244-3,511 9,809 8,391 2, , KBANK 6,768 9,706 4,452 6,411 5,952 9,922 5,888 6, KTB 6,373 6,604-4,737 14,954 13,648 6,367 7,155 7, SCB 3,944 6, ,878 4,394 5,227 5,901 1, TMB 1,901 3,725 2,142 2,024 2,549 2,239 1,907 2, TCAP ,174 1,477 3,690 1, TISCO KKP Total 30,299 36,412 3,548 42,807 43,259 31,745 29,900 29, Growth % QoQ , Bank - 4

5 Bank valuations look cheap and loan demand will accelerate: We believe that the current share prices of Thai banks are cheap. Our coverage s YE18 PBV is 1.2x (below its long-term mean of 1.4x and the regional peer average of 1.3x), squeezed by a rising NPL trend and slow lending last year. We assume coverage loan growth of 4.7% in 2018 and 5.0% in But we also expect state infrastructure project construction to accelerate in 2H18, so loan growth could beat our assumption. Although we anticipate more favorable macro-economic conditions in 2H18, there remains considerable uncertainty among both bankers and the broader business community (including concerns that government spending plans may be delayed). Such uncertainty is likely to discourage borrowing for investment spending to some extent. However, retail-driven banks have recovered from the mess of the First-time Car Buyer Program (which ran 2012-June 2013). Therefore, retail driven banks TISCO, KKP, TCAP, and BAY (despite its size, 45% of its loan portfolio is retail) should be able to boost their lending further this year. In contrast, most big banks are likely to expand lending strongly in 2H18 in tandem with construction of state infrastructure projects and a new stimulus package (not factored into our model). Our model points to aggregate FY18 earnings of the nine banks of Bt194bn, up 5.4% YoY, driven by lighter LLPs and stronger loan growth (especially in 2H18). TMB, BAY, TISCO, and KKP are set to post strong earnings recoveries on swift loan growth in 2H18 onward. Figure 9: Budget disbursement table for state infrastructure projects, E Btbn % +0.2% % year infrastructure sprending and incremental percent to GDP Growth +1.3% % +1.8% % % % +0.9% % Bank - 5

6 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E YE01 YE02 YE03 YE04 YE05 YE06 YE07 YE08 YE09 YE10 YE11 YE12 YE13 YE14 YE15 YE16 YE17 YE18 Recommendations NEUTRAL rating stands; prefer BBL and KKP: We believe that demand for loans among corporates, big SMEs, and in order to finance big-ticket infrastructure projects (mostly mass transit, state-owned enterprises, and loans for 4G licenses) will build during 2H18. We also expect most commercial banks to reduce loan loss provisioning, so forecast coverage FY18 earnings of Bt194bn, up 5.4% YoY, following a bottom-line contraction of 7% for FY17. Among our coverage, BBL has the highest CAR of 18.2% and loan loss coverage ratio of 159%. Besides 17% of its total loan portfolio is in overseas markets, so it has a more diverse portfolio. Furthermore, as only a modest proportion of its business is retail, it shouldn t be much affected by the retail online/mobile banking transaction fee waiver war that has broken out. BBL trades at an undemanding YE18 PBV of 0.9x, making it our top BUY among the big banks. In small retail banking space, we prefer KKP for its strong FY18 profit expansion outlook, which we expect to continue into FY19, driven by ongoing loan growth (both organic and by acquisition). Besides, the improved capital market suggests that KKP could earn more IB and brokerage income than modeled. The stock trades at a YE18 PBV of 1.5x with the highest expected dividend yield among our coverage of 7.2% for Figure 10: PBV movement, YE01-18E, and ROE, E x Expensive ROE while valuation is still cheap +2.5 SD = 1.97x +1.5 SD = 1.73x LT-average = 1.35x SD = 0.98x -2.5 SD = 0.73x SD = 0.48x ROE of Thai Bank - 6

7 Regional Comparisons Bloomberg Price Market Cap PER (x) EPS Growth (%) PBV (x) ROE (%) Div Yield (%) Code (local curr.) (US$ equivalent) 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E Hang Seng Bank 11 HK HKD , BOC Hong Kong 2388 HK HKD , DBS group Holding DBS SP SGD , UOB UOB SP SGD , Malayan Bank MAY MK MYR , CIMB Group Holding Bhd CIMB MK MYR7.3 17, China Citic Bank CH CNY6.4 44, China Construction Bank CH CNY , Bank Rakyat BBRI IJ IDR3, , Bank Mandiri Tbk PT BMRI IJ IDR8, , Bank Central Asia Tbk PT BBCA IJ IDR23, , Bank of Philippines BPI PM PHP , ICICI Bank Ltd ICICIBC IN INR ,405 n.a. n.a. n.a. n.a n.a. n.a Axis Bank Ltd AXSB IN INR , Bank of Ayudhya BAY TB THB , Bangkok Bank BBL TB THB , KASIKORNBANK KBANK TB THB , Kiatnakin Bank KKP TB THB , Krung Thai Bank KTB TB THB , Siam Commercial Bank SCB TB THB , Thanachart Capital TCAP TB THB , TISCO Financial Group TISCO TB THB , TMB Bank TMB TB THB2.54 3, Simple average Bank - 7

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9 CORPORATE GOVERNANCE REPORT DISCLAIMER This research report was prepared by Bualuang Securities Public Company Limited and refers to research prepared by Morgan Stanley. Morgan Stanley does not warrant or guarantee the accuracy or completeness of its research reports. Morgan Stanley reserves copyright and other proprietary rights in the material reproduced in this report. Morgan Stanley is under no obligation to inform Bualuang Securities or you if the views or information referred to or reproduced in this research report change. Corporate Governance Report disclaimer The disclosure of the survey result of the Thai Institute of Directors Association (IOD) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The IOD survey is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. Bualuang Securities Public Company Limited neither confirms nor certifies the accuracy of such survey results. Disclaimer: The disclosure of the Anti-Corruption Progress Indicators of a listed company on the Stock Exchange of Thailand, which is assessed by the relevant institution as disclosed by the Office of the Securities and Exchange Commission, is made in order to comply with the policy and sustainable development plan for the listed companies. The relevant institution made this assessment based on the information received from the listed company, as stipulated in the form for the assessment of Anti-corruption which refers to the Annual Registration Statement (Form 56-1), Annual Report (Form 56-2), or other relevant documents or reports of such listed company. The assessment result is therefore made from the perspective of a third party. It is not an assessment of operation and is not based on any inside information. Since this assessment is only the assessment result as of the date appearing in the assessment result, it may be changed after that date or when there is any change to the relevant information. Nevertheless, Bualuang Securities Public Company Limited neither confirms, verifies, nor certifies the accuracy and completeness of the assessment result. BUALUANG RESEARCH RECOMMENDATION FRAMEWORK STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS BUY: Expected positive total returns of 15% or more over the next 12 HOLD: Expected total returns of between -15% and +15% over the next 12 SELL: Expected negative total returns of 15% or more over the next 12 TRADING BUY: Expected positive total returns of 15% or more over the next 3 OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index over the next 12 NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index over the next 12 Bank - 9