MBKET Sees Limited Downside on Thai Banks, Picking KBANK and TISCO for Accumulation

Maybank Kim Eng Securities (Thailand) (MBKET) published an analysis after the announcement of all securities in the banking sector with strong earnings growth in 2Q21, while choosing KBANK and TISCO as its top picks for accumulation on weakness.

 

MBKET expected economic recovery to be delayed by 3-6 months, but saw limited downside risk on share prices as the sector has fallen by 18% already since end-1Q21. Despite a spike in Covid cases, Thai exports are recovering globally (helped by a weaker THB), logistics (e-commerce) is picking up and commodities are rebounding (decent farm income). Capital-markets activities also supported strong fee income growth YoY in 1H21.
The securities company saw this as the opportunity to accumulate on weakness with its top picks as KBANK (TP@Bt160) and TISCO (TP@Bt110).

 

Lower credit cost helped 2Q21 EPS to grow 55% YoY
MBKET stated that most banks reported strong earnings growth YoY for 2Q21 (except TTB), thanks to lower credit cost and higher fee income growth in 2Q21. On a QoQ basis, net profit fell 9% to THB35.7b due to less fees from capital markets and bancassurance as a result of weak economic conditions. NIM and asset quality are better than expected for 1H21 but look challenging in 2H21 given stricter lockdown and rising infections.

 

Expect banks to offer long-term debt restructuring to reduce default risk
MBKET had a cautious outlook for the economy and expected weakness in asset quality, in terms of higher NPLs, credit cost and proportion of loans under debt-relief measures in 2H21. The prolonged movement restrictions will delay recovery in domestic consumption and require a longer period for the tourism sector to fully recover.
The securities company expected banks to offer long-term debt restructuring to reduce default risk. Hence, banks should benefit from stable NPL formation and credit cost, but at the expense of weaker NIM.

 

Most NPLs were re-entry NPLs, which require less provisions vs new NPLs
MBKET believed NPLs will gradually increase but saw no alarming signs of deterioration in asset quality. Banks guided NPLs rose in 1H21, but were mainly from customers who exited the deb-relief programme earlier and they require less provisions than new NPLs. The securities company assumed 1.4-1.6% credit cost for 2021-2023 vs 1.9% in 2020 and expected sector earnings to grow 22%/10% YoY in 2021/2022. As the central bank set a dividend-payout cap , ROE should improve slightly to 6.9% in 2021 from 5.9% in 2020.