Political, economic headwinds to hurt Thai banks' performance

Investors should be selective.

It has been noted that while most of the ASEAN region is seeing an economic slowdown, some of the ASEAN banking sectors have the potential to outperform because
of the change in the direction of interest rates.

According to a research note from Nomura, however, it seems Thailand isn't one of those sectors.

Nomura said that it sees no near-term catalysts in Thailand. Further, headwinds in the form of political uncertainty, weak consumption due to high household debt and low public and private investment continues.

Nomura said it believes investors need to be selective and its preferred picks are KTB and KBank.

Here's more from Nomura:

While most of the ASEAN region is seeing an economic slowdown, we believe some of the ASEAN banking sectors have the potential to outperform because of the change in the direction of interest rates.

Specifically, we believe Singapore and Indonesia banks will benefit from the interest rates changes.

Singapore – Higher rates offer huge operating leverage - We believe the Singapore banks, which are trading close to their mean valuations, can rerate further, as increases in short-term interest rates become more pronounced.

They benefit from higher short-term interest rates as their assets get repriced faster and by a bigger magnitude compared to their liabilities.

Both the inter-bank rate and the SWAP rate are up with the inter-bank rate 39bp higher than last year and the SWAP rate by 62bp. The SGD loans are typically pegged to these rates. For example at DBS, 40% of its SGD loans are linked to the inter-bank rate and 40% to the SWAP rate.

We estimate a 100bp increase in interest rates could boost ROEs by an average of 140bp. Our top pick is DBS

Indonesia - the easing of interest rates should stimulate growth - In Indonesia, we believe the recent 25bp cut in interest rates will be followed by a further 50bp reduction in the coming months.

While lower rates will squeeze the net interest margins (NIM) of BCA, Mandiri and BNI, we believe this would be more than offset of by the higher loan growth and lower credit cost. In addition, we believe the banks will benefit from Indonesia’s ambitious infrastructure programme.

We estimate close to 67% of the USD500bn projected spending will be outside of the budget and the banks are in a strong position to finance this spending. We estimate this could add 7 percentage points (pp) to loan growth and 11% to earnings. Our top picks are BRI followed by Bank Mandiri and Danamon.