Thai banks' 3Q17 earnings 'disappointedly weak'

Profits missed consensus by 8%.

Nine banks under Maybank Kim Eng's coverage reported aggregated 3Q17 earnings at THB46.7b (US$1.4b) (-9%YoY, +4%QoQ). NPL continued to rise for most banks (aggregated NPL rose from 3.70% to 3.81%), especially the big ones.

"Loans remained sluggish (-0.3% QoQ), especially in SME segment. Non-interest income improved somewhat (+4.3% QoQ vs. +2% QoQ in 2Q17), driven by solid income from securities-related activities. Small banks continued to deliver better results, thanks to improving NPL resulting in lower credit cost. In contrast, all big banks (SCB, KBANK, BBL, and KTB) continued to struggle with NPL, resulting in elevated credit cost and weak earnings," the analyst said.

Here's more from Maybank Kim Eng:

There are two things worth mentioning that could affect earnings outlook in the near term. First, many banks now apparently have realized the importance of regulatory risk including the accounting standard change to IFRS9 in 2019. Some banks (at least KBANK, SCB, and KTB) blamed that as one of the reasons for the lingering high credit cost thus far this year. We have been flagging this risk for some time and this confirms our view that banks may be forced to keep credit cost high in the near future.

Second, there was a strong rise in interbank assets in 3Q17 (+24% YoY vs.  +5.6% last year), a phenomenon last seen in 2015 when fears of NPLsescalated amid the default of SSI. We interpret it as banks being less willing to lend, despite improving macroeconomic growth.

We believe this is because banks see risk/reward unattractive in many segments. For example, for corporate segment, banks are facing competition from the bond market that offers lower interest rates. They feared NPLs in SME  segment. Personal loans/credit card are facing more stringent regulations. Apparently, it might be only auto loans (and possibly mortgage, to a lesser extent) that banks still see room to grow. If less willingness to lend is the reason for sluggish loan growth, loans may remain sluggish in the near termtoo.

In conclusion, we believe lingering high credit cost with dim loan outlook should put pressure on the earnings in the short term. After 3Q17 results, perhaps it is safe to say that the rally in the banking sector year to date may not be justified from the fundamental perspective. We see that possibly only TISCO’s rally is justified given its ROE expansion from 16.9% last year to 19.5% in 3Q.