Thai banks' earnings to bottom out next year

Earnings may grow 15% after two consecutive years of slump.

Thailand was the first country to enter into a downturn in 2013 and is likely to be the first one out of the door on credit costs next year, said Credit Suisse.

The research firm projects earnings of Thai banks to rebound to 15% next year after falling 13% in 2015 and 1% in 2016E.

"The macro backdrop has improved somewhat with nominal GDP at 5.0% YoY in 2Q (vs 3.1% in the past three years) and real rates starting to drop (inflation was negative from Jan-2015 to Mar-2016 but has risen in the past two months to +0.4%)," it said.

Credit Suisse added that while loan demand is anaemic, asset quality stress should not be deteriorating.

Here's more from Credit Suisse:

On 2017E, KBANK is trading at 1.2x book for 14.7% ROE (16.0% in 2018E) and 25% EPS growth. Similarly, SCB and BBL are attractive.

We acknowledge that Thai banks may not be structural growth stories, but mid-teen ROEs with high-single-digit earnings growth and mid-single-digit yields are nothing to scoff at.

Macro backdrop improved a bit; real rates starting to fall Thailand is no longer a structural growth story as the labour force is shrinking. There has been very little nominal GDP growth (3.1%) in the past three years, but it has stabilised in the past few quarters.

On the other hand, real rates are falling as inflation has returned (was negative from Jan-2015 to Mar-2016) and has started rising in the past two months (latest 0.4% in September), while the market rates are flat.

Money supply was 4.3% YoY, broadly in line with nominal GDP growth of 5.0% YoY in 2Q16. Bank of Thailand would likely stay pat as fiscal policy has been doing more heavy lifting for growth. Net net, the macro backdrop is neutral for the banks, which is unlikely to generate much loan demand, but is also not deteriorating (i.e., not increasing asset quality pressure).

EPS is projected to rebound to 15% in 2017E, the third strongest among Asian banks after declining 13% in 2015 and 1% in 2016E. We believe the worst is behind us in terms of new NPL formation, and current year’s credit costs should be the peak. Credit costs spiked from 2013 and were very elevated last year.

The BoT has allowed banks to hide NPLs but forced them to take more provisions.

However, loan demand is anaemic and will likely not accelerate much next year due to lacklustre GDP growth amid high household debt and the corporate sector's lack of investment. Banks have managed net interest margins incredibly well and there has been a minimal impact of the unilateral 25 bp lending rate cut of early April.

So, overall, ROEs should recover towards mid-teens from next year after a deceleration from high teens in 2012-13 to low-teens in 2016.