Local banks' strong Q2 2011 earnings underpinned by higher net interest margin (NIM), strong insurance premiums and well-contained costs should allow them to leverage the economic turnaround.
Earnings momentum is expected to be sustained, or even better for the rest of this year on back of sustained economic momentum and improve political climate.
Most analysts believe the Thai central bank will not raise its policy rate much higher than the current 3.25 per cent, while banks are unlikely to raise their deposit rates aggressively. This should contribute to improvement in their NIM in the following quarters. Robust loan growth will also help boost NIM and
fee incomes. Hence, second half 2011 earnings are expected to be stronger than that of the first half's.
Improving NIM
Higher net interest margin (NIM) both year-on-year (yoy) and quarter-on-quartor (qoq). All banks showed higher NIM yoy and qoq, except for Bank of Ayudhya (BAY), which saw a slight qoq dip. On average, NIM improved 13 basis point (bp) qoq and 20 bp yoy.
KTB showed the highest yoy improvement while TMB recorded the strongest qoq increase.
Basically, yields on banks' earning assets rose faster than costs on interest-bearing liabilities as banks did not raise rates for savings, which account for about 40 per cent, or more of their deposit portfolios. Meanwhile, they raised lending rates by 25 bp across the board.
With competition for deposits declining following the recent central bank policy rate hike, banks' NIM should be even better in the second half of this year than the first half.
Asset quality improved
Non-performing loans (NPL) ratios dropped for most banks. Given improved economic conditions, NPL ratios have declined. As the economy is expected to grow 4.5% this year, NPLs should slide further and
pose no concerns for the banking sector over the next couple of years. As a result, banks have room to lower their provisions.
Fee income still strong
Aggregate fee income rose 9 per cent yoy and 1 per cent qoq. Despite banks' lowering of provincial transfer fees and ATM withdrawal fees in Q1 2011, fee income was still considered very robust. Banks' fee income should grow by 10 per cent this year and next year.
Costs under control
Cost-to-income ratio averaged 45 per cent in the Q2 2011, down from 50 per cent in Q2 2010. Banks' aggressive branch and ATM network expansions over the past few years are likely to cool down, hence this ratio should start to decline. Lower cost-to-income ratios should help strengthen banks' profitability.
Banks aggregate earnings forecasts should rise by 2-3 per cent for the calendar year 2011-13, according to CIMB Securities (Thailand).
Siam Commercial Bank (SCB) and Krung Thai Bank (KTB) are CIMB Securities (Thailand)'s top picks. SCB is expected to be a foreign investor favourite in the banking sector, while KTB is likely to be domestic investors' pick among the banking stocks. The stronger-than-expected Q2 2011 results are likely to lead to brokers' earnings upgrades and a solid earnings outlook should be a catalyst for banks' share prices.
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