Thailand Banks:Third time’s the charm?

Stocks have lagged, up only 8% YTD. YTD, the SETBANK Index has been up aweak 8% and underperformed the broader index (+10%). Among ASEAN banks,Thai banks have been the worst performers (+8% YTD vs APXJ +18%). We hadearlier anticipated NPLs to peak in 2Q17, but we believe the likelihood of thathappening is low and now push our expectations to 2018e.

    We believe this is the final leg. The good news is that: 1) special mention loan growthis decelerating, and the stressed loans ratio has stabilised in 2Q17; 2) the new NPLformation ratio has declined for two consecutive quarters; and 3) 2012-14 vintage loanshave mostly turned sour. These trends could signal that the peak is near.

    Downside is limited with the sector trading at a 10x 2018e PE. We continue to beconstructive on the sector, as 1) the downside risks look fairly limited, given the ongoingstability in the economy; 2) the market has not priced in a credit cost recovery; and 3)valuations are not expensive at a 10x 2018e PE (slightly below mean at 11x).

    Cut net profit by 11-15% in 2017-19e, mostly to reflect higher credit costsassociated with the asset quality deterioration in 2017e (from 130bp to 142bp) andNIM pressure arising from the cut in lending rates in May 2017 (by 5-7bp). We alsolower our revenue growth (loan and fee income growth) on the back of a delay inNPLs peaking. In this report, we also roll forward our valuation to 2018e and set newtarget prices based on 2018e BVPS.

    Our preferred picks are KTB and BBL. Our preferred stocks are KTB (which standsto benefit more than peers from peaking NPLs, corporate and infrastructure projects)and BBL (attractive valuation, corporate and infrastructure play).