Thailand’s rising banking shares could jump a further 30 percent over the next 12 months as profitability soars on strong investment and corporate lending growth, according to Japanese brokerage Nomura.
Thai banks have already put in a strong performance — shares in the country’s fifth largest lender, Bank of Ayudhya, are up almost 48 percent so far this year. Shares in Thailand’s fourth big bank, Kasikornbank, have gained 43 percent, while Siam Commercial Bank, the third largest lender, is up 37 percent, and Bangkok Bank, Thailand’s biggest bank, has rallied 27 percent.
Banking stocks have outperformed the broader Thai market, which has gained around 17 percent this year.
Despite the strong share performance, the potential for further gains by Thai banking stocks is being underestimated and the uptrend is just the beginning of the sector’s strongest profit cycle in 20 years, Nomura said in a report published on Tuesday.
“We believe that the Thai banks’ earnings are set to double through the 2014 [fiscal year], a sea-change in the earnings backdrop from previous years but in line with the trend in the early 1990s when bank PBs [price-to-book ratios] went from 1.2 times to 2.8 times,” analyst James Moss said.
Nomura has "buy" ratings on all four banks and believes return-on-equities will expand from 14 percent to 18 percent into 2014, while price-to-book ratios in the sector will rise from 1.5 times to 2 times.
The brokerage says companies and small-to-mid size businesses investing and borrowing for the first time since after the 1997 Asian financial crisis is driving up loan growth, supporting fees and lowering cost-income ratios.
“We project profits rising 89 percent through 2014 [fiscal year] as investment and corporate/ SME [small and medium enterprises] credit penetration bounce strongly from depressed levels,” the report said.
Economy Recovering
Several Thai banks have been raising their loan growth target for 2012 in the past month due to stronger-than-expected lending in the first half of the year.
Thailand’s government expects the economy to grow 5.7 percent this year, boosted by a pick-up in investment, consumption, and fiscal spending. The economy grew just 0.1 percent in 2011 after the worst floods in half a century hit the manufacturing sector.
The Bank of Thailand left its benchmark interest rate steady at 3 percent for a fourth meeting last week, keeping monetary policy easy to help factories continue their recovery from the floods.
Siam Commercial Bank, the country’s third largest lender, reported a 24 percent rise in second-quarter net profit from the previous year and raised its loan growth target to 18-19 percent from 12-14 percent on Tuesday. Kasikornbank, meanwhile, said loan growth was up 5 percent in the first half of the year from the previous year and aims for up to 10 percent loan growth in 2012.
Nomura said the biggest risk to its bullish outlook for Thai banks is sharply lower exports and tourism given global economic weakness, along with ongoing aggressive state-bank lending and regulatory pressure on fee income.
But the brokerage believes higher loan volumes by commercial banks will lessen the regulatory risk on fees.
Nomura’s top picks in the sector include Bangkok Bank because of its high exposure to loan growth, with 90 percent of its loans coming from corporate and SME lending. Nomura also likes Kasikornbank which it believes will see return-on-equity jump from 13 percent in 2009 to 21 percent in 2014.
The brokerage has a neutral rating on Thailand’s second largest lender, state-owned Krung Thai Bank, which it expects to see a 6 percent upside in shares because of an increase in the bank’s asset-equity gearing from 14 times to 15.7 times since 2008. This implies the bank has limited capacity to grow and could deliver lower dividend payouts, Nomura said.
By CNBC's Rajeshni Naidu-Ghelani