Steel Exposure Weakened SCB’s Asset Quality

27 April 2016

Credit Brief

Siam Commercial Bank PCL      

Steel Exposure Weakened SCB’s Asset Quality 

Key Credit Highlights                                                                     

¨           Profitability to decline further. SCB’s ROA fell by 0.32% to 1.73% in FY15 (Chart 1) due to higher credit cost and tightening net interest margin. The Group registered higher provisioning cost of 165bps in FY15 mainly due to the default of Sahaviriya Steel Industries Plc (SSI) and its subsidiary in United Kingdom (SSI-UK). We expect provisioning cost to remain elevated in FY16 as asset quality is to stay under pressure this year. NIM narrowed by 18bps to 3.18% in FY15 on the back of the 50bps policy rate cut in 2015, and may decline by another 10-15bps this year following the downward adjustment of its minimum lending rate by 25bps to 6.275% in April. Nevertheless, SCB is one of the most profitable banks, with 2nd highest ROA among the top 4 banks, supported by higher net interest margin and better cost management (Figure 2). SCB has the lowest cost-to-income ratio of 36%, compared to peers’ average of 42%.   

¨           Mild recovery of loan growth in 2016. We expect better loan growth of 4-5% in FY16 (FY15: 3.2%, FY14: 2.4%) to be boosted by construction and related sectors amid the government’s initiatives to boost infrastructure projects worth approximately THB1.8tn (or c.USD50.2bn). Nonetheless, the high household debt-to-GDP of 80% could act as a drag to retail loan growth, while the bank is to remain cautious in extending loans to stressed sectors such as manufacturing, commercial, and commodities. 

¨           NPL jumped 0.8% following the default of steel firms. NPL surged to 3.2% in FY15 (Chart 4) following the default of SSI and SII-UK. The Bank has already set aside full provisioning for the THB11bn lending to SII, and written-off the remaining THB11bn loans to SII-UK. We understand that the loans to SII are under the restructuring process. While the asset quality for its corporate portfolio has deteriorated in FY15, we note improvement in the retail portfolio where delinquency rate dropped from 2.3% in FY14 to 2.0% in FY15, notably in the mortgage loans segment.

¨           Strong capitalization helps to buffer asset quality challenges. SCB’s capitalization ratio has been increasing over the past 2 years with total capital ratio enhanced to 17.3% in FY15, from 15.4% in FY13 (Chart 5), mainly from the appropriations of net profit and better risk-weighted asset utilization. We expect SCB to tap the primary market to refinance the USD1.5bn Senior maturing in 11/16 and 3/17, as well as THB20bn LT2 callable in 2/17.

¨           Healthy liquidity and funding profile. SCB maintained healthy liquid asset level of 25%, which alleviates the concern on its high LDR of 97% as at FY15, the highest among the top 4 banks. SCB’s total deposit fell by 0.2% in FY15 due to the intense competition and restructuring of its deposit composition to reduce its funding cost. As the result of the new funding strategy, the proportion of low cost deposit increased from 56% in FY14 to 62% in FY15, in line with the top 4 average of 60%. Banks in Thailand have adopted the Basel 3 Liquidity Coverage Ratio (LCR) Framework, which requires the banks to phase-in LCR of 60% starting Jan-16, to 100% in Jan-20. We expect the central bank to establish the initial guidance for Net Stable Funding Ratio (NSFR) after Basel issued the finalized guidelines end of last year.