Banks, Ex-S&L Thai Banks - Looking through COVID-19 impact - how to position in Thai banks

For Thai banks, we believe current valuation discounts non-performing loan crisis risk similar to 1997 when NPLs rose to 40-50% of loan books. It also implies the market has priced in long-term negative damage from COVID-19.

17 Apr 2020

Major Thai banks' 2020E P/BVs have fallen below 1997 and 2008

Source: Company data, UBS estimates

This figure charts the rise and fall of major Thai banks forward price to book value ratios and return on equity from 2001 through 2019, with estimates for 2020 to 2024.

Earnings cut (again) – is this the last?

Our 30-40% lower EPS estimates (down 40% year over year in 2020) reflect our base case on the COVID-19 impact. Although bank profitability is unlikely to recover rapidly as non-performing loan (NPL) problems would have to be resolved, we believe the risk of cash calls is low.

Our key assumptions

We expect GDP to contract 5.1% in 2020, dragged by government-imposed restricted activities until June to contain the COVID-19 outbreak. This could lead to a 3.7% contraction in system credit in 2020. We expect Bank of Thailand (BoT) to lower the policy rate to a record low of 0.25% to shore up confidence and factor in a 30bp decline in banks' 2020 net interest margin (NIM), also weighed down by rising haircuts on loans. BoT's proposal to lower FIDF fees could limit downside risk to our NIM estimates. While NPL pressure is mounting as bank customers experience cash flow problems, we think new NPL formation and credit cost might not be out of control, helped by BoT's relief measures (eg, easing NPL classification) and sizable excess provision reserves that could be released later on.

Near-term negative but risk reward still skewed to the upside

Although there could be another NPL crisis if restrictions on normal activities are prolonged (eg, towards year-end), we think banks, with BoT support, should be able to manage large NPL inflows. However, this would likely lead to an extended credit cost cycle.

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