Bank – 3Q26 review: A start of NII expansion

Review 3Q26: A start of NII expansion. In 3Q26, the banking sector’s earnings were flattish QoQ (higher NII offset by weaker non-NII) and down 10% YoY (lower NII and investment gains), broadly in line with INVX and consensus forecasts. The earnings beat came from KKP (larger-than-expected capital market-related non-NII) with impressive results across all fronts. Earnings misses were seen at BBL (higher-than-expected opex) and KTB (lower-than-expected investment gains), despite positive NII momentum. The key highlight of 3Q26 was the start of QoQ expansion in NII, supported by a recovery in both NIM (better than expected) and loan growth. Key takeaways for the sector are as follows:    

• Asset quality: NPLs were stable with easing inflows. The sector’s credit cost eased 13 bps QoQ despite additional management overlays, including provisions for the potential flood impact.
• NIM: The sector’s NIM edged up 5 bps QoQ, slightly beating expectations, supported by a modest upside surprise in yields on earning assets. Meanwhile, funding costs declined at BAY, TTB, TISCO, and KKP, but began rising at BBL as it secured funding for upcoming loan growth. Other banks saw relatively stable funding costs.
• Loans: The sector’s loans grew 0.5% QoQ, 4% YoY, and 2.7% YTD, primarily driven by large corporate loans. 
• Non-NII: The sector’s non-NII dropped 9% QoQ and 13% YoY, mainly due to normalizing investment gains from a high base. Meanwhile, net fee income slipped 2% QoQ (largely due to the BoT’s standardized fee measures) but rose 7% YoY (driven by stronger capital market-related fees).  
• Cost to income ratio: The sector’s cost to income ratio was flattish QoQ but improved YoY, reflecting disciplined cost control. Cost to income ratios at BBL and KKP exceeded our expectations due to higher-than-expected opex (discretionary spending on efficiency enhancements at BBL and higher staff costs aligned with business volume growth at KKP).

Expect a gradual recovery ahead. The 3Q26 results reconfirmed our view that banks’ earnings are entering a recovery phase as the rate-cut cycle ends and the investment cycle begins. With no further pressure from rate cuts, NIM is expected to improve modestly in 4Q26 and 2027, supported by a rising loan-to-deposit ratio alongside an unchanged policy rate. We see a medium-term recovery in loan growth driven by Thailand’s investment cycle, backed by a surge in BOI investment applications. We expect the sector’s loan growth to gradually improve from 3.4% in 2026F to 4.2% in 2027F. We maintain our forecast for sector earnings to remain stable in 2026F before recovering by 6% in 2027F. For 4Q26F, we expect the sector’s earnings to fall seasonally QoQ (due to the peak season for opex) but rise YoY (driven by higher fee income).

Decent dividend yield. On the back of sizable excess CET1 capital and efforts to support ROE, we expect banks to maintain high payout ratios and deliver 2026F DPS at or above 2025 levels, translating into an attractive dividend yield of 5-7%.  

Large banks as the sector picks. We prefer large banks—BBL, KTB, and KBANK—as sector picks to capture the start of an investment cycle, which will be a key turning point for the banking sector.     

Key risks: 1) Asset quality risk from economic slowdown, 2) NIM risk from a cut in interest rates, and 3) ESG risk from market conduct.