Bank – Factoring in expected policy rate cuts

Following the 50 bps cut in the Fed fund rate by the FOMC, INVX’s economist expects the policy rate to be cut by 50 bps in 4Q24 and 50 bps in 1H25. Factoring these into our forecasts results in a small cut in NIM for all banks in 2024, with a material NIM squeeze in 4Q24. In 2025-2026, we cut NIM by 4-9 bps for large banks but raise NIM by 6-11 bps for TISCO and KKP. As the cut in lending rates will benefit asset quality, we thus cut banks’ credit cost for 2025 and 2026. We trim 2024F by 0-1% for all banks as we factor in a material NIM narrowing in 4Q24. In 2025 and 2026, we trim earnings for large banks but materially raise earnings for TISCO and KKP. We keep BBL and KTB as the sector’s picks as their valuation is cheapest and asset quality risk lowest. We raise TISCO’s TP to Bt105 from Bt103 and KKP’s TP to Bt46 from Bt38.

Factoring into potential policy rate cuts. Following the 50 bps cut in the Fed fund rate by the FOMC, INVX’s economist forecasts a cut in the policy of 50 bps in 4Q24 and 50 bps in 1H25. We expect large banks to mitigate the damage from rate cuts by cutting lending rates less than fixed deposit rates. We forecast a 25 bps cut in lending interest rates (MLR, MR, MRR) and a 50 bps cut in fixed deposit rates in 4Q24 and 1H25. We assume banks keep savings deposit rates unchanged. In 2024, we expect a small 1-2 bps negative impact on NIM for all banks. In 2025-2026, we cut NIM by 4-9 bps for large banks but raise NIM by 6-11 bps for TISCO and KKP. In 4Q24, we expect an 8-12 bps squeeze in NIM for all banks due to the lag for repricing between lending rates and deposit rates. In 2025, we now expect NIM to narrow by 4 bps for large banks, followed by 12 bps in 2026, but expand 10 bps in 2025 and 11 bps in 2026 for TISCO and 6 bps in 2025 and 9 bps in 2026 for KKP. In 2025 and 2026, we expect BBL to see the largest NIM narrowing of 8 bps in 2025 and 12 bps in 2026 and TISCO to see the largest NIM expansion of 10 bps in 2025 and 12 bps in 2026.

Trim 2025 credit cost to factor in benefit from rate cuts. The cut in lending rates will be positive to asset quality, allowing banks to lower credit cost. We thus cut banks’ credit cost by 5 bps in each of 2025 and 2026. We expect banks (excepting TISCO) to see a gradual ease in credit cost in 2025 due to setting aside lower management overlay provisions. TISCO is expected to resume its usual credit cost of 0.9-1% in 2025 after a depletion of excess LLR.

Earnings revision: Slight cut for large banks but raise TISCO and KKP. We trim 2024F earnings by 0-1% for all banks as we factor in a material narrowing in NIM in 4Q24. We revise earnings down by 2% in 2025 and 3% in 2026 for large banks as the cut in NIM is partly offset by a cut in credit cost. Meanwhile, we raise earnings for TISCO and KKP by 11-13% for 2025-2026 as a result of an upward revision in NIM and a cut in credit cost. We now expect the sector’s earnings to grow 3% in 2024, 6% in 2025 and 6% in 2026, with lower credit cost, modest loan growth and narrowed NIM. In 3Q24F, we expect earnings to be somewhat flattish QoQ and YoY. In 4Q24F, we expect earnings to slip QoQ (but grow YoY) due to lower NIM and seasonally higher opex and credit cost at some banks (KBANK, KTB and TISCO).

Keep BBL and KTB as sector picks; raise TPs for TISCO and KKP. We keep BBL and KTB as the sector’s picks as their valuation is cheapest and asset quality risk lowest. We raise TISCO’s TP to Bt105 from Bt103 and KKP’s TP from Bt46 to Bt38. We keep TPs of other banks unchanged. We maintain our recommendations for all banks.

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