Bank – Preview 3Q24F: Essentially stable

In 3Q24F, we expect the sector’s earnings to slip 2% QoQ and rise 3% YoY, with a slight reduction in credit cost, stable NIM, contracting loans, lower non-NII and rising cost to income ratio. We keep BBL and KTB as sector picks, as valuations are the most attractive in terms of PBV/ROE and lower asset quality risk than peers.

Preview 3Q24: Essentially stable. In 3Q24F, we forecast a slip in sector earnings of 2% QoQ with a rise of 3% YoY. On a QoQ basis, we expect the largest growth at KKP at 30% due to lower credit cost (smaller management overlay) and larger gains on investment thanks to a rally in the SET. On the other end of the spectrum, we expect the largest QoQ fall at KBANK as we conservatively expect less gain on financial instruments accompanied by a rise in credit cost and opex.

3Q24F highlights:

1) Credit cost: We expect a continued rise NPLs due to a weak macro picture but a small reduction in overall ECL QoQ (stable YoY) on smaller management overlay. The used car price index fell 7% MoM and 15% YoY in July, which will likely raise loss on repossessed cars.

2) NIM: We expect NIM to be stable QoQ with a stable yield on earning assets and cost of funds after cost of deposits peaked in 2Q24.

3) Loan growth: We expect a QoQ contraction in loans. As of August, the sector’s loans had contracted 1.2% QTD, 1.7% YTD and 1.6% YoY.

4) Non-NII: We expect most banks to see a QoQ fall in non-NII due to our conservative forecast of smaller gain on financial instruments. We expect QoQ stable net fee income as better fee income related to the capital market is expected to be offset by lower loan-related fees.

5) Cost to income ratio: Cost to income ratio is expected to increase slightly both QoQ and YoY.

Earnings outlook. We have factored policy rate cuts of 50 bps in 4Q24 and 50 bps in 1H25 into our forecasts. 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.

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.