Bank - Lower ECL to be offset by falling NIM in 2025

4Q24 review: Slight beat. In 4Q24, the sector’s earnings fell 8% QoQ on seasonality but rose 8% YoY, slightly better than INVX and consensus forecasts. The largest beat was at KKP, on FVTPL gain. BAY was the only bank whose earnings missed expectation and this was on lower-than-expected NII. BBL had the best set of results with a substantial fall in NPLs and NIM expansion. On a QoQ basis, overall 4Q24 results reflected: 1) easing credit cost at most banks with slowed NPL inflow, 2) a squeeze in NIM after a cut in policy rate and in lending interest rate, 3) a seasonal pickup in loans, 4) higher non-NII with a seasonal pickup in fee income and 5) seasonally higher cost to income ratio.

Decreasing NPL inflow and ECL in 4Q24, easing credit cost in 2025. The sector’s NPLs fell 4% QoQ in 4Q24, led by BBL, whose NPLs decreased 17% QoQ due to an upgrade of restructured loans. NPL inflow was slightly slower in 4Q24. KBANK saw a 13% rise in stage 2 loans, primarily from restructured loans. The sector’s credit cost fell 9 bps QoQ on less management overlay added. KBANK and KKP saw a QoQ rise in credit cost. Most banks expect credit cost to ease in 2025 on lower additional management overlay and less NPL inflow due to a stricter credit policy and interest rate cuts. TISCO is the only bank that expects a rise in credit cost to a normalized level in 2025 after depleting excess LLR. Banks see high asset quality risk on small SME and housing loans and downside risk from the potential slowing in GDP growth in 2025.

NIM: hit by rate cuts in 4Q24 and 2025. The sector’s NIM fell 6 bps QoQ in 4Q24 because of interest rate cuts. NIM expanded – but minimally - at only BBL and TISCO in 4Q24. Following a 25 bps cut in the policy rate in October, several banks cut lending rates by 12.5-25 bps and kept deposit rates unchanged. Unlike peers, BBL cut both lending rates (20 bps on MLR and MOR and 5 bps on MRR) and deposit rates (10 bps on savings deposit rates and 20 bps on time deposit rates). Other large banks cut savings deposit rates by 5 bps at the end of November. Factoring in a cut in the policy rate of 75 bps in 2025, we expect the sector’s NIM to narrow 14 bps this year. NIM is expected to rise at only TISCO and KKP in 2025 due to their high exposure to fixed-rate HP and title loans. Note that our forecast has not yet factored in any impact from the “You Fight, We Help” measure. We preliminarily estimate that the “You Fight, We Help” measure will cut NIM by 2-10 bps from lower EIR, which will later be offset by a 50% subsidy by the government (which will be as non-NII) and lower ECL.

Loan growth: Modest pickup in 4Q24 and sluggish in 2025. In 4Q24, loans were up 1% QoQ (on seasonality) but down 1% YoY from weaker loan demand, a stricter credit policy and proactive write-offs and NPL sales. KTB had the strongest loan growth at 5% in 2024 (led by government loans), followed by 1% at BBL (corporate and international loans) and KBANK (working capital loans). Banks’ 2025 financial guidance suggests small loan growth, if any as they continue to focus on asset quality rather than loan expansion. We maintain our forecast of a pickup in sector loan growth to 1% in 2025 from -1% in 2024, undergirded by corporate loans.

Modest earnings recovery in 2025. In 2025, we expect earnings to inch up 2%, with slow loan growth, narrowed NIM, easing credit cost, modest non-NII growth and flattish opex.

More active capital management. Banks are being more active in capital management with good dividend yield, treasury stock and M&As. We believe that this is a key share price support in near term.

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