BBL carries the only Buy rating in the sector with TP of Bt180, as we see catalysts from: 1) the sector’s cheapest valuation, 2) easing credit cost with upside from THAI, 3) potential for the highest loan growth, 4) upside to NIM and 5) upside to dividend.
Research
High Conviction: BBL Lowest valuation, upside for NIM and DPS
- Key risks: 1) Asset quality risk from a global economic slowdown, 2) NIM risk from interest rate cuts, 3) slower-than-expected loan growth from sluggish loan demand and 4) ESG risk from market conducts.
- Easing credit cost ahead. BBL’s higher-than-expected credit cost of 1.37% in 9M24 (vs. the original guidance of 0.9-1%) was mainly due to smoothing earnings out to offer stronger-than-expected toplines rather than a material deterioration in asset quality. There is a chance it may be able to declassify the Bt11.9bn loans to THAI as NPLs in 2025, as THAI is in the process of exiting its rehabilitation plan. Taking the THAI loans out of NPLs would slash BBL’s NPLs by 12%, bringing NPL ratio down by 45 bps and lifting LLR coverage to 301% from 267% at 3Q24. We expect credit cost to ease 15 bps QoQ to 1.07% in 4Q24 and 18 bps to 1.1% in 2025 from 1.28% in 2024.
- Pick-up in loan growth in 4Q24 and 2025. BBL expects international loans and large corporate loans to lead to a pickup in loan growth in 4Q24. The loan contraction in 3Q24 was due to high repayments (as per schedule), higher prepayments and a delay in international loan drawdown in Vietnam. BBL is seeing a substantial rise in international loan deals in the pipeline. Corporate loans, its primary focus, appear to be the only segment with growth potential amidst tightening credit policy. It is also best-positioned to gain from rising FDI in ASEAN. We forecast loan growth at 1% (vs. sector average of -2%) in 2024 and 3% (vs. sector average of 1%) in 2025.
- Upside to NIM. Unlike other large banks that cut lending interest rates by 12.5-25 bps with no change in deposit rates (effective November 1), BBL cut both lending rates (20 bps for MLR and MOR and 5 bps for MRR) and deposit rates (10 bps on savings deposit rates and 20 bps on time deposit rates). We calculate that the interest cuts will slice 7 bps from its NIM, less than the 12.5 bps hit for other large banks. BBL expects 2024 NIM to be ~3%, higher than our forecast of 2.92%. BBL expects no further cut in the policy rate this year and a further cut, if any, of no more than 25 bps later next year. Assuming policy rate cuts of 50 bps in 4Q24 and 50 bps in 2025, we maintain our NIM forecast at 2.92% (-3 bps) in 2024 and 2.79% (-13 bps) in 2025.
- Upside on dividend payout. BBL may raise dividend payout to 40% vs. our forecast of 34% in 2024 as its capital adequacy ratio returned to its preferred level pre-Permata acquisition of 20.8% (17.4% tier-1) in 3Q24.
- Cheapest valuation. BBL is trading at the lowest PE (PBV/ROE) of 6.2x for 2025 (vs. sector average of 8x) and PBV at 0.48x (vs. sector average of 0.8x). There is 22% upside to our TP of Bt180 based on 0.58x PBV (6% sustainable ROE, 9.7% cost of equity and 1% L-T growth).
- Easing credit cost ahead. BBL’s higher-than-expected credit cost of 1.37% in 9M24 (vs. the original guidance of 0.9-1%) was mainly due to smoothing earnings out to offer stronger-than-expected toplines rather than a material deterioration in asset quality. There is a chance it may be able to declassify the Bt11.9bn loans to THAI as NPLs in 2025, as THAI is in the process of exiting its rehabilitation plan. Taking the THAI loans out of NPLs would slash BBL’s NPLs by 12%, bringing NPL ratio down by 45 bps and lifting LLR coverage to 301% from 267% at 3Q24. We expect credit cost to ease 15 bps QoQ to 1.07% in 4Q24 and 18 bps to 1.1% in 2025 from 1.28% in 2024.