Bank – 2Q23: Beat on NIM and gain; miss on ECLs

Bank 2Q23 results reflected: 1) worse-than-expected deterioration in asset quality with higher credit cost, 2) recovering loan growth, 3) better-than-expected NIM expansion, 4) weaker fee income growth with a beat on FVTPL gain and 5) easing cost to income ratio. Post results release, we raise sector 2023F earnings growth to 19% from 13% with upside on NIM forecast. We preliminarily forecast 3Q23F earnings to rise YoY but slip QoQ. We keep BBL and KTB as sector picks on their lead position to benefit from interest rate hikes and lower asset quality risk than peers.

2Q23 review. The sector’s earnings grew 3% QoQ and 18% YoY in 2Q23, 10% above our forecast and 4% above consensus, from FVTPL gain on financial instruments and NIM expansion, offsetting a higher-than-expected ECL. The largest beat was at TTB (NIM, ECL and non-NII) and the largest miss at KKP (ECL). BBL appears to have turned in the most solid 2Q23 performance.

Highlights of overall sector results:

1) Deteriorating asset quality: Except for BBL, banks saw accelerating NPL inflow. However, overall headline NPLs were fairly stable QoQ (direction among banks mixed). Sector credit cost rose QoQ, on a deterioration in asset quality and addition of precautionary ECL. KKP reported the biggest rise in credit cost due to rising NPLs on corporate and HP loans.

2) Recovering loan growth: The sector’s loan growth recovered seasonally QoQ at 1% in 2Q23 vs. 0% in 1Q23, backed by corporate and retail loans. YoY and YTD loan growth remained weak at 1%. We cut our sector 2023F loan growth to 3% from 4%.

3) Better NIM: Better than expected, the sector’s NIM expanded 19 bps QoQ in 2Q23 as a 30 bps QoQ increase in yield on earning assets exceeded a 13 bps QoQ rise in cost of funds.

4) Larger non-NII from FVTPL gain: Most banks saw a QoQ and YoY rise in non-NII, mainly from larger FVTPL of financial instruments in 2Q23. However, the sector’s net fee & service income (including net insurance income) slipped both QoQ and YoY, dragged down by capital market-related fees.

5) Easing cost to income ratio: This came down both QoQ and YoY as an increase in toplines exceeded opex growth.

Raised 2023F earnings with upside on NIM. Post results release, we raise the sector’s 2023F growth from 13% to 19%, adjusting NIM and FVTPL gain to fine tune with results; KKP is the only bank for which we cut 2023F, mainly on ECL. The sector’s 1H23 earnings accounted for 51% of our full-year forecast. In 3Q23F, we preliminarily forecast earnings to continue rising YoY (better NIM) but slip QoQ (smaller FVTPL gain). There is potential upside to our NIM forecast for large banks (BBL, KTB, KBANK, and SCB) because policy rate may be raised further to 2.5% in 2H23, above our assumption of 2%.