Bank – Under pressure from NIM squeeze ahead

3Q24 review: In line. In 3Q24, the sector’s earnings rose 1% QoQ and 7% YoY, essentially in line with INVX and consensus forecasts. Overall, 3Q24 reflected:
1) less NPL inflow and credit cost, 2) stable NIM, 3) contracting loans, 4) better non-NII with a pick-up in fee income and 5) higher cost to income ratio.

Slower NPL inflow with easing credit cost. The sector’s NPL inflow was slower in 3Q24 and credit cost fell 11 bps QoQ (-1 bps YoY) upon less management overlay added. In 4Q24, we expect credit cost to be quite stable QoQ with a mixed direction among banks: down for BBL and SCB; up for KTB, KBANK and KKP; stable for BAY, TTB and TISCO. We expect credit cost for all but TISCO to ease in 2025 on lower additional management overlay, less NPL inflow (thanks to a stricter credit policy and interest rate cuts) and smaller balance sheet cleanup. TISCO expects a rise in credit cost to a normalized level after depleting excess LLR.

NIM: Stable in 3Q24, to be hit by rate cuts. In 3Q24, sector NIM was stable QoQ (up at most banks, down at KBANK and BAY) but in 4Q24, it will be eroded by interest rate cuts. Following a 25 bps cut in the policy rate in October, several banks cut lending rates but kept deposit rates unchanged. KBANK, SCB, TTB and BAY cut lending rates by 12.5-25 bps (12.5 bps for MLR), to take effect on November 1. Unlike peers, BBL cut both lending rates (20 bps for MLR and MOR and 5 bps for MRR) and deposit rates (10 bps for savings deposit rates and 20 bps for time deposit rates). On this basis, we expect BBL to experience less of a narrowing in NIM than other large banks. Factoring in a cut in the policy rate of 50 bps in 4Q24 (October and December) and 50 bps in 2025, we expect the sector’s NIM to narrow 11 bps QoQ in 4Q24 and 16 bps in 2025. We cut our 2025F NIM by 1-7 bps to factor in the non-parallel cuts between lending and deposit rates.

Contracting loans, cut in loan growth forecast. The sector’s loans contracted 2% QoQ, 3% YoY and 2% YTD, shrinking in all three segments. Banks have become more cautious, employing a stricter credit policy and shifting loan mix more toward corporate and title loans. We cut our loan growth assumption for the sector to -2% from 2% in 2024 and to 1% from 3% in 2025, expecting the banks to remain cautious in the midst of a gradual and uneven economic recovery.

Non-NII: Fee income picking up. In 3Q24, the sector’s non-interest income rose 1% QoQ and 15% YoY with a recovery in fee income (+3% QoQ, +4% YoY), driven by fee income related to the capital market. We expect fee income to continue to rise in 4Q24 on fees related to the capital market and bancassurance. In 2025, we expect a modest 2% growth in the sector’s non-NII and a 3% growth in fee income.

Rising cost to income ratio. Cost to income ratio rose in 3Q24 due to weaker toplines and higher opex and we expect it to rise again in 4Q24 on seasonality. We expect this ratio to continue to rise in 2025 due to lower net interest income, despite tightening opex.

4Q24 and 2025 earnings outlook. We expect 4Q24 earnings to fall QoQ (NIM squeeze and seasonal rise in opex) but rise YoY (lower ECL). In 2025, we expect the sector’s earnings to be essentially flat, with sluggish loan growth, narrowed NIM, easing credit cost, modest non-NII growth and lower opex.

BBL as the sector’s only Outperform. We keep BBL as the sector’s pick: its valuation is cheapest and asset quality risk lowest; we remove KTB from the list. We expect banks to struggle to sustain earnings upon the onset of a cyclic narrowing in NIM. We see a decent dividend yield as the sector’s only catalyst.

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.