Bond: SCBTB 3.9 24
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Fundamental View
AS OF 22 Dec 2023Siam Commercial Bank (SCBTB; Baa1(stb)/BBB(stb)/BBB(stb)) is seen as a sound and profitable bank. It has a slight focus on the retail segment and targets to increase margins by growing personal unsecured lending. Recent credit costs have been elevated in 9M23 due to the retail exposure.
The capital buffer is strong with a CET1 ratio of 17.5% at the Holdco (SCB X) level and 16.6% at the Bank level at Sep-23. It announced a major business overhaul in September 2021 to establish a new parent company called SCB X to segregate the group’s core banking services from its new fintech and digital businesses and to enable greater flexibility and independence.
Business Description
AS OF 22 Dec 2023- Siam Commercial Bank was founded as the "Book Club" in 1904. In 1907, it started operating as a commercial bank and was renamed as "The Siam Commercial Bank". It completed its IPO on the Stock Exchange of Thailand in 1976.
- The bank is 23.35% owned by the King of Thailand, and a further 23.10% is owned by the Vayupak Fund 1, which is controlled by the government.
- SCB is the fourth largest Thai bank by assets and is known for its robust retail franchise.
- Its loan profile was 36% corporate, 17% SME, and 47% retail as of end-September 2023.
Risk & Catalysts
AS OF 22 Dec 2023The bank’s new strategic direction is sensible given limited domestic growth opportunities, but it comes with execution risk since the fintech and platform space are new to SCB, as well as higher credit costs. However, we take comfort in the ringfencing of the bank unit (SCB) from the Group’s riskier business units, and capital support to the Gen 2/3 businesses is subject to a minimum 16% CET1 ratio being maintained at the bank.
High household debt and challenged SMEs remain as longstanding issues in Thailand. SCB X’s higher NIM and low-40%s cost-income ratio provide comfortable room to absorb its elevated 9M23 credit costs (~200 bp) and maintain a similar level of returns as peers, but the sluggish Thai economic recovery may keep credit costs high due to its larger Blue scheme and unsecured retail books, thereby limiting further returns improvement relative to peers.
NIM expansion going forward may be more limited as well due to difficulty in passing on rate hikes in full to the large retail book without asset quality ramifications.
Key Metrics
AS OF 22 Dec 2023THB mn | FY19 | FY20 | FY21 | FY22 | 9M23 |
---|---|---|---|---|---|
PPP ROA | 3.11% | 2.58% | 2.63% | 2.50% | 2.94% |
ROA | 1.3% | 0.9% | 1.1% | 1.1% | 1.3% |
ROE | 10.4% | 6.7% | 8.4% | 8.3% | 9.3% |
Equity/Assets | 13.5% | 12.6% | 13.4% | 13.5% | 13.3% |
CET1 Ratio | 17.0% | 17.2% | 17.6% | 17.7% | 17.5% |
Reported NPL ratio | 3.41% | 3.68% | 3.79% | 3.34% | 3.30% |
Provisions/Loans | 1.70% | 2.14% | 1.84% | 1.45% | 1.89% |
Gross LDR | 98% | 93% | 93% | 93% | 96% |
CreditSights View
AS OF 22 Jan 2024SCB is the 4th largest bank in Thailand and has a leading retail franchise. Asset quality during COVID was poor. It created a new HoldCo structure (SCBX) in 2022 to shift digital units and unsecured retail loans outside the bank, and pledged a >16% CET1 ratio at the bank. The BOT has also ringfenced the bank which further reduces the risk for the SCBTB bonds. However, the COVID Blue scheme book still sits within the bank and is the highest % of loans among peers (12% at 4Q23). Management claims to have taken the necessary provisions for future slippages from this book over the next 1-2 years but we are cautious. FY24 credit costs could stay at FY23’s elevated levels. Still, they can be comfortably absorbed as FY23 returns led peers despite the high credit costs.
Recommendation Reviewed: January 22, 2024
Recommendation Changed: January 25, 2023