Oil Stocks:

So we all know that oil pries have recovered in the past 2 years from a low of ~25 to ~70 today. But when we look at the European index for oil stocks versus just PTTEP we scratch our heads…how is is that PTTEP has outperformed? Bongkot/Erawan is just a replacement/continuation, oil pries meh…so what is going on here? This divergence doesn’t quite make sense…it is just another reason for me to be worried about the SET levels (unless oil prices continue to rally) due to the fact that the PTTEP is one of the 7 names that have driven the SET to 1,800.


Thai Banks

I have been wracking my brain to try and find a positive story/investment thesis for Thai banks for the past 6 months and I still don’t see it.  Spoke with two friends on the sell-side whose viewpoints and analysis I thoroughly respect. But the fact that BBL seems to be the best bank at the moment is akin to choosing a dog with the least amount of fleas,  the sector has weak loan growth, throw in declining Non-Interest income and a pinch of IFRS 9, it’s a bad omen for the industry to me…
But what is interesting from all this starts with IFRS 9, here’s a snippet from a Bangkok Post article this week…
Under IFRS 9, the accounting practices for banks will be tightened, particularly for loan-loss provisions, so well-planned management for bad assets is needed because the new rules will take a toll on provision reserves and capital funds, said SAM head Thitima Rungkwansiriroj.
She said the company expects the amount of NPL sales this year to surpass last year’s total. Commercial banks last year divested of 120 billion baht in non-performing loans.
SAM, a wholly owned subsidiary of the Financial Institutions Development Fund (FIDF), last year bought bad assets worth 4.8 billion baht, below the target of 5 billion, and its NPL acquisition is targeted to be raised by 10-20% this year, Ms Thitima said.
She said Bangkok Bank is the only commercial bank that has yet to sell non-performing assets (NPAs). The bulk of NPAs sold by banks are SME and retail loans, while banks prefer handling soured corporate loans themselves rather than selling them off.
SAM has a policy of buying secured assets with targeted returns of at least 10%, and it typically sells such assets within 3-5 years after purchase.
So what?
  • Its obvious that Thai Banks will have to increase provisions => declining profits
  • It is interesting that there will be a lot of bad debt to be sold into the market this year, who benefits? JMT and CHAYO. But it does appear from a glance that valuations are pricing this year .. I could of course be wrong
Next SCB HAS FINALLY ADMITTED THAT THEIR EARNINGS WILL BE CRAP. This is after the fact with 1Q18 earnings already announced and showing the decline.
In the news they came out with the following…
SCB has set a three-year budget (2016-18) of 30-40 billion baht under its transformation programme, the bulk of which has been used for staff training. The infrastructure investment covers the digital platform, marketing and promotion, and human resource development.
The country’s second-largest lender by assets saw its net profit fall by 4.6% from a year earlier to 11.4 billion baht for the January-to-March quarter. The decline in quarterly net profit could largely be attributed to a rise in operating expenses from higher marketing expenses for digital acquisition and higher investment in digital banking to comply with the bank’s strategy.
The bank’s decision to end fees for digital banking transactions from March 28 has not had a substantial impact on its fee-based income, said Mr Arthid.
Fee-based income contributions from transactional services have declined in line with the rising popularity of online transactions.
Interbank and cross-clearing-zone money transfers are free for life, as are bill payments, top ups and cardless ATM withdrawals done through its online channel.
The bank’s non-interest income for the first quarter jumped by 13.4% year-on-year to 12.0 billion baht mainly because of higher net trading and foreign exchange income, as well as an increase in net fee income from corporate finance fees and bancassurance fees.
The bank will continue to downsize its brick-and-mortar branch network to cut down operating costs as traditional banking transactions have continued to decline in accordance with consumers’ changing lifestyles. SCB plans to shutter 200 branches this year.
So what?
  • I do wonder what will happen to the real estate locations where these bank branches used to be, banks typically paid top dollar for ground floor real estate (outside of the shopping centres) and how will real estate owners replace this lost revenue? Convenience stores? Does this mean that 7-11, Lawsons, family mart now have bargaining power?
  • I completely AGREE with the CEO’s statement that the decision to end fees for digital banking transactions have not had a substantial impact on its fee based income …for the first quarter of 2018. Just watch this continue to unravel throughout the coming quarters and years.
  • A friend compared Thai banks to Korean banks in the sense that its a low growth environment, the hey days are over, and there’s nothing amazing to expect from this sector. 
Source (IFRS): Bangkok Post
Source (SCB): Bangkok Post
Final Note:
I’ve decided to return to doing Random Thoughts every week, and I am just getting into the groove of this again so excuse the light information/analysis format for now, it should (I hope!) improve over time. If there’s anything that pique’s your interest about the Thai market/names, just shoot across an email, leave a comment and I’ll see if I can add value.
  1. I’m of the view there is a lot of fat that can be trimmed from the banks, closing bricks and mortar is def one and reduction in staff numbers as customer migrate to lower cost digital services. Just the other day, went to KBank and had a lovely girl open the door and greet me and another lovely lass press the queue button for me, seriously?

    Banking is an industry ripe for heavy disruption when some clever soul invents the uber or airbnb of banking, like those P2P lending platforms.

    • Does make me wonder about the potential increase for unemployment numbers then again..the official number of employees in the industry is ~80-100k, a third of job’s lost would be ~27-33k, not the end of the end but given that there are officially only 2 mn tax payers in thailand, its a dent nonetheless.

  2. Pttep – the stock was trading at deep discount before (2-3x EV/EBITDA) hence justifying the re-rating that we have already seen.

    • When was it trading at at 2-3x EV/EBITDA?

      Quick looks shows me 2015 when oil bottomed. Historical average range is 4-6x, currently at 6x, but in the end it moves with oil prices and the discrepancy versus other major oil players is something one should be aware of.

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