1QFY16 net profit down 19.8% y‐y, 10.6% q‐q to Bt11bn, misses view

　　SCB posted 1QFY16 net profit of Bt11bn, which was below our expectation as a change ofaccounting policy in its life insurance arm resulted in higher‐than‐expected provision. On y‐ybasis, the quarterly profit fell by 19.8% as the significant increases in provision for the lifeinsurance business and other businesses outweighed the rises in interest income, fee‐basedincome and other non‐interest income, and lower operating expense. In q‐q terms, the profitalso declined 10.6% due to provision for the life insurance unit.

　　NPL declines amid slower loan growth

　　In the first quarter, loan grew a mere 0.3% q‐q. Key driver was SME loan, which grew 1.5%,followed by retail loan of 0.1%, but large corporate loan contracted 0.1%. Despite themoderate loan growth, NPL declined significantly by Bt3.9bn to Bt55bn of total loan,compared to Bt59bn SCB recorded in 4QFY15. About Bt1.7bn out of the decrease was due toNPL sales, which pushed NPL to total loan down to 2.6% from 2.9%. The bank also set asidehigh provision in the quarter and that move drove NPL coverage ratio up to 123% from 110%in the precedent quarter.

　　High provision likely over course of the year

　　Despite the decrease of NPL, SCB also witnessed a continued increase of new NPLs, at aslower pace q‐q though. We expect the bank to continue to set aside high provision overcourse of the year to provide cushion against economic fluctuation and to increase its NPLcoverage ratio above a 130% level. Hence, we expect SCB to keep its provision level at 1.1% oftotal loan as in 1QFY16. However, NPL is likely to improve in the second half of the year andSCB could lower its provision in the period. In short, we expect SCB to set provision at 1.05%of total loan in 2016.

　　Lending rate cuts to impact net interest margin and profitability

　　SCB took the lead cutting its MLR and later cut its MRR and MOR, but the bank keeps itsdeposit rate unchanged. That move will likely have an adverse impact on its net interestmargin, which seems to narrow down further and thereby its profitability. Combined withsignificant provision for its life insurance arm in 1QFY16, we cut our FY16 net profit projectionby 8.9% from Bt53bn or Bt15.52/share to Bt48bn or Bt14.26/share, still representing growthof 2.7% y‐y. We also lower our dividend assumption to Bt5.50 from Bt6.

　　Target price cut to Bt155 but rating maintains at ‘BUY’ stance

　　We de‐rate our P/BV to 1.6x from 1.8x to reflect our projection downgrade and a reduction ofROE in the long term. As such, our target price decreases to Bt155 from Bt170. Shares of SCBhowever trade at a significant upside to our target price and thus we keep our ‘BUY’ rating.