• Expect 1Q18F aggregate net profit to rebound 21% qoq on lower OPEX and provisions led by KBANK and KTB
• Cut FY18F/19F sector earnings by 6%/4% to reflect lower NIM and non-NII growth; fee income to drop from 2Q18 onwards
• Downgrade to Neutral (from Overweight); downgrade KTB to Neutral and upgrade KKP to Outperform; BBL and TISCO are our picks for resilient earnings and smaller IFRS9 impact

1Q18F sector EPS to grow 21% qoq but shrink 7% yoy

We forecast the eight banks under our coverage will report Bt42.6bn aggregate earnings in 1Q18F, up 21% qoq (on lower OPEX and provisions) but drop 7% yoy (on higher credit cost and weak non-NII growth). Top line growth should remain sluggish due to weak loan demand and non-NII. NIM should drop 5bp qoq and yoy to 3.05% due to lower loan yield. Weak top line growth and higher OPEX driven by IT-related investments should push up cost-to-income ratio (CIR) to 42.8% from 41.8% in 1Q17, but would be lower than 4Q17 (45.2%) due to seasonal effect. TISCO and TCAP should report strongest earnings growth of 16% yoy led by higher NIM for the former and lower OPEX for the latter. However, SCB’s and KTB’s earnings are expected to shrink 20% yoy due to higher provisions.

NPL ratio to remain high in 1Q18F; cut FY18F/19F EPS to reflect lower loan yield and more intense competition for fee income

We expect NPL ratio to increase to 4.0% in 1Q18F vs 3.94% in 4Q17 and 3.84% in 1Q17, led by higher bad debts at big banks. Provisions should grow 14% yoy driven by extra provisions at SCB and KTB. We cut FY18F/19F EPS by 6%/4% after trimming EPS for KBANK, KTB and TMB. KBANK has revised down non-NII growth to negative 6-8% from zero growth, worse than our forecast of -2%. We estimate KBANK will lose Bt3.7bn-5.0bn in fee income from the fee waivers, much higher than SCB’s guidance of Bt1bn. We also cut KTB’s and TMB’s earnings to reflect slower loan growth and NIM for the former (after CEO guided SME loan growth would remain weak in 1Q18) and higher funding cost and OPEX for the latter (to maintain market share). As a result, we forecast FY18F sector earnings will grow at a slower rate of 9% yoy from 16% previously.

Prefer BBL for big banks and TISCO for small banks

Following the earnings cuts, we downgrade sector weighting to Neutral from Overweight. We also downgrade KTB to Neutral and upgrade KKP to Outperform amid share price weakness. Our top picks remain BBL and TISCO for their clear earnings visibility coupled with minimum impact from IFRS9 due to their high NPL coverage.