A cut in lending rates is expected to take a small bite out of this year's net profits for the country's four largest lenders, with a single-digit percentage point being wiped out, say stock analysts.
"We have a slightly negative view on the one-sided rate reduction [a rate cut for loans but not deposits] at large commercial banks as it will narrow net interest margin [NIM] of the four largest banks by two to six basis points and shave 1.5-3.2 percentage points off their estimated earnings," Capital Nomura Securities (CNS) said in a note.
The four largest commercial lenders have cut their prime lending rates, with a focus on the minimum retail rate (MRR), in a range of 25-50 basis points, effective from yesterday. The move is intended to alleviate pressure after Finance Minister Apisak Tantivorawong asked banks to narrow the wide interest gap between large and small borrowers.
Bangkok Bank (BBL), Krungthai Bank (KTB) and Kasikornbank (KBank) slashed their MRR -- a rate for individual and small-business borrowers -- by 50 basis points, while Siam Commercial Bank (SCB) trimmed its MRR by 25 basis points.
SCB also cut two other prime lending rates, the minimum lending rate (MLR) and the minimum overdraft rate, by 25 basis points, while BBL lowered its MLR by a quarter percentage point.
CNS projects that KBank will take the hardest hit among its industry peers from the lending rate cut, with 3.2 percentage points being wiped out from the bank's earnings forecast this year to 34.4 billion baht, as 29% of its loans outstanding are charged based on MRR.
SCB, the country's third-largest lender by assets, is expected by CNS to be the second-most affected, with up to 58% of its total loans impacted from across-the-board rate cuts of 25 basis points. The broker estimated 3% of SCB's net profit forecast for this year will be wiped out, down to 47.8 billion baht.
BBL was projected as least affected by the rate cut, with CNS noting a mere 1.5% of the largest lender's net profit forecast will be shaved off to 36.2 billion baht.
"We expect the rate cut will start to take a toll on banks' earnings in the second quarter, with the full impact seen in the third quarter," the broker said. "However, we initially maintain our earnings estimates for 2017 as the impact is only 2-3%. CNS anticipates several banks will adjust their deposit structure and seek lower funding costs to offset the impact from the lending rate cuts."
KGI Securities Thailand estimated SCB would be the hardest hit among its peers from the lending rate reduction as 38% of its loan are charged based on MRR.
"SCB will be hurt the most as the bank's mortgage accounts make up the largest portion, and it cut lending rates across the board," the broker said.
JP Morgan said in a note that the cuts will likely affect NIM in the second and third quarters.
"We believe this is not the end of NIM pressure, as we still see current lending rates as too high for economic conditions," JP Morgan said.
"Street downgrades are likely to continue putting pressure on banking stock prices, which have already underperformed post-first-quarter financial results on disappointing asset quality development. Non-net interest income [NII] growth appears more challenging in later quarters than in the first, in our view, given less favourable capital market conditions. We believe interest rates are too high compared with economic growth, which is causing the rise in bad loans."
JP Morgan forecast a 10-basis-point year-on-year NIM compression in 2017. It said non-NII growth will be challenged this year by a fragile economy and government attempts to widen PromptPay and electronic data capture debit card usage.
Arthid Nanthawithaya, SCB president and chief executive, said the bank would pay more attention to fee-based income to maintain profitability this year. The bank has continued to increase non-interest income and hopes to see the ratio between interest and non-interest income even out over time.
Rate cuts of all types of loans will reduce financial costs for all the bank's customer segments, improving asset quality and lowering loan-loss provisions, Mr Arthid said.
The share prices yesterday of BBL, SCB and KBANK on the SET fell 1.50 baht to 178 baht, 1.50 baht to 150.50 baht, and 2.50 baht to 182.50 baht, respectively, while KTB was unchanged at 18.70 baht.