Thailand Banks:2Q17e preview,Mild QoQ earnings contraction

Mild contraction in earnings: The six Thai banks under our coverage report 2Q17results between 18 and 21 July. At the PPOP level, we expect earnings to contractmarginally by 1% QoQ, driven by some margin compression and higher opex, offsetby stronger loan growth and better non-interest income. With NPLs still on the rise,we estimate banks are likely to post 6% higher provisions QoQ, leading to an overallnet profit contraction of 3%. In that regard, we expect our preferred picks, KTB andBBL, to outperform their peers, with the least quarterly contraction during the quarter.

    Valuations not expensive, downside risks limited: YTD, the sector has justoutperformed the broader market (SETBANK +6% vs SET Index +2%). Although themarket is still wary of rising NPLs, we believe current valuations are decent (PE of 10x2017e at its historical mean; PB of 1.2x vs ROE of 12%), with risks to the downsidelimited given the ongoing economic recovery. Our preferred stocks are Krung ThaiBank (which stands to benefit more than peers from peaking NPLs and infrastructureprojects) and Bangkok Bank (attractive valuation and infrastructure play).