Siam Commercial Bank (SCB) announced
over the weekend that it would cut its interest rates by 25 basis
points across-the-board effective today. The market was anticipating
an interest rate cut and it shouldn’t be a surprise to market
watchers that one of the private banks is taking the lead.
The Monetary Policy Committee announced
only last week that it would maintain its 14-day repurchase rate
at 2.5%. However, in its statement to the public the MPC concluded:
“it will closely monitor future developments with a view to moving
to a more accommodative stance should the economic recovery turn
out to be weaker than expected.”
We don’t think the Bank of Thailand
will lower the repurchase rate any time soon. With the flood of
liquidity in the Thai money market, the repurchase rate is largely
symbolic anyway. Although we believe that the central bank is
maintaining its primary policy objective of stable exchange rates
and foreign reserves, it appears to be giving commercial banks
the green light to cut interest rates. This indirect method has
its advantages, particularly as commercial banks would have much
more flexibility in adjusting rates back up if needed. According
to SCB’s management, this is not a policy issue, but an attempt
by the bank to lower its funding costs and improve profitability.
Typically, commercial banks’ net
interest margins (NIM) tend to temporarily narrow on an interest
rate cut. Lending rates, largely based on MLR and MOR, adjust
down immediately, while average deposit rates, largely locked
in for 3-6 months, take time to adjust down.
However, with the current banking
sector’s low loan/deposit ratio an interest rate reduction would
improve profitability. Based on SCB’s current outstanding loans
of Bt472bn and deposits of Bt588bn, SCB 25 bp rate cut would lower
its interest income by Bt1,181mn and its interest expenses by
Bt1,471mn, netting an additional Bt290mn to its annual operating
profit.
Other commercial banks will follow
suit because 1) their loan/deposit ratios are around SCB’s 0.80x
and 2) the situation will likely worsen before getting better.
According to the Bank of Thailand’s numbers released last week,
loans (adjusted for write-offs and loan transfers) grew by only
0.3% yoy in October, while deposits grew 4.2%. At the same time,
NPLs continue to grow and yields on other assets, particularly
government bonds, have already come down.
At this point, we are expecting interest
rates to decline by only 25 bps. However, we still believe that
the interest rate reduction theme will be a factor in the market’s
next rally. The following table highlights our favorite interest
rate plays.
Interest Rate Plays
