Full Year 2019 Siam Commercial Bank PCL Earnings Call
Bangkok Jan 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Siam Commercial Bank PCL earnings conference call or presentation Tuesday, January 21, 2020 at 10:59:00am GMT
TEXT version of Transcript
* Arak Sutivong
The Siam Commercial Bank Public Company Limited - President
Arak Sutivong, The Siam Commercial Bank Public Company Limited - President 
Well, welcome back and Happy New Year. It's first month of the year. So I guess the intention is we sent out the results last Friday, along with MD&A. So what I think what we'll do is -- I'm sure you guys had a chance to digest it over the past couple of days already. And I'm sure there are a few questions that you'd like to ask. So what I'll try to do for this session is rather than going through kind of the detailed readout on 2019. I trust that you already are well familiar. What we'll do is we'll start a little bit with the -- our outlook for 2020, and then we'll just touch on the highlights for 2019, and then we'll open the floor for questions that you might have for some of the numbers in the previous year as well as outlook for this coming year. Okay.
So the first one, as you can see, I think the backdrop of the macroeconomic is -- for this year, I think we will see a relatively yet another slow year. Unfortunately, for the macro economy, we'll see a slow growth environment -- it might -- our EIC. This is a house view is that it might be a little bit better than 2019. But frankly, a lot of the numbers that we're also seeing is kind of wildly fluctuating around below 3%. So all in all, below 3% looks to be the norm. It will be relatively slow compared to several years past. Also, the market is going to be relatively volatile. A lot of uncertainties in and around kind of global geopolitical. The U.S. is having election this year, unknown results and the implications of that. So with that, I think we'll see a relatively kind of subdued macroeconomic situation.
In terms of other numbers, export, we project it to be flat, which is probably -- unfortunately, flat is meaning better than this past year, which is -- that goes to show how sort of the slow economy might be. The RP rate probably also flat for many reasons. We don't see a change from 1.25%. The Thai Baht is probably fluctuating around 30 plus/minus, depending on the situation, but I think that's unfortunately it's going to be the new normal, which, of course, would affect the export, which we very much depend on. Therefore, the loan growth for the entire sector, at least our house view is that it's going to be on a very low single-digit, might be flat. Things that might shift. This particular one might be around the major kind of infrastructure buildout, EEC, or there might be major transactions that many of you, of course, are following closely. So that might dictate kind of quantum of the loan. But otherwise, generally, I think, it's going to be a relatively slow year for 2020.
Now in terms of our guidance, you've seen this -- we published this, this morning. I realize that there are probably -- this is probably much anticipated set of numbers that you would like to see and hear our view on, on what we think it might be.
In terms of loan growth, I think we are projecting kind of 3% to 5%, and we'll -- that's a pickup from previous year that you as you see minus 1.3%, and we can get that a little bit deeper into the -- during the Q&A, but the previous year is also a part of when we adjust the portfolio, right. We are trying to optimize for better risk return. Some of them, we actually have to sort of flight for quality to do that. But this coming year or this year, we are seeing something that -- we'll get deeper into the portfolio mix, but we do see our -- we continue the strategy in terms of growing -- optimize for risk return. So you will see things such as -- we might -- you might see some growth in corporate segment. That's simply because we feel that there are major projects and major M&A transactions that might happen, right? So if that happens, and I think that you'll see quite a bit of growth, you see EEC. And of course, unsecured lending is something that we continue to build. Digital lending is something that we continue to build. So you see that actually being the driver for our 3% to 5% projection.
The NIM. NIM is actually -- NIM itself is actually interesting because it -- this year is undergoing a couple of changes for us and structural, right? For us, this past quarter, and this will be the first full year of deconsolidation of SCB Life, which, of course, had the impact on the NII. That also led to part of the Q4 numbers that you saw. The NII might actually look a little bit different because SCB Life no longer consolidated, and that has some implications. So this will be first year when we actually fully report results without SCB Life, so that's one.
The other structural thing is the IFRS 9, the IFRS 9, where you would recognize the income differently, including from the NII, right? So we see a shift, and we're trying to project the best we can. Given the shift in the portfolio, you actually see a shift in NIM from us. Apart from those 2 factors, one would be, if we grow the same portfolio, we might have a relatively thin margin but very safe asset. But at the same time, we also would grow, for instance, unsecured lending, which actually has a relatively wider NIM, but of course, come with a different risk profile. So you see 2 forces being pulled together. But the important thing is that we try to optimize the risk return so that is suitable. And so we kind of see a situation where flat NIM. We're trying to maintain the NIM, which is actually on a given the market condition of 3.2% to 3.4%. And last year, we closed at 3.34%, that to be a NIM that's actually, I think, is quite robust for a situation that we're seeing right now.
Non-NII growth, this is actually also yet another one that's structurally, more specific to our bank where some of the NII that got recognized from SCB Life, would then got recognized as non-NII. The commission fee that used to be sort of -- removed from -- after consolidation will be recognized in full, along with the -- some of the amortization and a lot of things that we discussed last quarter on SCB Life transaction. Also, we see significant growth that we want to build from wealth management as well as in insurance in addition to what we have been able to do in the past, and you would actually see our wealth business as one of the kind of driver for growth over the past 2019. As well, we continue to see significant acceleration on this one, which would lead to non-NII growth of kind of 7% to 10%, which is something that I think is a positive development for the economic situation that we are in right now.
Cost to income. Cost to income, we're actually guiding in the high 40%. A couple of clarification, and this one is that, of course, the -- when the income -- we're trying to grow the income, but it's going to be in the environment where it's relatively slow. You see kind of -- we try to drive the growth from the income. But the important thing is that the cost of 2019 probably is relatively high, and we think that we already peaked on the costs in 2019. So you should see a declining trend for the OpEx on 2020, which would lead to C/I. Unfortunately, it's a relatively large quantum. So C/I will remain sticky for a little while on 2020, but we do see the positive development that the OpEx should actually started to come down visibly in this year.
So on the NPL, if you see -- we see the NPL, the growth of 3.4%, which is pretty much the same as last year. And this one actually came from the fact that we see portfolio -- over the past quarter -- the last quarter, you will actually see the portfolio deterioration in some areas, and we'll get into that when you have questions, but we actually see stable NPL on this one.
Credit costs, which is actually something that's actually quite important, is 120 to 130 basis points. Net-net full year last year with the additional provision, additional buffer that we've built in, we closed the year at 170 basis points. So you would actually see a market decline on the provision to 120 to 130. So in a way, you would see that because -- and that actually led to quite a bit of questions from many of you in terms of what happened to Q4, the numbers, right? So the condition there is that we look at the situation, and we try to take a proactive view on -- if we -- okay, if we rewind a little bit, you would actually see at the end of Q3, we took a significant onetime additional provision of THB 9.1 billion. And at the time we guided saying that the proceed that we have from the transaction, there was still some excess amount. And the questions were at the time, what happened next? We guided at a time that we want to take a look at Q4 to see the situation, whether the market condition as well as the portfolio condition, what it would look like, and then we would take decision on what to do in Q4.
So as we completed Q4, we definitely saw a kind of a little bit of a slowdown in 2020 and the outlook. So that's why we decided to be prudent and add an additional buffer to cushion us and actually get us into 2020 with a relatively strong position. So with that significant buildup of the buffer that we have, we feel that this year, given the portfolio focus, given the growth that we are seeing, we should need only around 120 to 130, which is kind of renormalizing back to the levels that we've seen before this search in the provision last year.
In terms of coverage, we still intend to maintain coverage ratio of above 130%, but this is also something that's actually interesting in the context of TFRS 9, whether the coverage is still a metric that makes a lot of sense or not because that, as you know very well, the way the provision will be set and will be used. But for the time being, we'll continue to report this, and we will continue to see the coverage of above 130%. And linked to this one, I think, there were quite a bit of questions coming in, considering that we set quite a bit of provision last year. The coverage ratio hasn't gone up, and in part because the series that we did was we took a fair amount of qualitative loan classification, some from SM to NPL and some from performing to SM. That's just to take a more conservative view on that one.
And based on that classification, it has certain implied amount of provision that's required. So we put in, therefore, the right amount and appropriate amount in there, which would still have the coverage at the 134% that we saw last year. So the logic was the condition of the overall market is not necessarily -- kind of still in a fairly challenging outlook. So we say we classify more conservatively and trying to clean up part of that, and then we set provision accordingly. So that's why when both the numerator and denominator goes up, then at least to -- even though we put in provision, the coverage hasn't gone up as sort of proportionately.
So that's sort of 2020 outlook. Basically, we see a relatively slow and still volatile year. A lot of things will continue to -- we have to be sort of very adaptive to the market condition. We will -- but we believe that the way we have been actually building up our position, as well as the infrastructure that we built in the growth area, we should be able to see growth -- healthy growth from certain segments of loan business. The high margin continue certainly from corporate -- should be -- continue to come in. We probably don't grow as much in the SME. We don't grow as much in the mortgage and the high prices, right? The fee income will come from wealth management, will come from insurance, will come partly from the kind of loan-related fee linked to lending.
In terms of Opex, as mentioned, we believe that we have actually now peaked and should be actually on a downward trend for this coming year, right? And asset quality, as I've mentioned, just completed now. We see a relatively robust 120 to 130 basis point guidance on the provision. Okay. So that's 2020.
On the -- okay. Let me, I guess -- so the numbers, of course, adjusted for the one-off transaction in life insurance, you would actually see slightly different number. We don't see this 59.3%, things like that, but we see -- we do see growth in the top line. We see growth in the non-NII as well across the board. So that's actually a good sign. The loan growth, as I mentioned, the loan growth looks a little bit of a decline. But actually, that was towards the end of the year when we try to make -- to optimize the risk return as I mentioned. So you would see actually quite a bit of corporate loan portfolio reduction. That's part of the attempt.
The NIM, you saw that. There's no -- some of the highlights are as shown. If you break it down, you would actually see the one that actually continue to grow the top line. The expense, we actually -- there's quite a bit of -- obviously, from the number-wise, you would actually see expense jump from people costs and as well as from the depreciation from the investment that we've made over the past few years, right? Buffer that we put in for the provision, so that's that, and that's roughly around 1% growth.
In terms of non-NII and NII composition, you -- the -- what we actually have to notice is that fourth quarter, of course, the deconsolidation of SCB Life led to a decline in average NII that we will see, but at the same time, we also have the slow -- a lower quantum of the loan. So in and of itself would actually drive the NII down a little bit, but the real reduction is actually coming from deconsolidation. Loan growth is (inaudible) economy.
In terms of fixed deposit and CASA, it looks kind of relatively stable compared to previous year. And we continue to build up the CASA position, which actually proven to be, of course, difficult, but it's also important part of the low-cost deposit strategy that we try to drive.
NIM. I think for people in this room, I don't think you need to be educated, but for -- but you would see, actually, some people say, significant NIM drop and stuff on that one. Partly 3.68% was inflated because of SCB Life at a time when we deconsolidate the numerator and denominator didn't work out at the same time. But if you see the blend, if you see the average, you would actually see a general improvement in terms of NIM per the strategy that we mentioned that we want to expand towards more overall risk return more effective, and not just from NIM expansion, but from at the end -- the bottom line, including credit costs and everything.
In terms of loan, as I mentioned, you would actually see corporate loan decline by quite a bit, but that was actually intentional. We're trying to kind of lean the portfolio, rebalance it when -- if you don't get the right kind of return, both the NII and non-NII linked to that particular loan, we try to kind of consolidate and try to rationalize the portfolio. So you would see that.
And then frankly, I think people in this room are quite familiar corporate loan growth, in and of itself, it's fairly bulky, and you can actually drag it up and down quite significantly and widely. So the real thing is then how do we try to rationalize it. And SME is relatively flat. Retail, as I mentioned, for secured lending, we try to optimize. We try to shift the portfolio mix within to improve the better risk and return and see that it will continue to grow.
On the yield, I think some of you might have some questions that there seem to be a NIM yield compression or decline in the fourth quarter. What you would see there, a couple of things that drove that, right? One is from the fact that as I mentioned, flight for quality that we try to optimize. And towards the end of, I guess, last year, you would hear a lot of measures that being put out by various, I guess, including the regulators and including some internally as well to reflect tightening of the underwriting to make sure that we really screen for cream in terms of risk return.
So if you go for, of course, safer segment within a particular product, then your NIM -- then your yield will naturally compress, and that's actually seen in some of these retail products, right? Some of them, the decline came from the MRR rate cuts. So that's actually typical enough. And other thing is also coming from -- essentially, we're trying to optimize the portfolio towards safer assets. So that's why I explain the yield compression. But at the same time, we don't have it on this page, but the NIM, as I mentioned, on the overall aggregate, we continue to see NIM expansion, which is kind of small, it might be, but it's actually expanding.
Now on the NPL, that's also -- it looks -- I would say, if you look at it, and you kind of take a little bit of a step back, you would see -- every now and then, you might see a little bit of bump or dip. But all in all, across all major segments, it looks to be relatively kind of renormalizing to what it has been in the past, except SME where you would actually -- you see a jump, right? I mean, that's a huge jump. But as I mentioned, it was due to qualitative classification of the -- a lot of SME account. Quite a lot of the new NPL formation that you saw, you saw THB 18 billion of new NPL formation in Q4. And well, of course, in third quarter, there's one big corporate client that we all know and Q4 is this one. If you take out the qualitative, you actually would revert back to more or less Q1 and Q2 kind of number. So in that sense, that's why we're saying that when we kind of put in numbers for the numerator and denominator for the provision, when you put in the same amount, the coverage didn't go up, but because we already try to be conservative and be more prudent when we try to do this, right? But suffice to say -- well, not suffice, but it's important to say that some of these NIMs, we apply a fairly strict standard well beyond -- in fact, we're not yet leveraging the sort of more relaxed classification of SME. If anything, we try to be more stringent and strict because this is where things could be quite volatile. In the event that happens, we are -- at least some of them, we already account for, which leads to a spike in the SME new NPL.
The coverage, naturally, we built out the credit costs over time. Our -- the -- it doesn't show here, but the amount of reserve is THB 114 billion or something like that. And when you divide it by the NPL, you get the coverage of 134%. It might look like a drop in the coverage. But if you factor in large corporate account, which we provisioned sufficient amount of provision net of collateral, which by definition, is less than 100% coverage because there's a collateral as well as the -- some of the pre -- the classification, the conservative classification, the provision. So that's why it dropped. But otherwise, this would look to be fairly high in terms of coverage, not 134%.
The recurring income, and that -- of course, there's no net insurance premium anymore in Q4, and you can actually -- you've seen this. I will not try to bore you with reading off the chart. We took a slightly different cut just to reflect the fact that we are focusing on kind of make it more aligned with what we've mentioned as a strategy for you, wealth management, bancassurance. We got the feedback. We've heard that. We changed that. It may complicate it for some of you. Apologize for that. But -- so going forward, we'll try to kind of keep it in this format where we expect to see growth from wealth and bancassurance in a meaningful way. And Q4, you start to see that. And hopefully, we'll be able to show you much more traction when we announce Q1 in a few months' time. Of course, we just started a year, but we are hopeful.
Transaction banking, I think we all know this one is only going to decline over time just from the nature of the business. But the real proposition of transaction banking is that of number of customers as well CASA-base as opposed to fee income.
Operating expense, except for the kind of dip because of the onetime in recognition. We saw a spike in the OpEx, which is something that, I think, led to a few questions that some of you might have. But otherwise, the cost to income looks to be in the 48% -- kind of 48% to 49% range. It came from partly from the kind of the employee expense as well as depreciation. This one is interesting because -- we don't have time to go into some of these numbers in the appendix on the strategy part, but I do recommend you to see it. We try to update you with the latest sort of headline numbers such as number of customers, the nature of transactions. You would actually see that a lot of transaction is now happening on digital channel, right? You would see, for instance, the banking agent network that we've built started to take or offload the service-related transactions in the branch already. And you actually already see the transaction that happened in the branch. 3% out of 213 is already quite low -- a lot lower than 15% of 69. There were a lot of questions back then. And this trend only started to see -- for instance, if you do 109 multiplied by 9%, or 143 multiplied by 6%, you kind of see -- percentage-wise, branch tend to have declined. But absolute-wise, it hasn't. But if you see in December '19, you would actually see that it indeed has declined. So that goes to show that the activities in the branches started to come down, which would allow us to be able to really rationalize the infrastructure cost, right? Unfortunately, right now, we're still living in a sort of 2 infrastructure, one is digital, and the other one is physical. What we need to do is continue to actively migrate people from physical into digital, which would allow us then to rationalize the network that we have, both in terms of number of branches and any physical touch points, right, that actually, unfortunately is relatively heavy in terms of cost. And linked to that, of course, is the number of people that we have in the organization.
So if we go back to the previous page, you would then see -- that's why we wouldn't -- it's something that we are actively working on to try to basically migrate and rationalize -- migrate and rationalize on that one, which would actually drive down the total OpEx for this coming year.
Capital, you are aware. And yes, it's high. So -- and the rest is sort of the business plan, the numbers, for sake of time, I will not go through that. I'll just kind of -- but it is important that if you do have time, please flip through some of them because they point to a number of customers. For instance, we now expand to 16.4 million customers. The jump actually came in the past few years, which kind of speaks to the fact that the engagement effort that we've done, a number of customers on Easy is 10.5 million and the channels that we talked about. So that's sort of highlights of the previous year as well as the guidance for this year.
There was some -- you will see us -- one statement that we say we move the dividend cap of 50%, right? So it used to be -- we guided that dividend policy is 30% to 50%. But now we say above 30%. It's actually meant to be a positive thing. But many people say, are you now not going to pay as much as -- it's meant to be positive. We try to keep it flexible, especially in the kind of high capital regime. We want -- and then low -- kind of lower growth and things like that. We want to make sure it's flexible. It's meant to be positive. So please reflect accordingly.
The other one that also came in from various sources is the announcement that Khun Arthid made on the THB 20 billion investment in the technology, right? So this one needs some clarification, and I think he mentioned it to press and media. It was -- it needs more clarification. In fact, we'll do a more formal announcement this Thursday. This THB 20 billion is different than the THB 40 billion transformation program. So if you're asking yourself how to incorporate THB 20 billion, it's not CapEx. It's not OpEx, but it's an investment, right? So it's a financial investment mostly. And -- but linked to -- and I'll tell you a little bit about SCB 1OX, which is something that you probably picked up in the newsfeed already. But the essence is that as we see the slowdown in the overall banking sector, not just us, not just Thailand, it's just regionally and globally. We see that we need to rethink about how do we create new growth above and beyond what we already discussed wealth and insurance and digital lending, which would be the primary growth for the main bank.
At the same time, since we came into the proceed of THB 80 billion of excess cash from SCB Life transaction, one of the things that you probably have in mind, and maybe people are asking, how do we plan to monetize that, right? In the short term, we -- as mentioned last time, while we help with the liquidity in terms of replacing the high cost deposit, we do a lot of things, but fundamentally, to create growth, you need to actually redeploy it effectively. The long -- it will be a couple of options. One is to do -- kind of get into the new business, be it M&A or significant investment, and also drive growth from the high-growth businesses, technology-driven businesses and business models. So SCB 1OX, in the essence, what it's trying to do is that we built on what we've learned over the past few years. We -- I would kind of -- the headline would to say go from experiments to exponential. Meaning, for instance, we have digital ventures. We have venture capital fund. We have -- we've set up a few subsidiaries over the past few years. Now SCB 1OX is consolidating all these things into one entity, a separate legal entity trying to focus on building tech-related growth, which will -- significant amount of THB 20 billion already -- not significant -- sizable amount already coming from the existing portfolio, publicly known USD 150 million venture cap and a few direct investments, totaling up 30%, 40% of the existing portfolio already kind of been in the works over the past few years.
So now the idea is how do we leverage. So THB 20 billion -- in a way, THB 20 billion out of the THB 80 billion proceed will be used on the technology-related businesses, which actually come in 3 parts. One is -- the one that we're kind of familiar with is the investment. These are some of the examples of the names that we've invested in either fund-to-fund or direct investment, you know them well. For instance, Ripple, you've heard that they're actually doing well as far as global remittance company, blockchain-based. And they've been -- we've been fortunate enough to get in the investment early, and that should actually be a pretty good investment as you'll find out over time.
Some other investment. So the idea is that if there are good opportunities, if we can support -- we can participate, we participate, which actually links to not only financial return, but also the new capabilities. The Ripple itself, again, as an example, we -- this is a couple of years back. We actually helped them grow their business through cross-border remittance between Japan and Thailand -- as well as Thailand and regional within CLMV. So that one, not only we invest in the parent company, but we also help them grow. So that's the -- that's supposed to be the logic of the investment, not just putting in the money in various pockets, but it's where we can actually add value, and that's actually one example, right? A few other -- there are some information of this in the website.
But if there are no such companies, what do we do? We build. We believe that we find a business that could create exponential growth. We're not looking for something that would expand kind of BAU, plus-plus type of business. We don't do -- main bank should be doing that. Main bank should continue to say how do we make digital offerings of certain products and services. But this thing is supposed to be leaps and bounds in terms of the complexity and in terms of the ability to create new growth, right? Digital Ventures that -- you saw the news of Khun Orapong, who used to be our president. He sat down from the President and joined as CEO of DV full-time to create the new growth from DV. So he's very much part of the family, but he's now kind of taking charge of how do we drive new growth from that one. SCB Abacus, you're aware of digital analytics as well as digital lending company. So if we believe that this gap within the country, within the region, if we can do, we try to build, but important thing here is that it's not requiring huge amount of investment. By definition, exponential type of platform, you need to be able to leverage the capital market. You need to invest a small amount to prove the concept. And then soon after that, you need to leverage the venture capital platform to grow because some of these things, if you say we have to fund everything, it will not be effective, as you know, quite well in terms of how startup would be requiring the funding, right? And some other things that if we work with partners, if there's some interesting companies that are relatively mature, either we partner with them to build new offering. Monix, this is another partner that we met through one of the funds that we invested in China. They introduced us to this company to setup basically, we moved the digital platform that they have in China relatively successful to Thailand. Or some, we might do significant co-investment.
So the idea is then part of the proceeds from the SCB Life transaction, THB 20 billion, we try to redeploy them in a high-growth area, but we do so in a way that's sort of step-by-step what they would call a stage-gate approach where we don't just throw in big money after some opportunities, but we systematically go through, which is a pretty rigorous process of making sure risk return is right. It's higher risk, but at the same time, of course, on a blended return. This could actually turn out to be -- not turn out to be but we expect this to be one of the growth drivers for the bank. It might not happen over the next 1, 2 years, simply because the nature of, for instance, Ripple. When we found them, they were relatively small, but -- and they were incurring losses along the way, but now they're started to turn. So it requires a different type of P&L profile that we might not -- that we might be used to. But these are something that will, over time, we continue to engage with you on -- in terms of what it might mean, right? But until then, that's the plan on that one.