Q2 2019 Siam Commercial Bank PCL Earnings Call
Bangkok Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Siam Commercial Bank PCL earnings conference call or presentation Friday, July 19, 2019 at 10:59:00am GMT
TEXT version of Transcript
* Jens Lottner
The Siam Commercial Bank Public Company Limited - Senior EVP, Acting Chief Strategy Officer & CFO
Jens Lottner, The Siam Commercial Bank Public Company Limited - Senior EVP, Acting Chief Strategy Officer & CFO 
So good afternoon. Thank you, everyone, for coming. And today, we're talking about the first half results as well as second quarter. And so I think the normal procedure, I just walk you quickly through a couple of the numbers. Of course, we already posted most of them so -- and we've already seen that a couple of you already wrote their reports. So maybe I can share some new insights. But anyway, I just walk quickly through that. And then I think we open it up for Q&A. So here we go. Okay.
So again, on the SCB Life and transaction, I think that's actually important for you to note. As we go through some of the numbers, you will see that we basically show some numbers including the transactions and some where we're basically taking it out. So what we have done is or, basically, with the signing of this share, of the SPA, we basically taken out the assets in SCB Life and basically started taking it into assets and liability held for sales. So there is a certain notion in the reports where we're basically putting it -- all the assets out and then also the liabilities.
The effect is the following, because that will reduce our earning assets for a certain period of time until closing, and it's really out, but -- so we're taking it out of the earning assets. But of course, the yields we are receiving is still basically booked. So our NII, or wherever the income is coming in, it's still receiving yields from these assets, but we're taking it out of the denominator. So by definition, these numbers are going up. So if you see yield on earning assets, and because the income stream is still there but the denominator has been reduced for these assets, you will actually see that these numbers are going up. You will have this until the end of 2019 because, again, we still have the income stream but the assets are basically taken out. By the first quarter of 2020, assuming that the deal actually then has happened, you don't have the income stream anymore, you don't have the assets, and things are going back to normal. So again, that's why we are showing you right now 2 set of numbers. One which has to be reported. But the other one, which are more like under business as usual, which will be the ones, which, going forward, probably you should also start looking at and tracking in order to make sure that our normal operating business is actually performing well and okay.
So again, I thought it's just important to make that clarification as we start running through some of the numbers that -- with the deal, we basically have reclassified the assets of SCB Life.
So when you look through the numbers on high level, basically, total income growth on the quarter was roughly 4.9%. And most of that was driven out of NII, which grew 7.1% year-on-year. Most of that were actually really not driven out of higher balances, but actually better yield. So I told you before, we are actually trying to reprice the portfolio. And especially on the mortgage side and on the corporate side, we basically rather keep steady on the balances, but make sure that we actually get better rewarded for the risks we are taking. And then we're also expanding very heavily on the unsecured lending on retail and SSME, which is giving us better yield. So that is what you're seeing in terms of the NII income. And again, you will see that as I walk you a little bit more through the numbers.
Non-NII also increased 6.6% quarter-on-quarter and even year-on-year. And some of that is just, as we also said, in -- and we took the hit on the fees, on the fee waiver for online channels basically starting second quarter. So that now has been run all the way through. So that baseline effect has actually gone out. So now for the first time, you basically have a quarter which you compare -- or year-on-year, where you compare the bank and without the online channel and fees. And so I think it gives a little bit better feeling of where is our current trajectory and have we basically bottomed out and are we taking the non-NII income up.
So the improvement basically come mostly off recurring fee income, which is exactly what we want it to be. We're still struggling somewhat on the SCB Life Insurance business. Again, I show you the numbers. And one of the main reasons why we basically, at one point [announced that] maybe there's somebody who is a better owner of this asset. So we're still slightly positive. But again, there clearly is a drop what we had last year, but then massively from a couple of years ago. And so that actually has driven it down and why we are not recording a bigger growth.
And the C/I ratio declines. If you recall last quarter, we booked a very high one-off provisioning for a change in the labor law, which was 1.4%. We are right now going somewhere to THB 16.7 billion per quarter, which is more on the trajectory we used to be also over the last couple of quarters. So we hope, actually, again, as I said beforehand, that we're trying to keep the OpEx side actually stable. And again, maybe it's running up 2% or something like that, if you take this one-off effect out. But again, we are getting closer to the end of the transformation cycle. And so, therefore, numbers start getting stabilized.
So that all led to an operating profit increase, 15.8%, 4.4% year-on-year. And again, then also net profit went basically up, especially quarter-on-quarter, still a little bit lower year-on-year.
On the NPL coverage ratio. And again, I already saw when I look through the reports, our NPL coverage ratio is still high. But again, we have one big item, which we put under special mention, which is one account. And again, we will talk a little bit more about that. But again, on that one, we are fully provisioned and it's provisioned like as if it would be an NPL. So again, there is also no surprises or anything on that side.
We also quantified it basically on qualitative assessment, not a quantitative assessment. So basically, we took a perspective on it, and that's why we classified it accordingly. But again, it's fully provisioned. So that's the high level. Let me go a little bit deeper into some of the details.
So that is the profits. As you see, if you just look into the net profit, THB 11.0 billion is probably more in line like what we saw on average over the quarters. The THB 7.1 billion was mostly because we started provisioning in the fourth quarter, so there was the one dip. And then the THB 9.2 billion was especially also driven out of this onetime provisioning. So if you take these one-off effects out, the THB 11 billion net profit is probably more in line with the trajectory we had in the past. And again, that's actually also what we expect kind of to be going forward, THB 19.4 billion on operating profit, again, is if you compare it to the last quarters actually right on the high side.
Non-NII, again, if you look at it and compare it to the quarters, we're usually showing it's actually the highest. And we have 7.1% year-on-year. The noninterest income is still not at the same level where it used to be, if you look first quarter '18. But then compare it to the run down which we had over the last couple of quarters, it clearly is on a different trajectory. And as I said, given the fact that it comes a lot also out of recurring income, we actually believe that this is the trajectory we will be on going forward.
So loan growth, just give you some numbers. Again, if you see the net interest margin, actually, net interest margin is going up first half '18, first half '19. There were comments on why is actually the yield on the earning assets as well as yield on loan seems to be a massive, massive increase. Two comments on that. First one is, usually, what we see is, we see actually a dip in the first quarter. And so if you would usually see first -- or fourth quarter '17 to first quarter '18 actually dropped by roughly 10 bps, and you have roughly, in that case, high bps drop or something like that. And so there's one which is a natural effect just because first quarter has a couple of days less than other quarters. But then the other one is also that we're reporting this here on -- if you're basically calculating it, we take beginning of the quarter balance, end of the quarter balance and we just basically make average, divide it by 2. And that gives you the balance. If we basically record it on daily average balances, which is probably closer, you would have seen that the first quarter '19, the numbers already would actually have been much higher. And so that is what we put into the footnote 5 already, last time, we grow -- we saw actually that dip, and we already saw actually that the loans were coming higher on a better yield. So therefore, the real increase is actually much more steady. You just basically see that dip. But again, we roughly record around 5 to 6 basis points increase in the yield on loans over the last 2 quarters, which comes mostly out of the effect that we've maintained pricing discipline on the big box corporate as well as mortgage, and that we're actually expanding our high-margin lending, unsecured lending on the SSME and the retail side.
So again, I think, right now, roughly 5% to 6%. One point what you're seeing is the 4.65% that is exactly the effect I told you on the yield on earning assets. And so that's the reported number because we took earning assets out because they are now asset held for sales. Therefore, not accounted anymore as earning assets. If you look into the footnote, if you would basically still keep that in, it will roughly be 4.40%. And then on the yield on loans, it's a little bit less because it has not earning assets in there. There is just a consolidation issue. But on the earning asset, that's actually where the massive effect is. But again, if you want just continue to track how we're doing on a more kind of business as usual performance, you would probably rather take the 4.40% than the 4.65%. Again, this will go away once we close our deal.
So in terms of the growth target and loan growth, you're seeing we are somewhat a little bit below. The loan growth was roughly 2.33%. Again, we probably say, we still aim for the 5%, but it will be at the lower end. So if you take the 5% to 7%, we will be at the lower end.
On the other hand, if you take NIM, 3.2% to 3.35%, we're actually gaining and trying to get to the higher end of that range. So that NII, the current trajectory, we're seeing we actually want to maintain that. But again, we will probably just achieve that goal by being a little bit more capital efficient.
On the deposit side, again, and funding, I also told you last time, we're a little bit kind of -- that was a little bit too tight for comfort. So we actually launched a lot of deposit campaign, fixed deposit campaign, especially on the individual side. So that's why you see, on a quarter-on-quarter, that fixed is going up quite a bit. And of course, you have then some kind of cannibalization that some of the current accounts get into the fixed deposits. But again, we wanted to reduce the dependencies on the corporates deposit, while that is kind of good and cheap and we can manage, there was just a little bit too much volatility. And for the kind of lending book and expansion we are doing, we actually wanted to have a more diversified funding base. So we are doing this fixed campaign right now, and we will actually continue this over the second half of 2019. And so again, we'll probably still maintain that. Current accounts, as you see, is growing. And we still have a double-digit growth for the current accounts, but you might see that on quarter-on-quarter actually, some of the fixed might actually going up, especially on the retail and the wealth side.
So that's the loan. Basically, again, we're following a little bit GDP growth. Here is a little bit the breakdown of how the portfolios are developing. As you see, corporate loans, well, we went up a little bit from quarter, first quarter. But again, in the end, if you take the overall quarters, it's pretty much stable. And year-on-year, it's a little bit down. Again, we are not expanding that as massively. The same is true on the SME loans. Retail loans are going up, but housing, again, a little bit also due to the macro prudential measures, LTV restrictions. As we said last time, we're keeping that. We rather make sure that we get the right pricing. But then if you look into the unsecured portfolio, that is -- which grew roughly 30% year-on-year. Last quarter, 8.4%. And again, in all of the parts, we're actually seeing an increase in yield. So the yield is not just driven out of the unsecured, it's also out of the pricing discipline. So also on the housing side and also on the corporate side, we would actually see an increase roughly 5 to 6 bps over the last quarter. Okay.
So here's the NPL formation. So what you're seeing is NPL is going up and the new formation. And we still have a coverage ratio which is pretty stable, some of that just comes because we're also taking off and selling off some NPLs or writing off NPLs. And so last quarter, there's roughly kind of sale was roughly THB 4 billion. So that maintains the ratio.
Again, SME is fine. Housing is roughly in line with the average we had over the last year. Probably Auto is a little bit up, but again, nothing which really gives us [unparsed,] really saying serious. And clearly, the corporate side, that is going up. And again, mostly, it's coming out of kind of agricultural commodities. That's mostly in the areas where we clearly see effects also of the global slowdown. So that's where we are a little bit more concerned.
Then you see the special mention. As I said, that is one big -- we won a big account. And most of these special mention increase are all coming out of qualitative assessments. They're not coming out of quantitative assessments but qualitative assessments. And we are just taking also in line with the upcoming IFRS, we basically go through the portfolio and see where would we put that. So we will monitor that carefully. But as I said in provisioning terms, we have provisioned as if this would be an NPL. So it will not hit, in any shape or form, that we actually would suddenly have to book additional provisions or something like that. It's already fully provisioned for. Again, we're looking through it, it's qualitative. Hopefully, we can take it out. And so that's what we are currently monitoring. But that's the explanation why that has actually gone up.
NPL coverage ratio, again, you see the numbers, we are reserving provisioning roughly at 5.9%. That is higher than in the past year. We are roughly running towards 110. Again, at the current level, we are probably running somewhere towards 115 basis points. So in terms of the guidance, it's rather the 115 and then the 135 NPL coverage ratio clearly is we're staying above that.
So overall, because people are looking at it, and we clearly see that we have to manage that portfolio and our loan book very carefully, it's clearly that the current macroeconomic environment is not helpful in terms of how this develops. But again, nothing where we would say this is out of what we would have expected or any things which are running alarm bells. But again, we just have to be clearly monitoring that very, very tightly.
Noninterest income, there are 2 areas. Again, you see overall, basically, it's going up, especially on the net fee income, which is -- a lot of this is recurring income, that actually is growing 8%, it's actually even 1% up year-on-year. You see the net insurance premium, so that is basically, in the end, the result, which is coming out of SCB Life. That used to be a pretty big number and it used to be, again, first half '18, it was THB 1 billion. Right now, it's THB 0.2 billion, and it used to be THB 0.3 billion in the first quarter. Now we are roughly at 0. Again, I explained it before hand, as we are shifting the book away from very much technical products, savings products into something which really looks much more like an insurance book, which are actually protection products, which are much harder to sell. We basically see that there's a lot of outflow of the insurance premium as some of these mature, and the premiums are flowing out. While at the same point in time, we are not getting the same amount of premium coming in because we're not doing the technical stuff, but we are actually going for better book. And that is actually driving down that result. And then as we had guided beforehand, that might be going on for quite some time as this book is actually restructured. This piece, once the transaction is done, will actually be getting out. So the number where people then -- some were saying, "Oh, it used to be THB 5 billion, THB 6 billion," if you really look through the numbers, they were already a little bit on the downturn, and we would not have expected them to go up in the kind of immediate or near-term future. But again, we also don't have this problem going forward anymore.
The reason why I spent a little bit of time on that is, if you look into our Bancassurance fee. And you see actually that the Bancassurance fee here is coming down. Now Bancassurance fee in that part is everything outside of SCB Life. And what we have done in the past was actually very much -- we actually gave a lot of business to other partners, and not so much to SCB Life. Right now, in order to maintain the book and the quality of SCB Life, we basically shifted business back to SCB Life.
So if you look into our pure commission income, if you look into the pure sales of Bancassurance, we were probably, last quarter, the best-performing bank in the market. And so actually, the uptick of our commission income and all of that is massively in the double-digit numbers. But again, because we're shifting it into SCB Life and SCB Life is overwhelmed by some other effects, you don't see that. But overall, we're actually quite happy with our overall Bancassurance business. And as I said, once the moment we get SCB Life out of our books, you will actually see that probably much more clearly, as we will record it then very differently.
The ones which are helping right now is loan-related fees and credit-card fees. So they are really coming in. On the loan-related fees, there's actually very much SME business, where we're getting upfront fees. Card is just our normal card business. You also see that mutual funds are doing quite well. So we are seeing quite an uptick from the first quarter, and we expect actually that this continues on that kind of trajectory. And you remember that we guided somewhere kind of 0% to 5%. That always was aspirational. You always ask the question, are you really sure. So probably, we still maintain the 0%, maybe not the 5%. But again, I still think that even if the first quarter were bad, I think we're actually pretty okay for the next half. So we still guide that we should be able to somewhat get into the flat region.
Cost-to-income ratio, because we took the 1.4% out from last time, which was actually the increase. And again, income is coming in. You see we're running at 46.2%, which is, of course, much better than what we had last quarter, but which has also started going below what we had last year, where we're running at 46.8%. As I said, you see right now, we are at second quarter, THB 16.7 billion operating expenses. If you look and you take the 17 point -- the THB 1.4 billion out, we are in the THB 16.5 billion kind of category, we're trying to maintain that. So that would then, with the exception of the THB 1.4 billion, would probably get us a little bit higher. But again, we're trying to maintain the cost discipline that we're not breaking away. I would say still, people are asking, are you done with your transformation program, or are there are some surprises coming? We're probably at 80%, 85% spent of the program and we don't think we need more. The rest is then start getting to business as usual, as we start reaping the benefits. So we should be able to finance that out of cost efficiency alternatively, if we are basically opening up new revenue sources. But again, the C/I ratio, as we guided, should be in the mid-40s and then should be coming down going forward.
Liquidity, again, you see down, 98.5%. A lot of this -- as we said, we're a little bit too high and trying to drive that down. And again, you have a little bit of an effect here of SCB Life. If you would take that out, we roughly would be at 99%. But again, I'm trying to get this down to clearly stay below the 100%. Capital adequacy, still not a lot of change, pretty strong, 17.1%. Again, there will be some changes. At the moment, we will start really closing the deal with FWD. But as we said last time, we cannot give you more information than the ones which we gave you a couple of weeks ago. Once we know more, we will let you know. But at this point in time, we cannot exactly tell you what are all the implications, depending on exactly how we close the deal. So that was very much through the results. Again, I don't go through the whole transformation program update. I think, probably just a couple of slides, I want to talk mostly a little bit about partnerships. Because last time, there were questions coming. So all the other guys -- not all the other guys, one bank is doing a lot with graph and line, and what are you guys doing? And then I said, well, there probably will be some news to be shared over the next couple of sessions.
So okay. So that's the deal we've got. Again, I think we talked about it, right? So we entered into a partnership with GET or GoJek, we made an investment. We didn't kind of -- it was undisclosed, but again, we participated in the last funding round. Again, the main reason is, and the 2 companies actually came together, is that we really believe we can actually solve a couple of customer pain points and can really help, especially, expanding merchant business and can provide better service. What we are, of course, very much interested, if you see the number of app downloads, if you see the number of drivers on all of that, they are just opening up a different set of customers, and we can also get them access to our customer base. So it's a lot about acquisition and expanding our reach into the ecosystem. So what we're doing is, we will basically provide payment solutions. And over time, we will provide kind of loan solutions, most of that is basically on an exclusive basis. So we really hope that we can actually start building that up quite a bit. And again, there will be more and more solutions launched over the next couple of quarters.
So probably stay tuned. But again, I think we are trying very much to basically build with them, very much align the line -- along the lines like what Grab is doing. Again, you will probably see more of these things coming up over time. And again, we will always start announcing them and then saying, what's the rationale behind it?
The other one, I think, what is important, and we talked about not just going with the super apps or things like that but just also using other partners. So that is just our partnership with 7-Eleven, so 7-Eleven is -- start acting as our banking agent. I think the number which I think probably is interesting to look at, so when we launched it somewhere in April, so that's kind of 3 months ago. And you see right now, the amount of deposit transaction at 7-Eleven, which represent roughly 14% of all our banking transactions. So within kind of a quarter, 14% of the transaction, which used to be in the branches are now somewhere happening outside the branches. So if you think about our attempt to structure and streamline our physical infrastructure, already 30% of the transactions kind of year-on-year are out. The ones which are still remaining are mostly cash-handling transactions. So if these cash-handling transactions can also go to a different partner that, again, will enable us, actually, again, to be much more aggressive on streamlining our physical infrastructure.
So again, this is not about just expanding physical reach, I think it's also a lot of these partnerships about being much more disciplined and open us abilities to actually think about what are we doing with our physical infrastructure and make sure that we actually use it in the most efficient way.
I think that's mostly -- because, again, I think that's a little bit of updates much more on the partnership. But otherwise, I think you can go through it or if you have specific questions, we can go through them in more detail. Otherwise, I would just leave it here.