Thai banks' liquidity conditions finally improving, margins likely to be stable

Broad money supply grew 9%.

According to Nomura, domestic liquidity conditions are improving, having been weaker since the floods. Broad money supply growth (seasonally adjusted) accelerated to 9% y-y in May-13 from 6% y-y in Feb-13 (peaking at 13% in Jul-11).

Here's more from Nomura:

Note that domestic liquidity conditions have generally been tight post the 1997 financial crisis and were affected by rising oil prices post 2003 and again in late 2007 (Thailand’s oil imports rose from 6% of GDP to 14% post 2003).

Margins are likely to be stable/up slightly in 2Q13 and our LT view remains that margins rise. Margins have been under downward pressure since 3Q11 (and peaked at the end of 2007) following downward moves in interest rates.

Whilst our economics team sees the risk of a further 25bps cut in policy rates (to 2.25%), our base case view is that medium-term interest rates in Thailand have bottomed.

With bonds and equities having sold off, there is some downside risk to our non-interest income assumption for 2Q13. Increased bonds and equities have underpinned higher non-interest income for the banks since 2011. Our current assumption is that whilst down from 1Q13, non-interest income remains relatively elevated.

Note though that noninterest income to assets was stable in 2008 (from 2007) at 1.5% primarily on higher fee income. Our current view is that non-interest income to assets rises from 1.8% in 2012 to 1.9% in 2013 (and to 2.0% in 2014); 1.9% in 2Q13 versus 2.0% in 1Q13.

The risk of lower non-interest income would also put upside risk to our cost-income assumptions. For 2Q13, our cost-income projection is 47% (down from 49% in 2Q12 and up from 46% in 1Q13).

Note that cost structures for the Thai banks have been improving since 2010 on stable cost-asset ratios (following the end of their expansion post 2004) and improving revenues.

In 2008, cost-income ratios rose (although this reflected a costasset ratio that increased from 2.23% to 2.36%. Our current assumption is that banks’ cost asset ratios fall to 2.31% in 2013F from 2.34% in 2012 and 2.42% in 2011.