Edited Transcript of SCB.BK earnings conference call or presentation 20-Apr-20 10:59am GMT

Q1 2020 Siam Commercial Bank PCL Earnings Call Bangkok Jul 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Siam Commercial Bank PCL earnings conference call or presentation Monday, April 20, 2020 at 10:59:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Arak Sutivong The Siam Commercial Bank Public Company Limited - President * Jens Lottner;Senior EVP & CFO ================================================================================ Presentation -------------------------------------------------------------------------------- Arak Sutivong, The Siam Commercial Bank Public Company Limited - President [1] -------------------------------------------------------------------------------- Welcome to the earnings call. And this is a virtual meeting, and I certainly hope that -- while we can't see you, but we certainly hope that you stay healthy and safe. Over the next 1.5 hour or so, we'll be sharing with you the results for Q1 as well as giving sort of a discussion on the outlook which is, I think, something that you are most interested in. But please also bear in mind that this is still early into the process, right? We're -- as a country, as a world, we are entering in this unprecedented crisis. So in that sense, we'll try to give you some dimension of how we see things. But at the same time, please take this whole thing with a grain of salt. I think we'll be able to see more and assess more in Q2. Now let me start by introducing the panel. We have a full set of team here. On my left, President Khun Apiphan; in the center, you know him, Khun Jens; next to him, President Khun Sarut; and the right side most is our Chief Risk Officer, Khun Anucha. So all of us will be here to answer the questions. But primarily, in the beginning, next 45 minutes or so, Khun Jens will be walking us through Q1 results, and we'll save sufficient time for Q&A. You can do Q&A by sort of unmute and ask the questions, and we're going to do some. Hopefully, we can manage the logistics. Alternatively, you can also send in the questions. Some of you have already done so. Towards the end, what we'll do is that we'll read all the questions that have been asked but not yet asked in the live session. So we have with that. I'll hand it over to Khun Jens to go ahead and take us through. -------------------------------------------------------------------------------- Jens Lottner;Senior EVP & CFO, [2] -------------------------------------------------------------------------------- Okay. Yes. Good morning. I think what I'm going to do is to take the mask off here because otherwise, it might be a little bit hard to hear me. So we can just get the presentation off, please. Okay. So as Khun Arak has said, I'll basically run through the key numbers over the next 40 minutes or so. And please hold your questions and everyone mute, and then we open up the floor. So first of all, let's say, this is probably a quarter which requires significantly more explanation than usual. And some of that is because we have some structural changes in the way how we are reporting. So that has 2 elements to it. One is TFRS 9, which, again, changes the way how we are doing some of the income recognition but also loan staging. And then also the fact that now for the first time, our Bancassurance partnership with FWD comes completely through. You will see some of the changes in the numbers. And then, of course, we have the whole COVID situation. So there are the unique programs coming in, debt assistance measures. We get some guidelines from BOT, to be fair. And we -- a lot of this is only taking place right now, so it's not affecting so much Q1 numbers. But again, we will try to point out where we believe some of these numbers going forward will actually be affected by some of these measures. So the way we thought on running the presentation is what we just quickly talk about key changes on the TFRS. And the reasons for that -- because otherwise, we would have to [un-footnote] a lot of numbers in the first quarter because we would always say, this is now with, without. So we give you an overview so that you can actually have this in mind when we look through the first quarter results. And then we talk specifically about the outlook of -- and what we are seeing, what we can probably already say and where it's a little bit [drag]. So key changes under TFRS. Basically there is a group of things under classification measurement, and there are some under impairment. Classification measurement is mostly about interest income recognition. Some elements on the fee income side and then also on how do you recognize capital loans. And then the other one is loan classification as well as provision. So first, interest income and fee income recognition. As you know, going forward, we will actually report effective interest rate, so over the life cycle of a loan. That means is if you have contractual rates, which vary over the loan life, then you will actually rather report an average rate than actually showing these step-ups. Because we have a lot of book, especially on the mortgage side, which are having these step-ups where we have a relatively low rate in the first 3 years, which would then go up, we actually start seeing higher income recognition. And so for the first quarter, that amounts up to 30 bps in NIM or if you translate that to NII, it's roughly THB 2.2 billion. So that adds on top of our normal NIM. And so therefore if you see a higher NIM, and some of that actually comes straight, all of this different income recognition. On the other hand, you have fee income recognition where you are supposed to amortize that over the life of a financial asset. So that is mostly (inaudible) loans. So if we have front-end fees, commitment fees for loans which we're providing or granting, then that is supposed to not be booked in one go but actually both over the lifetime. So because of that, we actually have a lower non-NII of THB 0.7 billion. So that actually is reducing our non-NII income. And the amortization will basically [unbooked] up in NII. So therefore, again, if you see certain drops in -- especially loan-related fees, again most of that is due to that different income recognition. Secondly, the way how we are thinking or how we are classifying our investments. So you know that used to be general investment hedge maturity availability for sale or trading. And going forward, you only have a characterization basically what is amortized cost, what goes as fair value to P&L and what goes to OCI. As you see, only the element of fair value to P&L is roughly 11%. That's relatively small but still kind of sizable number given our balance sheet. And the only thing why that is important is you might see somewhat more fluctuation in mark-to-market losses than what you have seen in the past. And losses cannot be gained, so there's a little bit more volatility. And, again, given the size of our growth, not material but within a quarter, especially if we see these massive market disruptions like what we have right now, you might actually see some of that coming through, which was not so much in the past. The other one is, I think people might be looking at it because, especially equity investments, might actually go or people might be concerned about. And you see that only the smaller one is actually going to P&L. But the larger part is actually going to OCI. And a lot of the increase was mainly because of the fact that we bought units from the asset management company and as some part of BOT measures in order to get a little bit of panic away as some of the mutual funds, especially the money market funds started to get liquidated very, very quickly. And so we've provided liquidity by buying some of the units. Again, temporary measure, which will probably go and disappear over the next couple of months. So lastly, there were a lot of questions raised already beforehand; where is staging, how much is in Stage 1, Stage 2, Stage 3? As you see on Page 6, we have the old classification and the new one. Again, if you see, of course, loan performing has not changed very much. But then special mention compared to stage 2, which now stands at roughly 8%. And some of that is because what used to be underperforming, which were some of the restructured loans, which were -- and from our perspective, still completely performing, is now classified under Stage 2 even if it is performing because it went through a significant increase in credit risk over its lifetime and therefore, has to be classified as Stage 2. The overall amount and allowance, and we are standing at THB 117 billion, and at the end of the year, we were at THB 114 billion. It's basically and mostly in Stage 3. But then, again, kind of equally split between Stage 2 and Stage 1. Again, these numbers, probably over time, will also vary. And of course, it has not yet reflected the COVID impact. So this is, at this point in time, March 31, and mostly has not yet seen stage migration of some of the loans. We're trying the program according to the measures announced by BOT but also actually very much in line with the other jurisdictions as well. So that's just the area of TFRS. So higher NII and somewhat lower non-NII. We booked some of that investments into P&L and impact, which means somewhat higher volatility. And then the allowance and basic process, we don't have any excess, but we're actually putting all of that into our existing Stage 1, Stage 2 and Stage 3. So with that in mind, talking about the numbers for Q1. And it actually had been a pretty strong operating performance before the onset of the pandemic. As you see, the total income has grown basically roughly 9%. That is from both ends, NII as well as non-NII. And NII, even if there was pressure on the loan book, and so loan decreased by roughly minus 1.4% instead of 3.5%, what we had in mind. But then NIM went actually up quite a bit for 2 reasons. The one is the 30 basis points I just talked about. But the other one is true that there was already a measure in reducing FIDF from 46 basis points to 23 basis points, which actually helped on the cost of fund side. So while there is the pressure on NII and overall margins were actually going up, we see 3.54% compared to 3.34%, which we have before, which is above the guidance. But again, we expect this to come down over the year. First, because we have to pass through the FIDF. But then, again, we will probably still see more margin pressure as that will be applied to more quality. In terms of non-NII, it was really strong quarter, 20% up, mostly from wealth and Bancassurance. And wealth, of course, given the market turbulences even as people went out, but there was a lot of activity. And then on Bancassurance, what you will see is that, and right now, we have the first quarter where we really get the full elements in from the deal with FWD. And there are additional bonus payments which are coming in, which actually made this look very, very strong. In terms of net -- or basically cost income ratio because both -- no, OpEx, sorry. OpEx is actually coming down. We're roughly 8% to 9% down compared to year-on-year but also quarter-on-quarter. And we will continue to do that because it's actually pretty much one of the very few variables we have completely under control. So cost-to-income ratio is actually standing at 44%, lower than the guidance. But again, given the fact that income will be under pressure, we expect this to drop. The pre-provision operating profit was pretty strong, 27% up. Adjusted costs on both sides, of course, were pretty well for us. Liquidity is strong, 92%. A lot of this is, and I'll go to that in more detail, is coming because a lot of people liquidated their positions, but there's also a flight. And again, to quality, some of smaller banks were using money, and it's deposited with big banks. So we are actually having ample liquidity. NPLs, before COVID, we had actually down because of NPL management. We sold a couple of portfolios, but we also rolled off. So coverage ratio is pretty high because we also provisioned 185 basis points in term of credit cost. And please don't take this as this is the new normal for the rest of the year. I'll go a little bit into more detail on why we did the 185, which is a combination of different elements. So -- and then CAR and Tier 1 and equity is also still pretty strong. So let me go a little bit into more detail. First, if you see total operating income, non-NII, I'm now on Page 10, non-NII, NII. You see NII, while down quarter-on-quarter, is mostly, again, because of the deconsolidation of SCB Life plus the fact that we have 2 more rate cuts which, of course, are eating into the NIM. But then as you see year-on-year -- sorry, NII is actually 4.3%, still pretty strong because we have the effects I just talked about. And then quarter-on-quarter, despite the drop in the -- to rate cuts, we still have FIDF coming in via TFRS. So that's actually where most of the strength is coming from. If you see non-NII, the reason it's down quarter-on-quarter is because, in the last quarter, we took a lot of profits to mark-to-market from our equity positions. And because under TFRS 9, we would otherwise have put it to OCI, and we put it actually to P&L. So this one is down, but then if you compare to year-on-year, it's actually pretty strong performance with plus 20%. So growth is down. I think no surprises there. If you see our overall portfolio, we are down in most areas. The only one where we are still kind of holding it mostly is SME and also on the corporate. But again, SMEs even in the long term, a little bit stronger than corporate loans. But again that will probably change as we go forward and talk a little bit about that. Retail loans are down, and some of that is just because we're tightening our underwriting criteria, especially on the auto side, on the housing side. Auto is part of the portfolio. We are really looking very, very cautiously onto that one. Unsecured is down, again, also because of the tightening of the underwriting criteria. But we still keep it up on a year-on-year basis because we still believe that with the right selection and the right margins, we're actually having a profitable product here and part of the profitable segment, which we're going after. Net interest margin, as I said, we see 3.2% goes up to 3.54%. And most of that comes yield on loans, but you also see that the cost of funds and cost of deposits are coming down. So it's actually on both sides. And we're getting the relief. But then -- and we have not yet seen the full -- giving it back to customers. So the 40 basis points reduction on all the M-based loans, which we just recently announced with all the other banks, has not really find its way in. So please expect that to come down. But again, at 3.54%, we still actually still have some room to go given the fact that we targeted around 3.2% to 3.4%. We buffered anyway. So even if it comes down, and it should actually still look somewhat reasonable. And Page 14. We are on the loan breakdown, just giving you an idea of yields. What you see again, if you look at housing loans -- so the overall portfolio is pretty stable, right? So we're maintaining that pretty much. What you see is on the housing loan side is actually where you have a massive uptake on the yield, basically on TFRS 9, which is exactly where we said it would happen. And given the size of the portfolio, just the pure size. And it actually makes quite an impact to our overall NIM situation. But again, as we start pending some of that over -- of the FIDF rate cuts and to some of these portfolios, we would see that some of that will go down going forward. On Page 15, we show the little bit breakdown of the loan portfolio or the quality. And so you see Stage 3, Stage 2, Stage 1. Again, Stage 2 is pretty hard to compare because there is nothing like this in the first quarter. But what you see is on Stage 3, somewhat it's going down. New NPL are coming in a little bit lower. Some of that is just because we put quite a little bit in qualitative assessment in the fourth quarter of 2019. And so therefore, we already qualitatively expected some of that to happen. And so therefore, this quarter, we don't have to do so much. You see that, especially on the SME side, because this comes down from 1.97%, where a lot of these qualitative assessments actually took place, down to 1.12%. However, I would still say, overall, we still, of course, have pretty elevated levels. We see auto loans are up. And you see that housing loans is at least at the same level we have beforehand. And corporate, of course, is down. Again, I think that also should give you some idea that it's not like we're putting everything and do stage migration upwards and we keep everything red. I mean if we see things which are really not working already in quarter 1, we also basically put them into the right [partners and provisioning]. So in terms of our provision, I talked about it. We see 185 basis points. So that is a combination of 2 things, right? One, it is actually our normal provisioning against just NPL formation -- normal NPL formation. But then you know there's the cyclicality of the ECL models under TFRS 9, which require you to have a forward-looking perspective on what can actually happen, especially on the macroeconomic factors. And we've chosen to basically look into a relatively stressed scenario and provision against that case already in the first quarter. So we looked to the models, run them under stress scenario and the additional requirements which would be coming in, and we basically put it. So this is a one-off exercise. Don't expect that to be continuing. So therefore, it is elevated. On the other hand, again, we have not COVID in yet. So as COVID comes in, we will see how that actually works its way through the cost. But there will be the relief measures which will postpone some of that going forward. And once we have more clarity, we will impart it. But again, the ECL deterioration, because of macroeconomic factor deterioration that has happened in the first quarter -- in this first quarter. Coverage ratio, therefore, has gone up because we have -- NPLs came down, and we put in more into our provision. So we are now at 140% at a total allowance of THB 117 billion, which continuously started to build up over the last year from THB 104 billion. So now it's THB 13 billion more. But again, it's just a continuation from some of the exercises we did in quarter 3 and quarter 4 last year. Page 17. That is now fee income. Again, you see nonrecurring and others. Nonrecurring is down for exactly the reason I said in the fourth quarter and then it’s written up here [in the next line]. We did some profit-taking, but then recurring is up 30% year-on-year and 8% quarter-on-quarter. So if you look on 18, the main reason is actually Bancassurance. So on the Bancassurance side, first, there was a very, very strong quarter and a lot of commission income. But then as part of our arrangements with FWD, if there are certain productivity levels, which the bank is hitting, there will be also extra payments made and extra bonuses coming in. And so that is reflected right now in the number. And again, the commission income probably will be challenged just because we are -- right now the social distancing, it's very hard to sell Bancassurance products because they actually need to be closed in the branches. And we also just -- a lot of people don't want to take appointments. So that will probably be challenged for quarter 2, maybe quarter 3. But again, it should still be at a significantly higher level than what we used to have. Wealth management is continuing to be strong. But again, right now, in the current market situation, people are very careful. So we expect that to somewhat come down. Lending-related, again, that is where I talked about TFRS. And some is coming down because of TFRS. But the other one is also -- we already saw that -- and credit card spending was coming down. And as tourists were going down, people started and stopping traveling, and people were just a little bit more cautious. So that is also part of the drop in lending-related fee income. And then transactional banking, again, we guided this also before, and we expect this as a more secular trend to go down. But again, given here, FX, some of the normal transaction banking-related areas just as they were. So that's tourism and all of that was also coming down. So -- but again, at this point in time, all more than more compensated by a very strong Bancassurance and wealth management. On 19, this is, as we said, we see on the transformation program last year. So some of the numbers, of course, I know by the fact that we're also deconsolidating SCB Life. But as you see in some of the areas like marketing, which is coming down. Just because one thing has been more efficient in the way how we market, but the other one is also that some of the business activities are coming down. So therefore, volume-related costs are coming down. But then under others, others were actually getting elevated. There were a lot of fee related elements for some of the transformation programs. That has come down. You see premise and equipment, even if that has some elements of IT in there, just because the fact the premises are now we start getting out, some of the closures are -- and benefits are now taking full effect, we also see this number coming down. Depreciation is still going up as we run our investments through, and we would still see that coming in. Some of the CapEx, again, has been completely disbursed. We're expecting somewhere stabilization around THB 1.7 billion going forward. But overall, we are very clear that we don't want to see an absolute number of what we had seen last year of THB 17.5 billion. The overall number should be lower. Again, if it will be THB 16.4 billion, we try to maintain somewhere on that kind of trajectory but see if we can do actually better. So with that, C/I ratio, I mean, this math goes down to 44%. But again, even when we go up on the cost side, we see downside risk on the revenue side, which, again, drive C/I ratio somewhere up. Liquidity position, as we said, very, very strong because we had a lot of inflow on the CASA side, operating accounts, also banks, corporates, a lot of them keep liquidity, people liquidating their position in the markets. We see CASA is actually coming up. Liquidity ratio, liquidity coverage ratio, all these numbers are pretty strong. And then capital is down some, and the drop right now is in first quarter because we paid dividends. And again, as we start appropriating the profits in the second half -- or from the second half of 2019, these numbers will be coming up again. So again, going into that situation pretty strong. I think maybe that's the point also to talk about the cancellation of the treasury share buyback program. And we still maintain that we're actually in a very strong capital position. And the real reason is that, on the one hand, you never know. So I think, better safe than sorry. But the other one is also, we believe there will be other opportunities coming up, which might give good returns. So we will expect that, as long as the corporate bond market is somewhat frozen, that some of our customers actually want to go out and want to lend again and we're still ready to help at acceptable rates. But we also believe that maybe some other institutions might not come through the crisis as well as we hope we will get through, which should only cut some opportunity. So therefore, preserving that capital and to even looking to M&A opportunities is probably the better way to create shareholder value. So again, not that we are considering any scenarios where we are and getting into such a stress scenario that we need that capital. But again, just from a prudent perspective as well and trying to take opportunities. So the outlook. As you see, and I'm not going through all on what our EIC is constantly reporting. But if you see some of the GDP scenarios slide for this year, minus 5.6% and export growth down, and policy rate, probably still going a little bit further down. I think this is -- we're getting into a really unprecedented area. And it should be just right there, we have not seen that yet completely reflected in the numbers for the year. So on Page 25, what we're trying to do is we basically going a little bit through the relief measures, the packages and basically just saying, "How do we expect that to influence our P&L and our balance sheet?" So I mean the Board -- the interest rate cuts, the 40 basis point cut very clear and the yield on loans would actually go down. You've seen the cost of funds already. But again, I think the BOT will pretty much watch that whatever we gain on the cost of funds will be given back to the loan. So net-net, we believe actually this overall effect will actually [yield more sharpness]. In terms of the grace periods, payment holidays, lower minimum of kind of amounts due for credit cards, personal loans, all of that, it will drive our loan outstandings. So again, even if we were down minus 1.4% for last quarter, we expect that actually to go up. We also expect NII to go up. Because right now, a lot of this is actually on payment holidays, but we are not forgoing any NII. In some areas, yes, but not on these payment holidays relief programs. So it's still a growing interest. And even if we are provisioning against some of that because some of that might not come all the way through SCB loans might actually deteriorate over time, and we would still see some positive impact. Credit costs, of course, will also go up because some of these payment holidays we might actually have companies who ultimately will not be able to restructure. So we then have SSME, SME and some of the additional relief package of soft loans and payment holidays again. And the impact roughly will be always the same, at least on the balance sheet side. So the loan outstandings will be driven by that. And again, we therefore expect actually loans still to go up. And some have a positive NII. I think on some of the soft loans, NIM will actually going down because we are kind of cut off by 2%. And so therefore, if you run at a rough 3.54% right now, at 2%, of course, that will kind of bring the average margin down. But again, on the other hand, it also has a cost of funding at 0.01%. But again, that will add into the NIM. And on the credit cost, we just have to make sure that we are very, very careful in terms of how we're underwriting. Because in the end, we've seen that also with other loan programs and relief program and soft loans. And actually, that was pretty good business for us as long as we're very clear who we were actually underwriting. So if we're doing this very much shotgun, which we're not intending to do, we should actually have this part of the credit cost under control. But again, credit costs over time will clearly go up. We don't know exactly right now how much. So if we take an overall look at our loan portfolio because then we'll, of course, is one of the questions how will that look going forward. So retails from an area where there's been concern on the other hand, especially mortgage portfolio is very well collateralized. And then if we look into the unsecured loans, we only have 6% of total loans. And they actually have a higher margin to absorb some of the losses. However, we clearly take the underwriting criteria, the growing in the segments where we believe we actually can still get the right returns. So then even -- and if we will see some stress on the portfolio as the price continues, we believe actually we're pretty prepared on that one. And SME, it's a relatively small part of our portfolio. Also, the SME portfolio in itself is actually very well collateralized. And so the real SME portfolio is stable. Some of the growth rate in the past were mostly on SSME, which have given us much higher margins. And then we already took quite some downgrading already in quarter 4. So that's when you go back to the numbers. You saw actually that these -- that there was a major spike, 1.97% in quarter 4, which was exactly for these qualitative assessments. So already we started to look into this portfolio much more in the past. And then the corporates, I think it's a well-diversified portfolio across all the industries. The utilization rates so far have remained pretty flat. We don't see any pickups that people really start drawing down the lines. This is all kind of rather in business as usual, and we watch these utilization, of course, pretty closely. We believe, again, as I said, that as the capital markets are tightening and some might find it hard to finance through the capital markets and corporate bonds, that there are opportunities for revenue expansion. Again, on the other hand, we don't want to be the guys who are just replacing kind of this with relative cheap loans. So we will make sure that we actually get the right risk/return profile for that. The strategic priority is pretty clear. We want to help our customers, that's the first priority. And I think it's very important to understand that we believe proactively signing up customers to the relief programs is actually helpful. So if the numbers are high, that is kind of -- it's not an area for concern as long as it's not going, let's say, 80%, 90%. But if it really goes up to higher numbers like 30% or 40%, we believe that is okay because what we're clearly seeing from prices in the past, it's better to help customers while they have a kind of -- to stay in the picture to have a cough than if they're on the ICU. And that is not very good. So therefore, we early identify, we assist and we cooperate clearly with regulators in this whole market stabilization. We monitor our portfolio. And we will make sure that those who cannot be helped or which really need deeper restructuring, we look into that. And we also provision accordingly and then we focus on the quality and with a cautious stance. This is not the time to very, very aggressively expand into new areas. We use our digital channels. And if there was ever a reason to basically be very keen on digital, we can actually provide most of our products through Easy and [pure] investments funds, non-life, insurance deposits. So we will continue to do that and make sure that actually technology infrastructure remains pretty stable as we see more and more people coming on to that platform. And then costs is probably what we can control the most, so that's where we will focus and make sure that we tightly manage the cost base without sacrificing the investments we need to make in order to create the capabilities going forward. And then I talked about it, if there are opportunities, we are still having the means and the capital to take care of that usually. And what [number of good prices unused]. And I think we're following a little bit with that paradigm. So we will not give guidance yet because this is just too early. I think we just wanted to summarize a little bit some of the points I made. I think the loan growth probably with the demands from the corporates, the soft loan program and people that are stock repaying, we expect loan growth to go up, interest margin to come up. And it's a great year that it needs to be a pickup. But again, we also believe there's still way to go from the focus on the unsecured. And as we see going down to the lower end, lower boundary of our margin and guidance, we still have 3 point -- 0.34% to go. Non-NII will be coming down just because on the banca side and the volatile markets might deter some of the wealth customers to really go back into markets. Again, we will see what quarter 2 has in store and then -- and you'll see quarter 3, quarter 4 comes up again. So therefore, even if we control costs, if the revenue side comes down, cost income probably comes up. By then, we really will make sure that the cost is as good as we can be. And then NPLs, credit cost, coverage ratio that is really still up in the year. We have a couple of questions to that extent, and we try to answer them as much as we can do. But to be also responsible, whoever said right now, they have a clear grip on that and I am not quite sure they have completely comprehend the complexity of some of that. The only thing, as I said, the 185, please don't take this as guidance that this will be the rest of the year. It has one-off element in it to take care of some of these macroeconomic scenarios I pointed out some pages back. So that's Page 29, and that actually ends it. I think we should spend most of the time right now for before questions and answers. Thank you.