Thai bank stocks soar

What I got for Christmas was ... some Thai bank stocks.

Christmas might not figure in the Buddhist calendar but the Thais found something to celebrate anyway. With the stock exchange open for business throughout the festive period local investors gorged on bank stocks, rather than goose fat and brandy butter.

There was barely a turkey in sight as the banking index soared 31.8% during the month, led by Kasikornbank, which put on almost 55%. Christmas was the busiest trading day of the month for bank stocks as local investors took the chance to buy into the sector before the foreigners returned from their holidays; a kind of religio-cultural arbitrage.

The boom in bank stocks reveals a revival in confidence in the underlying strength of the sector: improved results are expected, good loan growth is projected for 2004, expensive post-crisis loans are being paid off, the level of non-performing loans is shrinking and, at the same time, a government hike in land valuations is set to improve the value of collateral held against the bad loans. And, for the first time since the crisis, banks are now preparing to pay out dividends again.

Still, the strength of the rally, and the timing of it, came as a surprise. All four big-cap banks - Bangkok Bank, Kasikornbank, Siam Commercial Bank and Krung Thai Bank - surged on the days before and after Christmas and the level of local participation, according to some analysts, was unusually high for a sector that is typically dominated by foreign players.

Investors' Christmas buying spree drove prices up so far that trading in 2004 kicked off with a swift round of profit-taking. By the close on Wednesday January 7 Kasikornbank had fallen from its New Year's Eve peak of Bt65 to Bt57.5. Siam Commercial Bank was beaten back from Bt55 to Bt49.5 and Bangkok Bank fell from Bt109 to Bt101. Krung Thai was the only big-cap to carry its upward momentum into 2004, but by the year's second day of trading investors were taking profits there too.

With that mild adjustment out of the way, bank stocks look set to continue gaining in January and there are plenty of banking bulls who claim the price spurt was more than just end-of-year window dressing. The main driver behind the upbeat mood is the country's positive economic outlook.

This year's growth is set to hit 6.4%. According to government estimates it will reach 8% next year and as much as 10% in 2005.

Of more direct relevance to the timing of the Christmas surge was the good news released in early December. Imports in October were up 16.7% on the previous year to $7.3 billion, a monthly record high.

The trade surplus stood at $136 million. Manufacturing output grew beyond expectations, plus tourism and hotel occupancy rates both improved on figures from the previous year. And, perhaps most important for the banks, the industrial capacity utilization rate rose to 69.1%.

"There has also been a dramatic improvement in corporate debt," says Bob McMillen, CEO of Seamico Securities, which helped rehabilitate Nakornthai Steel Mill after a three-year suspension from the stock exchange. On the first day that trading resumed, in November, its stock rose almost 130%.

"More and more companies are successfully completing restructurings, which all flows back to the banks," he adds.

All of this leads analysts to expect healthy profits for the Thai banknig industry in 2004, fuelling expectations that many banks will use the excess cash to pay off the hybrid securities, which have been a drag on their balance sheets since just after the crisis - the average cost of these instruments is about 11%.

Thai Military Bank completed early repayment of Bt13.3 billion of hybrids in December and, in the same month, Bangkok Bank offered 533 million new shares as part of a plan to pay off its Bt46 billion of hybrids.

Bank of Ayudhya, DBS Thai Danu Bank and Kasikornbank have all announced similar plans to make early repayments.

Also, as part of its financial master plan the government unveiled measures this week to encourage smaller banks and financial institutions to merge, which is eventually expected to boost competitiveness across the industry. Thailand is presently home to 83 financial institutions, which Bank of Thailand governor Pridiyathorn Devakula considers to be too many.

The new merger-friendly rules also spurred a boom in the rumour industry. Bankthai and Industrial Finance Corporation are odds-on to be the first merging entities under the new rules, but the favourite tale doing the rounds is that ABN Amro is looking to offload its 75% stake in Bank of Asia to UOB Radanasin Bank.

To be sure, its stock price ended the month marginally lower than where it started, apparently reflecting investor uncertainty about the bank's future. And ABN's representative on the Bank of Asia board, Felix van Kleet, stepped down from the position on January 7, convincing investors that something was afoot.

Bankers close to the matter dismiss the talk as idle gossip. They say Bank of Asia missed out on the rally simply because it hasn't gone on the record about issuing dividends.

"It's the same thing at DBS Thai Danu," says one banker. The market, meanwhile, prefers to look at what they consider a more pertinent similarity: the fact that Singapore's DBS is trying to negotiate a merger between Thai Danu and Thai Military Bank.