What about Thai Bank stocks.

Since 1997 I have continuously advocated owning most only Thai smaller capitalized value shares which pay high current cash dividends. Ever since this expressed view, contacts, members and strangers alike have written me regularly asking: "what about the Thai Bank stocks?" Are they not now finally turning?

We may be closer, I agree -but I still rate this sector "avoid".

Back in 1999 the bank stocks here had a good price rally and more then a few e-mailed me then with their own various bullish reasons why this time they said "I would be wrong, as surely the banks now had turned!". The rally burned out by year end, as it did the next year. But before that, one stranger tried hard to discredit me with CNBC-TV, because I did not agree with him on that point.

Now again the good question emerges: Should a rational long term investment stock portfolio in Thailand now start owing some bank shares again? While the answer always depends whom the investor is (like an institution or individual for starters), I still think it is wiser to allocate to choicer picks and so underweight the Bank sector. Surely on a quarter to quarter basis I could be wrong but my view here is 2-3 years out. The reasoning is still that one can do better by looking beyond the bank shares on the SET.

Here are some points I observe which are no doubt all valid to some degree or another. They summarize my thinking on why I keep being shy on Thai Bank stocks.

1. Inefficient and overstaffed along with record high interest spread. Banks, more so then other businesses in Thailand, are rather inefficient. Staff per customer, cost per transaction and having globally among the highest interest rate spreads at hand and, yet still not very profitable. (The interest rate spread is the difference between cost of deposits and prime bank lending rates). A high percent of non-paying loans on their books and far too much cash deposits in millions of smaller savings accounts. Further, not enough viable lending projects especially since most banks here are married in doing most only land asset based lending.
2. Dis-intermediation of savings not to their benefit. While long overdue, this is slowly happening and a new SET bull market will fasten this considerably. Both savers and borrowers are learning how to get beyond the banks for their respective needs. While still very dominant, Thai Banks' saving customers are "growing-up and wising-up" to a more sophisticated savings vehicles. In the future local Banks will be less dominant in the Thai financial system, I believe. While exaggerating a bit to make my point, one could call the banking industry here, a nouveau sunset industry.
3. Manufacturing not servicing are the strengths of a developing country; experience shows there is better long term earnings & dividend growth to be achieved in dominant companies in the non-service sector. With one exception and that is tourism, unless of course more tourism terror strikes.
4. Thai Banks in general are still some time off in paying any meaningful dividends. This makes for a big minus point all in itself, in current dire investment times.
5. When a stock or industry is overanalyzed one tends to overvalue the sector. This certainly just happened in the Telecom and High Tech sectors around the world. By far, no group of stocks or sector is more analyzed then these Thai Banks!
6. As the Thai economy keeps chucking nicely along, the excess deposit base now at hand will start to evaporate in late 2003. Invariably domestic interest rates will raise and I do not see how the Banks would benefit earnings wise, from this turn? Their net margins might well be squeezed and so the sun-set industry label more apparent.
7. Last but not least, the Thai Banks industry p/e is around 8-9 and so higher then say the average p/e of our latest published model portfolio called "The Crash Resistant Portfolio ( see October 1 '02). And as stated the expected dividend income is zero. I do not see much changing on this in year 2003. Again contrast this to the fat 7-13% annual yields that other choice Thai stocks provide. High cash dividends more then anything prove that solid earnings are truly at hand, and that they are for real.

So then one may rightfully ask why does the market price these Banks relatively high? One answer may be that I got it totally wrong and that Bank earnings are about to surge next year and so, dividends follow. Yes true, I could always be wrong.

Yet, you all know my answer and here it goes again: Liquidity commands a large & undeserved premium on the SET as:

1. The institutional investors can consider (most) only the largest cap Thai Stocks and brokers often advocate individuals to just trade, even to those whom are not inclined so.
2. Through the (visible to us) hand called "behavioral finance", large capitalized shares on the SET remain to high priced - this as when compared to their high yielding smaller cousins. This build in liquidity premium is no longer justified in a new environment of very high dividends (which fewest large cap stocks provide) and record low bank savings deposit rates. Not to mention, the "big is often not beautiful" reality we global citizens have witnessed lately on various fronts.

Surely this half decade old reality has given to many very large capital gains which I know more then a few of you have realized -and for some time already.

I for one am proud to have helped many others over the years in seeing this veritable wealth building phenomena. All materialized in front of my very eyes. And yes, I think it will continue because most are still very undervalued considering their growth prospects.

Indeed these size-distortions are the single biggest reason why individual investors, Thai's and Foreigners a like, should remain "investment-exited" here. But for now, do not count on the various SET or Broker seminars to tell you about these real market distortions, nore about these proven "investment jewels" -working for long already to your benefit.

Best Regards to all our Valued Members,

Paul A. Renaud.

www.thaistocks.com