Kiatnakin Bank

Kiatnakin Bank Plc (KK)
 

Investment thesis: We are optimistic about KK’s FY12 outlook, premised on: 1) lower loan loss provisioning after setting special provisions for the 4Q11 flooding, 2) swifter lending growth, led by a sharp recovery in HP business, 3) synergy-building with PHATRA following the merger in 3Q12 and 4) NPA sales expansion. Hence, we conservatively forecast FY12 profit growth of 5% YoY to Bt3bn, which would enable the bank to maintain a generous dividend yield of 7.9% (the highest in the Bank sector) for this year. Our TRADING BUY stands with a YE12 target price of Bt36.
Ambitious loan growth target of 21%, led by HP: KK is optimistic about the prospects for FY12 lending expansion, especially HP for new and used cars. Management has set a loan growth target of 21% for this year after the bank reported a 26.5% lending increase for FY11 (our assumption is a more subdued 17%). KK guides for HP (71% of its portfolio) portfolio expansion of 22% in FY12, following 30% in FY11.
NIM set at 4.3% for FY12: Given anticipation of a swift recovery in demand for HP and the bank’s greater emphasis on the high-yield used car market, it guides for an FY12 NIM of 4.3%. Note that KK hasn’t factored in the BOT’s planned new fees on deposits and Bills of Exchange into its NIM guidance.
Lower LLPs in FY12: The bank plans to set normalized loan loss provisions in FY12 after heavy LLPs of Bt1.2bn for FY11, due to the flooding. It guides for an FY12 credit cost range of 0.5-0.8% of total lending. KK has an NPLs/loans ratio target range of 3.5-3.7% for YE12. We expect the bank to set FY12 LLPs of Bt1bn.
Synergy-building with PHATRA: The deal presents a fundamental win-win scenario. A much bigger capital base would enable PHATRA to take larger slices of big-ticket underwriting deals (PHATRA’s current paid-up capital is Bt1bn; KK’s is Bt6.3bn). Also, being part of a bank would make funding costs much cheaper for PHATRA than they are currently. On KK’s side, it takes delivery of one of Thailand’s leading stockbrokers (with an excellent investment banking operation) and a new source of income—income that should expand with the greater capital size and cheaper access to finance afforded by the merger. KK guided for FY12 ROE of 13-15% before the deal.
Outlook
Ambitious loan growth target of 21%, led by HP: KK is optimistic about the prospects for FY12 lending growth, especially HP for new and used cars. Management has set a loan growth target of 21% for this year after the bank reported 26.5% lending expansion for FY11 (HP rose by 30% and corporate loans by 18.5%). KK guides for an HP (71% of its portfolio) lending increase of 22% in FY12, driven by significantly higher new car sales. Note that Toyota forecasts domestic new car sales of 1.1m units in 2012, up 38.5% from the 794,000 units sold within Thailand last year. Our KK loan growth assumption for FY12 is currently 17% (more conservative than the bank’s target of 21%). 
Positive about NIM sustainability in FY12: Management guides for an FY12 NIM of 4.3%, close to last year. Strong lending growth and changes to the funding structure will enable the bank to sustain its good NIM this year, according to executives. Note that KK plans to increase its proportion of current & saving deposits (CASA) from 7% of its total funding to 20% by YE12 in order to mitigate its dependence on Bills of Exchange (B/Es; 40% of total funding at YE11). Note, however, that the NIM guidance doesn’t factor in the BOT’s plan to start levying new fees on bank-issued B/Es and deposits, starting July 1, in order to service FIDF debt.
Lower LLPs in FY12: KK plans to set normalized loan loss provisions in FY12 after heavy LLPs of Bt1.2bn for FY11, due to the flooding. The bank guides for an FY12 credit cost range of 0.5-0.8% of total lending. It has an NPLs/loans ratio target range of 3.5-3.7% for YE12. We expect KK to set FY12 LLPs of Bt1bn. Note that management said it doesn’t plan to write back the extra loan loss reserve (Bt300m-400m) from last year to revenue.
NPA sales target of 3.5bn for FY12: Anticipation of a swift post-flooding economic recovery emboldened KK to set a higher NPA sales target of 3.5bn for FY12, up from Bt3.2bn last year. The bank aims for a mean profit margin of 40% from the sales  (basically the same as in FY11). We believe the targets are achievable, assuming GDP growth of 4% this year (but we wouldn’t be so confident in the achievability of the NPA sales targets if we were to rely on KK’s in-house GDP growth forecast range for 2012 of just 2.5-3.5%).
What the merger with PHATRA could mean: The deal, slated for 3Q12, presents a win-win scenario. First, a much bigger capital base would enable PHATRA to take larger slices of big-ticket underwriting deals coming up next year (PHATRA’s current paid-up capital is Bt1bn; KK’s is Bt6.3bn). Also, being part of a bank would make funding costs much cheaper for PHATRA than they are currently. On KK’s side, it takes delivery of one of Thailand’s leading stockbrokers (with an excellent investment banking operation) and a new source of income—income that should expand substantially over the next couple of years with the greater capital size and cheaper access to finance afforded to PHATRA by the merger. Note that KK’s capital adequacy ratio is high at 15.4% with Tier-1 of 14.7%.
The bank claims that new assets under wealth management would increase from Bt100bn to Bt200bn immediately post-merger. There should be scope to build the client base further and introduce new products, such as new mutual funds, derivatives & derivative warrants and stock lending & borrowing, which would boost fee income. Note that KK plans to transfer all its securities units—KK Securities and Kiatnakin Fund Management—to the PHATRA side of the operation (led by the existing PHATRA management team).
The liberalization of brokerage commissions this year means lower revenue for securities companies, but PHATRA is Thailand’s leading prime brokerage and has an excellent IB operation. As such, with the financial advantages conferred by its merger with KK, we expect it to emerge as one of the winners from the next wave of securities industry consolidation. Note that its FY11 securities trading market share was 4.76%, up from 4.2% in the same period last year. Given PHATRA’s leading position among both local and foreign institutional investors and the fact that it has only a modest retail operation, it conceivably might not even see much slippage in commission revenue (CLSA still apparently charges a 0.4% trading commission, premised on the quality of its research, far above the average current commission of 0.170% on sliding scale basis).