Krung Thai Bank

Krung Thai Bank Plc (KTB) 

Investment thesis: We maintain our BUY rating on KTB, based on: 1) its role implementing government policy objectives and the public sector investment up-cycle, 2) falling loan loss provisions, 3) increased high-yield lending, which will bring down the cost/income ratio, and 4) an inexpensive valuation.
Good 1Q12 profit: The bank views that its 1Q12 NIM will be close to that of the previous quarter. We, however, do not expect first-quarter NIM to be sustained that high, due to rising funding costs—intensifying competition for deposit mobilization among banks and the new FIDF (plus deposit insurance) levy of 0.47% (the old deposit insurance levy was 0.4%). We estimate a 1Q12 NIM of 2.76%, down from 2.83% in 4Q11. However, lending expansion, well-managed OPEX, falling LLPs and a lower corporate tax rate should boost earnings for the quarter to Bt6bn, up by 9% YoY and 660% QoQ.
Our 1Q12 estimate represents 27% of our FY12 earnings forecast of Bt21.5bn, which we maintain unchanged.
1-2% loan growth in 1Q12: KTB guides for 1Q12 loan growth of 1-2%, which would be in-trend with its FY12 target range of 6-7%. Retail and corporate business are the drivers. 2M12 loan growth was 0.3% YTD (squeezed by a big-ticket loan repayment by an SOE; corporate and retail business posted normalized growth). We maintain our FY12 lending expansion forecast at 10%.
Smaller LLPS: The bank plans to set normalized loan loss provisions of Bt1.5bn for the first-quarter as part of its plan to gradually raise its coverage ratio from 69% to 70-75%. We anticipate that KTB will set Bt10bn in provisions for FY12 and Bt9bn in FY13. Management anticipates a YE12 NPLs/loans ratio of below 4.0%.
Capital base is adequate: KTB’s lending will expand substantially over the next few years, led by state agency projects. There have recently been market rumors that it will make a cash call. But the bank’s CAR was 13.7% at YE11, sufficient to cover normal business growth this year and next. KTB said only if its loan portfolio were to swiftly expand 30% from the current level would it need to raise capital. 

Outlook

Anticipate moderate lending growth in 1Q12: KTB believes that retail and corporate business will enable it to achieve its FY12 lending growth target range of 6-7%. The bank will focus more on building high-yield lending; state agency loans pay low interest rates. Note that the BOT approved Bt10bn in soft funding for KTB to in turn lend to flood-damaged clients.
2M12 loan growth was only 0.3% YTD, due mainly to a big-ticket government loan repayment in February 2012. Management guides for 1Q12 lending of 1.0-2.0%, driven by corporate and retail loans. We maintain our FY11 lending expansion forecast at 10%. 
Lower loan loss provisions for 1Q12: The bank plans to set normalized loan loss provisions of Bt1.5bn for the first-quarter as part of its plan to gradually raise its coverage ratio from 69% at YE11 to 70-75%. KTB guides for FY12 normalized loan loss provisioning of Bt6bn. Management doesn’t expect any extraordinary LLPs, as was the case last year because of the 4Q11 flooding. We, however, anticipate that KTB will set Bt10bn in provisions for FY12 and Bt9bn in FY13.  
NIM will be close to the 4Q11 level: In the wake of the flooding, KTB helped inundated clients by offering debt rescheduling and additional soft loans. As such, we do not expect 1Q12 NIM to expand in tandem with lending. We forecast that NIM will dip to 2.76% in the first-quarter from 2.83% in 4Q11. We expect an FY12 NIM of 2.71% and an FY13 NIM of 2.77%. KTB sees the chief threat to NIM sustainability as the intensification of price-led competition.
Capital base remains adequate: Although lending will expand substantially over the next couple of years, led by state agency projects, KTB isn’t in a hurry to raise capital. Its capital adequacy ratio was 13.7% at YE11, sufficient to cover business expansion for the foreseeable future. The bank said that only in the case that its loan portfolio were to relatively swiftly expand 30% from the current level would it need to raise capital.
Anticipate good 1Q12 earnings: Given rising loan growth, lower LLPs and a reduced headline corporate tax rate, we estimate a 1Q12 profit of Bt6bn, up by 6% YoY and 660% QoQ.  Likewise, its 1Q12 pre-provision operating profit should post a rise of 8% YoY and 21% QoQ to Bt9.5bn. Our 1Q12 bottom-line estimate represents 27% of our FY12 earnings forecast of Bt21.5bn, which we maintain unchanged.

Recommendation and valuation

Reiterate BUY: KTB’s share price has been pressured by rumors of an impending capital increase during the last couple of weeks. We believe that its FY12 business operation will normalize with loan growth of 7-10%. There is no need for a capital increase this year. KTB said lending would have to expand 30% before a cash call would be necessary. Given its strong FY12 earnings growth profile of 26% and a cheap YE12 PBV of 1.4x, compared with a sectoral mean of 1.5x, we see opportunities to accumulate KTB on dips. We, maintain our BUY rating with a YE12 target price of Bt21, pegged to a justified PBV of 1.7x (up 1.5SD and close to its last peak in FY03).