Krung Thai Bank

Krung Thai Bank Plc (KTB)

Investment thesis: Although KTB is expected to post good earnings for 2Q12, we maintain our HOLD rating, due to: 1) recapitalization risk next year and 2) a possible rise in loan loss provisioning in tandem with perceived debtor risk. We believe that the two factors will pressure its share price performance in 2H12.      
Good 2Q12 profit, led by fee income: We expect a 2Q12 net profit of Bt6.5bn, up by 24% YoY and 2% QoQ. The YoY bottom-line growth is due to lending expansion of 12% YoY, a fee income increase of 15% YoY (which offset the effect of 2Q12 NIM squeeze from booking the BOT’s 0.47% levy on deposits and B/Es) and well-managed OPEX. Unlike other banks, KTB did not book the BOT levy in 1Q12, so it will recognize the cost for both quarters in 2Q12, which will squeeze NIM by 14 bps QoQ to 2.53%. We also expect 2Q12 OPEX growth of 18% YoY (flat QoQ).
Normal LLPs in 2Q12, but may rise in 2H12: KTB is expected to set normalized 2Q12 LLPs of Bt1.5m, flat both QoQ and YoY. We anticipate that provisions may rise in order to cover potential losses from the bank’s Bt10bn stake in a Bt24bn syndicated loan to Sahaviriya Steel Industries Plc (SSI) to acquire a billet plant in the UK. Repayments on the loan aren’t scheduled till next year, so it is technically still performing. 
Capital-raising risk? KTB denied recent rumors that it may make a cash call soon. But management doesn’t rule out the possibility on capital-raising in the future. The bank said it will maintain Tier-1 capital at above 8.0% (at end-March its Tier-1 ratio was only 8.03%). Given that we expect considerable demand for finance from state infrastructure projects, the bank looks all but certain to make a cash call next year, if it is going to keep its Tier-1 ratio above 8.0%.
3Q12 profit will rise slightly: Despite a big-ticket debt repayment by the government, KTB will see lending growth, fueled by the SME and corporate categories. It posted 5M12 net lending expansion of 12% YoY and 3.8% YTD. We currently assume 10% loan growth for FY12, which is broadly in line with the current trend. Besides, NIM will fatten with increased lending to SME and corporate clients—both categories pay higher yields than lending to government agencies. Given the increased focus on high-yield assets, we expect KTB’s 3Q12 profit to rise modestly, both QoQ and YoY.