Krung Thai Bank

Krung Thai Bank (KTB)  

KTB has announced a rights offer, which will likely trigger a near-term share sell-off. However, this issue should lift a major overhang on the stock, allowing the market to focus on its value. While we maintain our Neutral call, the deeper the stock sell-off, the more attractive the stock would become from a value perspective. At this stage, we also keep our target price at 1.4x FY12F P/BV, which is GGM-based assuming 13.5% long-term ROE, 11.7% COE, 6.8% growth. 
What Happened
KTB has announced a rights issue with the ratio of one new share for every four existing shares at THB12.6 each. The ex-rights date will be on 28 Aug 12 and the shareholders’ meeting to approve this capital increase is scheduled for 21 Sep 12. The stock will also go ex-dividend for THB0.36
on 28 Aug 12.
What We Think
KTB had been the prime suspect for a capital call as it has the lowest tier 1 capital ratio among its peers at 7.9% as at end-2Q12. After the exercise, we estimate that its tier 1 capital ratio will rise to 10.2% and its total capital ratio to 15.2% (from 12.9%). This should allow the bank more room to expand its loan book. Assuming a post-capital-increase ROE of 15% and 30-40% dividend
payout ratio, KTB should be able to grow its loan book by 9-11% p.a. without diluting its tier 1 capital ratio.
At the current share price of THB17,the ex-rights price will be THB16.1. The offer price of THB12.6 is around 2Q12 BVPS of THB12.3. Assuming a conservative 3% money market yield on the new capital, we estimate a slight P/E expansion to 8x (from 7x) for FY13F – see Figure 2. We also
estimate a lower end-FY12F P/BV of 1.25x (from 1.32x) on a lower full-diluted ROE of around 15%. The above P/E and P/BV estimates post rights issue would still place KTB as the best value among its large-bank peers – see Figure 3. A big sell-off would make KTB’s shares cheaper.
We are also expecting to learn more about its post-capital raising plans from an upcoming analyst briefing.
What You Should Do
KTB could turn into a valuable gem if its share price plunges in the coming days. Keep a look out for an entry.

An overhang being lifted
We estimate KTB’s tier 1 capital to increase from 7.9% at end-2Q12 to 10.2% with the proceeds from the rights issue. This should put the bank in a comfortable position for its loan growth ambition and ahead of the Basel III implementation, which could require a tier 1 capital of 8.5% or more by 2019.

The impact of capital increase on multiples
We expect a slightly higher P/E with the full impact of the capital increase in 2013F. This calculation assumes a conservative money market yield of 3%. In terms of P/BV, we expect the multiple to be slightly lower post capital increase, but this will be on a lower fully-diluted ROE.

Still looking cheap
After the capital raising exercise, we estimate that KTB will be trading at 1.25x on around 15% fully-diluted ROE. Hence, the stock would be cheapest among its large-bank peers (BBL, KBANK and SCB).