Krung Thai Bank

COMPANY UPDATE Investment thesis: After downgrading our KTB rating to HOLD on May 2, due to anticipation of capital-raising, the bank announced a cash call on August 9. Although the Tier-1 capital dilemma seems to be resolved, we think it would be premature to take a position in KTB just yet for the following reasons: 1) the cash call will mean a 20% dilution effect, 2) risk of heavier LLPs when a new CEO starts work in November and 3) the risk of the FIDF (which holds 54% of KTB) declining to subscribe to the share issue. Our HOLD rating stands. Within Bank space, we prefer BBL and SCB.
KTB FY12 loan growth target of 7%: Despite strong 1H12 lending growth of 5.4% YTD, KTB maintains its FY12 loan growth target at 7%. The drivers are corporate and SOE business. The capital increase won’t have much impact on FY12 lending, according to management. Note that we have revised up our FY13 lending growth assumption to 14% from 10% (we have an unchanged FY12 loan growth forecast of 10%).
Normalized LLP-setting in 2H12? KTB plans to set loan loss provisions at a normal level of Bt1.5bn/quarter (Bt6bn/year). However, it doesn’t rule out the possibility of provisions rising if necessary. The bank’s loan loss cushion ratio was 72% at end-June, up from 71% at YE11. Note that KTB has a 40% stake in the Bt30bn syndicated loan to Sahaviriya Steel Industries Plc (SSI). The loan remains an overhanging concern and is likely to require its creditors to set heavier LLPs.
Capital injection enables better earnings:  We calculate that the upcoming Bt35bn capital injection will boost KTB’s capital adequacy ratio (CAR) from 12.9% (Tier-1: 8.7%) to 15.24% (Tier-1: 10.3%). We now anticipate stronger FY13 loan growth of 14%  (up from 10%), given the scale of current and planned government stimulus spending.
We have revised up our FY12 earnings projection by 4% to Bt24bn, as the bank would be able to lend the new capital during 4Q12 (KTB won’t have to pay interest to depositors for the funds). Our FY13 earnings forecast rises 14% to Bt27.5bn, reflecting expanded expectations for loan growth next year. Key Ratios & Statistics
  Outlook
FY12 loan growth target of 7%: Despite strong 1H12 lending growth of 5.4% QoQ and 13% YoY, management maintains its FY12 loan growth target at 7%. The drivers are corporate and SOE business (such as mass transit projects and international lending). Note that last year KTB delivered 14% lending expansion, far in excess of its official target range of 6-7%. We maintain our FY12 loan growth forecast at 10%, but have revised up our FY13 assumption from 10% to 14% to reflect increased lending capacity.  
FY12 LLPs: Although KTB plans to cut loan loss provisions (LLPs) back to a normal level of Bt1.5bn/quarter (Bt6bn/year) after setting Bt13.5bn in 4Q11 (due to the flooding), management does not rule out the possibility of them being higher. The bank’s loan loss cushion ratio was 72% at end-June, up from 71% at YE11. Its NPLs/loans ratio was 3.5% at end-June 2012 down slightly from 4.0% at YE11. As such, we forecast that the bank will set LLPs of Bt8bn for both FY12 and FY13 in order to eventually build its loan loss coverage ratio to a level closer to the sector mean of 115%. Note that KTB’s 40% stake in the Bt30bn syndicated loan to Sahaviriya Steel Industries (SSI) is still classified as “performing”. As such, the bank hasn’t set any loan loss provisions for it.
Capital increase implies steady earnings growth: Management said the planned Bt35bn capital injection is for future expansion. Although its current CAR of 12.91% (Tier-1: 7.9%) would be adequate for this year and next under normal circumstances. We assume that the government has told KTB to prepare itself to lend heavily next year to public sector infrastructure projects. However, we are concerned that the FIDF, which has a 54% stake in the bank, might be reluctant to subscribe to the new shares, as it would have to inject a further Bt18.9bn in fresh cash if it were to take its full allotment. Note that the FIDF plans to wind up its operation next year.
We calculate that the upcoming Bt35bn capital injection will boost KTB’s capital adequacy ratio (CAR) from 12.9% (Tier-1: 8.7%) to 15.24% (Tier-1: 10.3%). We now anticipate stronger FY13 loan growth of 14% (up from 10%), given the scale of current and planned government stimulus spending. We have revised up our FY12 earnings projection by 4% to Bt24bn, as the bank would be able to use the new capital during 4Q12 to lend (it won’t have to pay interest to depositors for the funds lent). Our FY13 earnings projection rises 14% to Bt27.5bn, which reflects our expanded expectations for loan growth next year.