Krung Thai Bank

Krung Thai Bank Plc (KTB) 
 
While recapitalisation is not turning KTB into a better operation, it is removing a constraint to growth. On a fully-diluted basis, the bank now looks tempting as a value play, particularly since its share price has trailed behind its peers despite similarly solid earnings. We upgrade KTB from Neutral to Outperform as we expect strong earnings to lead to a rerating. Though we raise net profit numbers for higher loan/fee growth, EPS falls because of the dilution from the rights issue. Given the capital base clarity, we raise our long-term ROE assumption to 14.5% (prev. 13.5%), prompting a rise in our target price, now set at 1.6x FY12 P/BV (prev. 1.4x). 
Recapitalise and lend
After its ongoing cash call, KTB will have a balance sheet that is ready for growth. We raise our loan growth forecasts from below-peer levels to parity with peers at 11% in FY12 and 10% in FY13-14. KTB has an undoubted capacity to fund asset growth given its quasi-government
status. Its funding cost is the second lowest among its peers. As important, if not more, is the loan mix. Low-yield government loans have fallen to 15% of its portfolio, in favour of higher-yield private-sector loans. We expect this trend to continue, particularly with the removal of the capital constraint. KTB should also report stronger contributions from its associates, mainly those in life
insurance and credit card businesses. Not without pushbacks KTB’s coverage ratio is relatively low
at 70%. We model in a higher provision in 2H12 and beyond as KTB could ration its fat earnings to shore up loan loss reserve. Hypothetically adjusting for a 100% coverage ratio, we find that the value proposition still holds, albeit less so if an assumed loss from the SSI loan is also built in. The
imminent departure of the bank’s president will leave big shoes to fill though we believe that his potential successor can keep the show going, at least during the initial years.

A value play
While we continue to view KBANK as the best-quality long-term position within the Thai banking space, KTB is just too cheap to ignore. Based on our fully-diluted FY13 numbers, the
current share price implies just 8.5x P/E, 1.2x P/BV (on 15% ROE) and 4.7% yield. These multiples make it a clear value proposition, in our view.