Kiatnakin Bank

Kiatnakin Bank Plc (KK)

Q3 2012A, slightly above estimates. Note that KK began consolidating PHATRA’s
financial statement in September after completing the merger via a share swap.
With this, Q3 2012A net profit rose 31% YoY and 14% QoQ to Bt928mn, 6% higher than
our Bt875mn. The positive surprise came in non-interest income, mainly gain on
trading and investment contributed by PHATRA. Key points:
1. Loan growth: In line at +4% QoQ, mainly from auto loans (+4% QoQ), followed
by SME loans (+8% QoQ) and real estate loans (+3% QoQ). 9M12 loan growth
was 18%, in line with our full-year forecast of 24%.
2. Net interest margin: Meeting expectations at -57 bps QoQ to 3.15%, due to
absence of ~Bt200mn windfall from restructuring real estate loans, bringing
yield on earning assets down by 54 bps QoQ. Cost of funds edged up 4 bps
QoQ. Excluding the 2Q12 windfall shows a slip in its NIM of 21 bps QoQ.
3. Non-interest income: Much higher than expected at +52% QoQ, mainly from
PHATRA and largely from fee income and gain on investment and trading.
4. Asset quality: Worse than expected, NPLs in terms of amount rose 10% QoQ,
with an increase in NPL ratio to 3.58% from 3.39% at 2Q12. However,
provisioning fell 24% QoQ to Bt427mn, leading to a slip in LLR coverage to
103% from 107% at 2Q12.

Concern on goodwill write-off. We believe concern about the write-off of
goodwill is behind the 9% fall in KK’s share price over the past two days. KK is
considering whether to write off the goodwill from the merger with PHATRA. In
this case, the goodwill came from the non-cash share-swap transaction. We back
the writing off of this goodwill (as in the case of TMB and ASP) because the
accounting goodwill leads to equities being overstated and ROE understated as
goodwill was calculated at the closing share price of KK on the last day of the
tender offer period (Bt46.5/share) for the share swap. KK booked goodwill from
the merger with PHATRA at Bt4.73bn. According to accounting practices for
treatment of goodwill, an impairment test has to be conducted every year. If any
impairment occurred, this will be recorded as expense in P&L. If Bt4.73bn goodwill
is written off, 2013F BVPS will decrease from Bt43.1 to Bt37.4 but 2013F ROE will
increase to 11.5% from 13.3%, which will have no material impact on target price.

Upgrade to Buy; Rolled-over TP. We upgrade KK to Buy from Neutral in
response to a sharp fall in share price on overdone concerns about the goodwill
write-off –which will have no impact on target price as the decrease in book value
will be offset by a higher ROE and higher justified PBV. We raise target price (TP) to
Bt47 (1.1x 2013F BVPS) from Bt46 as we rolled valuation base over to YE2013 from
mid-2013. The merger with PHATRA in 3Q12 will lead to structural improvement in
operations with a more diversified income mix and stronger securities platform.
KK is expected to be included in the SET50 next round after the merger with
PHATRA, which will be a share price catalyst.