Krung Thai Bank

Krung Thai Bank Plc (KTB)

4Q12F preview confirms extra provision. KTB confirmed the extra provisions we had expected, but did not say how much. We estimate extra provisions of Bt6bn to be added to the Bt1.5bn normalized provisions in 4Q12. We look for earnings of Bt2.5bn in 4Q12, up 211% YoY but down 72% QoQ from the extra provisions. We expect loan growth to speed up QoQ to meet our 10% full-year forecast, with fee income to meet our 15% estimate for the year. Management expects a stable net interest margin QoQ as the positive from the lower proportion of low-yield government loans is expected to be offset by the negative from the interest rate cut.
Restructuring of shareholding in insurance companies. KTB is restructuring its holdings in insurance companies to comply with the regulation regarding foreign holding limits. To accomplish this, it has set up KTB Capital Holding Company (49% owned by KTB and 51% owned by three individuals) to hold the shares of the insurance companies. KTB has sold its 50% stake in Krungthai-AXA Life Insurance and 25% (it had held 45%) in Krungthai Panich Insurance to KTB Capital Holding at book value (Bt3.83bn for Krungthai-AXA Life Insurance and Bt966mn for Krungthai Panich Insurance). It is in the process of selling a 16.2% stake in listed Dhipaya Insurance (TIP), just waiting for the regulatory approval (including the SEC, to waive required tender offer). We believe there will be no material change in term of earnings contribution (dividend and profit sharing via equity method) as KTB has full control over KTB Capital Holding, despite the dilution in stated holding. We expect no investment gain on a consolidated basis from the sale of Krungthai Axa Life Insurance and Krungthai Panich Insurance at book value, but there will ~Bt3.67bn gain on an unconsolidated basis. 
Direction under new CEO. KTB’s new president, Mr. Vorapak Tanyawong is wanting to increase the proportion of SME loans, fee income - particularly from corporate client group - and foreign exchange. He has over 20 years of extensive experience in the banking business. Before joining KTB, he was Chairman and Chief Executive Officer of Finansa Securities Ltd. and served as Senior Executive Vice President and Group Head, Corporate Banking Group 1 at SCB over 2009-2010, Senior Country Officer and Country Head of Investment Banking for JPMorgan Chase Thailand over 2004-2009, Managing Director and Co-Head of Global Markets at Deutsche Bank over 2001-2004, and Bank of America, where he started as a Credit Analyst and progressed to Country Manager.
Best public investment play. As a government-owned bank, KTB heads the list to finance the public investment planned by the government, for which SCB EIC estimates growth will accelerate to 16.1% in 2013 from 5.2% for 2012. We expect KTB to be only bank with higher loan growth next year at 12% from 10% in 2012. 
Maintain top Buy. KTB remains on our list of top buys with unchanged target price of Bt23 (1.6x 2013F BVPS) for three reasons. 1) The recapitalization has provided it with a chance to build up LLR coverage to cushion against any downturn. 2) Worries about its asset quality risk are lessened by SSI’s capital raising. 3) It is the best play on the theme of accelerating public investment in 2013.