Kiatnakin Bank

Kiatnakin Bank Plc (KK)

Upgrade to Neutral. We upgrade KK to Neutral with an unchanged target price
of Bt60/share (1.4x 2013F BVPS), as a result of a 22% fall in share price from this
year’s peak in May and expectation of good 2Q13F result. We do see downside risk
on its banking operations in terms of asset quality, net interest margin (NIM) and
loan growth prospects. However, we expect offset from the synergy arising out of
the merger with Phatra and this year’s good capital market.
2Q13F preview – Good, big thanks to IB fee. We forecast 2Q13F earnings to
rise 65% YoY and 16% QoQ to Bt1.35bn, supported by strong fee income from the
capital market, particularly IB fees, despite weaker banking operations. Key points:
Capital market business: We expect a strong QoQ increase in fee income for
2Q13F, attributable to a sizable fee from the BTS Rail Mass Transit Growth
Infrastructure Fund deal with a huge offering size of Bt62.5bn and also a private
placement of CPN shares. Brokerage fees for 2Q13 decreased QoQ in line with
easing market turnover. Average daily market turnover so far in second quarter
is ~Bt50.4bn (as of June 26th) vs. Bt58bn for 1Q13, though this can still be
considered buoyant. Despite a collapse in the stock market over the past 5-6
weeks, Phatra is expected to still book a sizable investment gain in 2Q13 in the
form of realized gain on its direct investment portfolio and a stable gain from its
non-directional investment portfolio (equity & derivative trading and hedge
fund). However, unrealized investment gain under equity was inevitably reduced,
resulting in unrealized investment loss on the comprehensive income
statement.
Banking business: Loan growth slowed in 2Q13 in line with slowing demand
for auto loans and its greater caution towards expanding auto loans after
experiencing a rise in NPLs. Its 1.9% QTD (April and May) growth represents a
sharp slowing from 4.3% QoQ in 1Q13. 2Q13 loan growth stemmed mainly from
real estate loans. NIM is expected slip slightly QoQ. Despite easing pressure for
countercyclical buffer provisioning after Bt165mn extra provisions made in 1Q13,
2Q13F provision expense is expected to remain hefty as a result of rising NPLs on
auto loans.