Krung Thai Bank

Krung Thai Bank Plc (KTB)

Earnings missed all estimates
KTB posted a 2Q13 profit of Bt6.4bn, down by 14% YoY and 25% QoQ. The result was 24% below our forecast and 26% short of the Bloomberg consensus, due to much heavier loan loss provisions than modeled (Bt4.1bn; we had expected Bt1.6bn). However, Its pre-provision operating profit was Bt13.1bn, up by 18% YoY and 11% QoQ. 1H13 earnings grew 9% YoY to Bt15bn, which represents 47% of our FY13 projection.   
Results highlights
Lending rose by 3.1% QoQ and 7.6% YTD, in line with our model. Because, the bank lent more heavily to corporate and SME clients than to state agencies/SMEs during the quarter, its 2Q13 NIM inched up by 5 bps QoQ and 1 bps YoY to 2.75%.
Loan loss provisions shot up by 169% YoY and 156% QoQ to Bt4.1bn. KTB’s NPLs/loans ratio declined to 2.95% at end-June from 3.01% three months earlier, while its loan loss coverage ratio increased to 104.36% from 95.4% at end-March.
Fee income jumped by 22% YoY and 10% QoQ to Bt5.2bn in 2Q13. OPEX was Bt9.3bn, up 7% YoY but down 10% QoQ. Because fee income rose swiftly against a QoQ decline in OPEX, the cost/income ratio dived to 44.3% from 52.2% in 1Q13 (and 47.1% in 2Q12).
Outlook
3Q13 profit will rise YoY and QoQ in tandem with loan and fee income growth. We also expect LLPs to normalize at about Bt1.5bn/quarter from Bt4.1bn in 2Q13. Moreover, KTB should see an investment gain from Vayupak Fund 1.  
What’s changed?
We maintain our net earnings projections unchanged at Bt32bn for FY13 (up 35.8% YoY) and Bt36bn for FY14 (up 12.5%).
Recommendation
KTB should report strong core operations for FY13 and FY14, driven by ongoing loan growth in 2H13, much of it tied to state infrastructure projects (especially in FY14). We expect 2H13 loan loss provisioning to plunge YoY, as its loan loss coverage ratio now exceeds 100%, which is management’s stated comfort zone (much of KTB’s lending is to state agencies, so its loan loss provisioning requirements are lower than those of other commercial banks). KTB’s capital adequacy ratio of 14.88% (10.1% Tier-1) will enable it to lend aggressively for at least several years without need for a cash call.  Our TRADING BUY rating stands.