Kiatnakin Bank

Kiatnakin Bank Plc (KKP)

Investment thesis
We have cut our KKP earnings projections by 4% to Bt4.5bn for FY13 and by 11% to Bt5bn for FY14. Our downgrades were prompted by weaker prevailing demand for HP in 2H13 than modeled with the end of the first-time car buyer scheme and rising retail NPLs. Due to the lower earnings projections, our YE14 target price dives 30% to Bt50, pegged to a PBV of 1.08x. But there is still 17% upside to our downsized target price, so our TRADING BUY rating stands.
Loan growth assumptions cut, due to weak 9M13 lending numbers
Management admitted at the analyst yesterday that its FY13 loan growth target of 19% now looks unrealistic—9M13 lending rose only 10.5% YTD. HP for new and used cars (71% of total loans) is expanding slower than expected. HP loans grew only 9.1% YTD in 9M13; the FY13 target was 15%. SME business rose 21.6% YTD during the same period against a full-year target of 34%. As such, we have cut our loan growth assumptions to 15% for FY13 and to 10% for FY14 from 18% and 15%, respectively.
Loan loss provisioning looks set to rise
KKP said that its current loan loss coverage ratio of 110% is above its comfort zone of 100%. However, its loan loss provisions (LLPs) should increase in 4Q13 onward in order to cover the risk of sharply lower recovery rates on repossessed vehicles. The market prices of used cars have dived about 30% during the last year or so. About 50% of KKP’s HP portfolio is used car lending. But that possibly understates the issue—when the firm repossesses a vehicle that was purchased new, that vehicle is now second-hand and subject to the same weak resale market.
The bank holding company set LLPs of Bt1.7bn for 9M13, up 41% YoY. We project FY13 LLPs of Bt2.35bn, up 51% YoY. KK targets an NPLs/loans ratio range of 3.0-3.5% for YE13; it was reported at 3.5% at end-September up slightly from 3.3% at YE12.
NPA sales will miss the FY13 target
Management said that its NPA sales will be about Bt2bn this year, substantially lower than its earlier target of Bt2.5bn. NPA sales totaled Bt1.8bn for 9M13. We assume NPA sales of Bt2.1bn for FY13 and a gain of about Bt650m. Note that the assets up for sale mostly comprise real estate. Land prices have generally risen in recent years, so management probably anticipates that it can get higher prices next year so isn’t desperate to sell.