Krung Thai Bank

Krung Thai Bank Plc (KTB)
1Q14 profit was as expected
KTB posted 1Q14 earnings of Bt8.3bn, down by 3% YoY and 17% QoQ. The result was in line with our estimate but 3% above the Bloomberg consensus.  Pre-provisioning operating profit was Bt11.8bn, flat YoY and down 21% QoQ. 1Q14 earnings represent 25.3% of our FY14 projection.   
Results highlights
Lending rose by 3.3% QoQ and 10.8% YoY, more that we had assumed. KTB lent more heavily to corporate clients than to state agencies or SMEs during the quarter. Its 1Q14 NIM was 2.75%, down 6 bps QoQ as a result of it offering low rates to corporates and due to the BOT’s policy interest rate cut during the quarter. Loan loss provisions rose 10% YoY but plunged 43% QoQ to Bt1.8bn. KTB’s NPLs/loans ratio inched up from 2.58% at YE13 to 2.87% at end-March (led by small SME and retail). The bank’s loan loss coverage ratio declined to 106% from 114% three months earlier.
Fee income rose 9% YoY but dipped 4% QoQ to Bt5.1bn in 1Q14. OPEX was Bt11.5bn, up by 11% YoY and 1% QoQ. Because OPEX increased faster than fee income, the cost/income ratio inched up to 52.3% at end-March from 51.3% the previous quarter.
Outlook
We expect KTB’s 2Q14 earnings at Bt6.5bn, flattish YoY but down 20% QoQ on heavier LLP-setting in order to cover rising NPLs. Note that its end-March NPLs rose 10% QoQ to Bt61bn. We assume 2Q14 LLPs Bt4.1bn, up 137% QoQ and flattish YoY.
What’s changed?
Our FY14 net profit forecast stands unchanged at Bt32.8bn, down 3% YoY—there is less scope for extra gains this year and NIM will decline as competition intensifies to find low-risk corporate clients to lend to in the prevailing unfavorable business environment. We expect an FY14 NIM of 2.64%, down from 2.79% in FY13.
Recommendation
We expect a YoY earnings decline this year because of heavy loan loss provisioning, the absence of a revenue contribution from the Vayupak Fund 1 and NIM squeeze. However, KTB’s share price looks cheap at a low PBV of 1.04x significantly below its long-term mean of 1.2x.  Besides, its capital adequacy ratio of 13.3% (9.8% Tier-1) will enable it to lend aggressively once the economy starts improving without need for a cash call.  Our TRADING BUY rating stands.